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One potentially tricky area for trustees has been the extent to which information is disclosed to beneficiaries. The Act follows a similar approach to guidance recently provided by the New Zealand Supreme Court which favours keeping the beneficiaries informed. It imposes two positive presumptions on the trustees – firstly, to notify beneficiaries that they are actually a beneficiary and provide them with basic trust information and secondly, to provide trust information upon the request of a beneficiary - unless the trustees can reasonably and legitimately decide not to provide the information. The range of information that a beneficiary can request is defined widely and there will no doubt be an influx of requests for information from beneficiaries. Trustees will need to consider very carefully, and perhaps take professional advice, as to whether there are circumstances which mean the trustees can reasonably refuse to provide certain information.
A significant change is the setting out of trustee ‘standard duties’ which are separated into ‘mandatory duties’ and ‘default duties’. While a trust deed cannot exclude or modify the ‘mandatory duties’, the ‘default duties’ may be overridden. Where trust deeds are drafted to modify or exclude default duties, trust advisers will now be required to ensure the settlor of the trust is aware of the effect of any such modifications and exclusions.
The mandatory trustee duties set out in the Act are:
The default trustee duties are:
The Act also provides an overarching guidance that trustees, in performance of their duties, need to have regard to the context and objectives of the trust. Trustees will need to ensure that trust deeds clearly set out the objectives of the trust in order to avoid any future difficulties in exercising their duties and consider whether any of the default trustee duties should be “carved out” in order to achieve those objectives.
The Act provides that it is mandatory for the trustees (or at least one of them) to retain copies of the core trust documents for the entire duration of their trusteeships. The suite of core documents include, but are not limited to, the trust deed, variations to trust deed, memorandum of wishes, documents for appointment, removal and discharge of trustees, trustee resolutions and written contracts and accounting records. It would be wise for trustees to start compiling relevant documents now.
The new Act also confers upon the trustees “all powers” necessary to manage and carry out the trust (which is in line with current market practice of including “all powers” provisions in trust deeds). We would still recommend that future trust deeds contain express powers to for example buy, sell, give security, mortgage and give guarantees to satisfy the requirements of financial institutions.
In terms of trustees’ powers of investment, the new Act contains a list of factors that a trustee may consider in exercising their power to invest (as did the Trustee Act 1956). The duty to invest prudently is one of the default duties that could be modified or excluded. Trustees will also have a broad power to determine whether return on investment is to be treated as income or capital (for the purposes of distributions and preparing financial statements), and to apportion receipts or outgoings to or from income or capital.
The maximum life of a trust established after 30 January 2021 will 125 years (compared to the limit of 80 years under the old legislation). In some cases it may be possible to resettle an existing trust on to a new trust provided that resettled trust has a maximum duration of no more than 125 years from when the original trust was established.
The new Act clarifies and widens the range of circumstances where a trustee can delegate their duties by way of power of attorney. These circumstances include absence from New Zealand plus temporary inability to be contacted, physical incapability, and temporary lack of capacity. Other than under the prescribed circumstances, the trustees must not delegate certain fundamental powers such as power to appoint trustees, and/or power to resettle.
Independent trustees would have been very familiar with trustee liability/indemnity clauses in the trust deeds. The Act restricts the use of trustee exemption/indemnity clauses to the extent that such clauses are not to limit a trustee’s liability for breach of trust arising from dishonesty or willful misconduct, and gross negligence. This serves as a reminder that all trustees need be vigilant in their exercise of trustee duties. The essence of a trust is that trustees have a fiduciary duty to, and, are accountable to, the beneficiaries. If a trust deed contains provisions that exclude all possible liabilities of the trustees, then it will not be enforceable under the Act.
As innocuous as some of the changes may appear, the first step would be to review existing trust deeds. Trustees will need to consider carefully the applicability of the Act and ascertain whether variations will be desirable (if the terms of the trust deed allow for variations).
But wait there’s more
Whilst as much a tax and accounting issue, Trustees need to note that as part of amendments to the Income Tax Act 2007, from 1 April 2020, a beneficiary of a trust, may be deemed a ‘settlor’ for income tax purpose if the trust owes the beneficiary more than $25,000 and no interest is paid on the amount owing at the prescribed interest rate in the income year. As many trusts have loan and/or current accounts the change in tax law, trustees and settlors should seek legal and accounting advice as to the implications and how to best address the imminent change.