LET'S TALK LAW
Despite New Zealand having one of the highest rates of trusts per capita in the world, the law regarding trusts has been long overdue for an update.
Historically, trusts have been an extremely popular asset planning tool for many New Zealanders and although the rates of new trusts are decreasing, there are an estimated 300,000-500,000 trusts in NZ.
New law changes will affect most if not all of these trusts. Trusts give rise to complex legal obligations that are often misunderstood by settlors, trustees and beneficiaries.
This misunderstanding, as noted by the Select Committee overseeing the changes, is largely a result of the legislation being "convoluted and out of date". The Trusts Act is a long time coming, finally receiving royal asset on July 30.
The act will come into force on January 30, 2021, and is intended to modernise trust law, simplify the core principles and provide a more accessible list of the mandatory and default duties for trustees.
The act outlines a mandatory list of duties on trustees, which includes knowing the terms of the trust and the duty to act honestly and in good faith.
There are also default duties that apply unless expressly modified by the terms of the trust deed. These include the duty to invest prudently, the duty to avoid a conflict of interest, the duty to act unanimously and to act for no reward. Beneficiaries have stronger rights.
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Traditionally beneficiaries had the right to be considered and the right to have the trust properly administered. There is now a positive obligation to give effect to those rights by making available to every beneficiary the basic trust information.
This is the most controversial aspect of the new law. It is common for many beneficiaries in NZ to be unaware of the trusts they may have an interest in. The new law requires there to be at least a basic level of reporting to all adult beneficiaries and to the parents/guardians of all the minor beneficiaries.
The basic information that must be provided to all beneficiaries is the fact that they are a beneficiary of the trust, the names and contact details of all trustees (and any subsequent appointments and retirements) and the right of the beneficiary to request a copy of the trust deed.
There is a further presumption that if a beneficiary request additional trust information this must be provided by the trustees within a reasonable period of time. Some factors will justify the trustees withholding trust information, including the age of the beneficiary and the effect the information will have on that beneficiary, but in a conventional discretionary trust, the requirement for disclosure is likely to prevail.
By providing beneficiaries with this information, it provides a mechanism for holding trustees to account. As there is no trust register, the administration of trusts is open to abuse. Other changes include the maximum lifetime of a trust increasing from 80 years to 125 years and more stringent trust record keeping.
The new law specifies core documents that trustees must keep, including financial statements, any variations and all resolutions regarding any decision-making process. It is important that good advice is taken to ensure that trusts comply with the new law.
Although the rights and protections for beneficiaries have increased, trustees will have more responsibility and prescriptive administration duties.
• Petra Allen is one of the law column writers from Treadwell Gordon.