The new Trusts Act 2019 is coming into effect on 30 January 2021. The Act modernises the Trustee Act 1956 and incorporates the case law which has developed over the last 64-odd years. The new Act is also a bit easier to read. If you follow this link you will see what we mean: Trusts Act 2019 - www.legislation.govt.nz.
There is a lot of “noise” about the Act which is starting to appear in media from various “experts” and “commentators”. We want to reassure you that while the Act cannot be ignored, much of what you may be hearing is alarmist. In most cases the Act simply captures the current case law position, and addresses matters that have caused unnecessary difficulties and costs. However, the Act does include additional obligations, and demands a higher level of governance and management, and trustee accountability.
It is therefore important for settlors and trustees to understand the intricacies and implications of the Act, and to be aware of certain key matters that may require serious consideration and attention (in some cases immediately).
The Act introduces a legal obligation on trustees to notify each beneficiary of the existence of the Trust, and to provide details of who the trustees are and when they change. Perhaps most importantly, trustees must also advise each beneficiary of his/her right to request further trust information.
Beneficiaries already have a legal right to examine the actions of trustees, but of course they first need to know they are beneficiaries, which is why this requirement has been included. Many trustees will not hesitate to notify beneficiaries, while others will have clear reasons why notification is not appropriate. For those beneficiaries who already know of the existence of the Trust, this information will come as no surprise. For others, it may lead to a request for more information.
Before any notice is given to beneficiaries, trustees must (and should) consider certain factors as set out in the Act, such as the settlor(s) intentions at the time the Trust was established (if any), the age and circumstances of a beneficiary and the likelihood of him/her receiving trust property in the future, and the effect giving notice may have on any beneficiaries or on the relationships within the family.
Beneficiary Requests for Information
The Act confirms the current legal position that a beneficiary may request trust information from trustees. The intention behind both this obligation and the obligation to notify beneficiaries is to enable beneficiaries to monitor trustees to ensure they are acting in accordance with the purposes and intentions of the Trust and the law. While this does not necessarily change the current position, it does increase trustee accountability.
If a request for information is made by a beneficiary, trustees should carefully and properly consider the request, and must respond within a reasonable time. Again, as with notifying beneficiaries, the trustees must (and should) first consider whether there are factors present that support a decision to provide only some or no information, and the consequences of such a decision.
What the Act does is highlight the trend in case law about the need for trustees to be accountable for their decisions and actions (or inactions). It highlights the need for good processes and administration, particularly in relation to keeping good records of decisions (preferably in writing). It does not mean any increase in trustee liability in terms of decisions made. An investment or other decision properly made and taking into account relevant criteria which subsequently does not perform as expected will not incur any greater liability than under current law. With the changes regarding beneficiaries imminent, now is the time to consider the beneficiaries of your Trust, and to make any necessary changes (if possible) if the list of beneficiaries includes anyone not intended to benefit from the Trust.
Maximum Duration of a Trust
Many existing trusts will have a vesting date or perpetuity period (now referred to as the maximum duration in the Act) of 80 years, or sometimes even less. In some cases, a Trust Deed will specify how its end date is to be determined. From next year, trusts can be established with a maximum duration of up to 125 years. Trusts established prior to 30 January 2021 may be able to extend the maximum duration past the current 80 year period. While the longest possible duration may seem appealing, careful consideration of the intentions of the settlor, the beneficiaries of the Trust, and the terms of the Trust Deed will be required to determine if this is appropriate.
Trusts that are established for the benefit of the settlors, then their children, may not require the 125 year duration. However, the ability to daisy chain for the benefit of successive generations is one benefit of either stipulating the greatest duration or having the flexibility to extend the maximum duration of a Trust. Careful consideration should be given as to how the maximum duration may fit with the intentions of the settlor(s), and whether there may be unintended consequences for stipulating a period too short or too long.
The Power of Appointment and Removal of Trustees
The power to appoint and remove trustees is an important but often unknown or misunderstood power within the Trust.
The Trust Deed should specifically name who holds this power, commonly the settlor(s) initially. The Trust Deed should also stipulate whether the power is held jointly or severally, what happens when there is more than one person holding the power, and how and when this power can be passed on (for example: on death or mental incapacity).
As the power to appoint and remove trustees continues for the duration of the Trust, properly considering and addressing succession of this power is important to the successful ongoing administration of the Trust. There can be undesirable consequences if this power falls into the wrong hands. Key considerations include:
Who holds the power to appoint and remove trustees when you die?
Should your surviving spouse or partner hold this power solely or should it be held jointly with someone else?
Who should hold this power when both you and your partner have died?
These are matters that need to be addressed as part of any considered estate planning involving a Trust.
The estimated 300,000 to 500,000 trusts in New Zealand hold immense wealth. Wealth, perceptions of entitlement, and competing interests can create issues within families if not managed properly. Managing competing interests can be challenging, particularly where intentions or arrangements are not clearly recorded.
Beneficiaries are increasingly aware of their rights, and of their ability to hold trustees to account, resulting in more challenges to trustee decisions. This will increase further with all the media attention around the Act.
Trustee liability is at the forefront of many a trustee’s mind - particularly those trustees who have agreed to act as trustee to help out a friend or family member. Often these favours are granted without a real appreciation of what the
role entails. It is important that trustees act properly and actively in the governance and management of a Trust. It is clear that there are consequences for not doing so, which can include liability with no recourse to trust assets (even if the Trust Deed provides for recourse), meaning a trustee is left with the costs and/or the debt. Many trustees are reconsidering their trustee appointments due to this increasing personal liability.
Many trustees are not aware that they are able to seek independent legal advice when facing a tough decision, or where co-trustees are contemplating actions that are not aligned with the intentions and purposes of the Trust or the law. Trustees also have the ability to seek the directions of the Court if the circumstances warrant it.
It's all getting too hard - do I still need a Trust?
It may seem like trusts are becoming more and more complicated and expensive to maintain. While this may be true, trusts, when done well, are still an incredibly valuable tool in asset protection and estate planning. We are often asked whether a Trust is still providing value, particularly where it is perceived that the cost of administering the Trust appears to outweigh any benefit. We remain in favour of trusts and take a cautious approach to any decision to wind up a Trust because of the potential loss of asset protection and benefits in terms of managing wealth succession to the next generation.
Often the initial purpose underlying the establishment of a Trust is no longer present (for example: to protect assets while in business), leading to a belief that the protection of a Trust is no longer required. However, after fully considering the circumstances it is often revealed that there is clear value in retaining the Trust, sometimes including unintended value that is not obvious to the settlors or other professional advisors.
Before considering winding up a Trust, it is important to understand the consequences
and risks of transferring assets out of the Trust. Trustees will need to consider the
implications that winding up the Trust will have on the beneficiaries of the Trust, and whether there are any specific circumstances that might have priority over the wishes of the settlor(s).
If the ongoing costs of retaining the Trust is the main concern, there are other options that can be considered either in addition to retaining the Trust, or winding up the Trust but retaining protection.
Trends in Will challenges
As the value of a typical estate increases, so too does the potential for a dispute. This is amplified by the fact that families are now more diverse, with beneficiaries who have competing interests (particularly in blended families). We are seeing an increase in challenges to Wills under the Family Protection Act 1955 based on claims that the deceased had a moral obligation to provide for a beneficiary and hasn't done so, or has provided for them inadequately. Adequate provision is difficult to quantify, and will be determined on a case by case basis. Sometimes a person holds a belief that he/she does not have a moral obligation to provide for a beneficiary, particularly if the beneficiary is an adult or in circumstances where there has been no contact for some time. While this may be a genuinely-held belief, it is not necessarily the legal position. Full disclosure to a legal advisor at the time of estate planning will ensure that any potential issues are addressed.
Along with an increase in challenges to Wills under the Family Protection Act, we are also increasingly asked to advise clients in respect of relationship property entitlements upon death. Where a party was in a qualifying relationship with the deceased at the time of death, the survivor also has entitlements pursuant to the Property (Relationships) Act 1976. It is unfortunately often the case, that the deceased has made a Will that provides less than the survivor’s entitlements under the Property (Relationships) Act. When this situation arises, there are options available to consider and it is important that legal advice is obtained promptly.
Sometimes assets are transferred to a Trust immediately prior to death with an intention to exclude certain beneficiaries. A trend is emerging where beneficiaries are challenging such transfers based on a claim that the deceased had a fiduciary obligation to provide for the beneficiaries, and has used the Trust to avoid a Family Protection Act claim. This is generally in a situation where one child or beneficiary has been preferred at the expense of others. Again, this is another area where good decision making processes and documentation of reasons may assist, should a claim arise.
Enduring Powers of Attorney
It is important to have someone to rely on in difficult and challenging times. More importantly, the person you rely on should be someone you have chosen. Enduring Powers of Attorney (EPOAs) enable you to nominate trusted attorneys to make decisions on your behalf in relation to your property (not including Trust property), and your care and welfare. To be clear, you can appoint any person you choose to be your attorney – in this case “attorney” does not mean “lawyer”.
For more information EPOAs see our latest article here.