It’s almost one year since the New Zealand trust landscape changed and the new Trusts Act 2019 (the Act) came into effect.
One of the main purposes of the Act is to ensure trust law is accessible to the public. It sets out the powers and duties of trustees in ‘plain’ English and deals with some of the administrative processes surrounding trusts like record-keeping. Importantly, the Act also provides mechanisms to resolve disputes among trustees, and between trustees and beneficiaries.
So, what do the changes mean for a typical Kiwi trust?
Say mum and dad have a trust set up for themselves and their children, and mum and dad are the trustees. The trust owns the main home, an investment portfolio and the family bach. Mum and dad live in the main home, the interest and dividends from the investment portfolio go to them and the family uses the family bach from time to time. You may think all is well, right? Unfortunately, it’s not that simple.
The Act provides that a trustee may not benefit under the trust, unless the trust deed provides that they may – so it’s important to check the wording of the trust deed. The provision stems from the principle that the trustees must act for the benefit of the beneficiaries and not for themselves. The Act also provides that all beneficiaries should be treated equally unless the trust deed provides otherwise. For example, does the trust deed allow the trustees to distribute income from the investment portfolio to mum and dad and not all the beneficiaries?
There are some day-to-day factors that can impact the trust. For example, when is the last time the trustees looked at the insurance of the home and bach? Are the dwellings adequately insured? Does the insurance company know the trust owns the properties, even though mum and dad live there and pay the insurance premiums?
As settlors of the trust, it’s acceptable for mum and dad to record their wishes in respect of the trust in writing. That may include that all children are to benefit equally when the survivor of the two parents passes away; or that the grandchildren should benefit when the relevant child passes away. Although mum and dad (as settlors of the trust) cannot prescribe to future trustees how to exercise their discretion, the courts have recognised that it is important for trustees to have regard to the wishes of the settlors.
A reality that a lot of ‘older trusts’ face is when mum or dad starts to lose capacity. Under the new Act, a trustee must be removed if they lose the capacity to perform the functions of the trust. So, in this context it’s important that mum and dad consider who should succeed them as trustees and who should have the right to appoint future trustees. The trust deed is sometimes silent as to who has the right to appoint trustees and in cases such as these the provisions of the Act apply.
We recommend you undertake a review of the trust and its affairs regularly. At a minimum, the trustees should give thought to the following and record their findings in the form of a resolution, taking the necessary steps to implement those findings.
Is the trust still necessary?
The trust could have been set up to protect against business risk but now that mum and dad have retired, the trust can be wound up. Discuss the implications of a winding-up. A distribution of fixed property from the trust might trigger the Brightline test, and new wills may need to be put in place. Will the winding-up impact residential care subsidies that mum and dad have planned since the beginning?
Who are the beneficiaries?
As there is a presumption that beneficiaries will receive basic trust information, it’s a good idea to narrow the group of beneficiaries, if the beneficiaries under the trust deed is very wide.
Do the beneficiaries know they are beneficiaries, who the trustees are and that they may ask for a copy of the trust deed?
If the answer is ‘no’ it’s important to record why the trustees decided not to make this information available. They should also record the review actions taken by the trustees.
It’s also important the trustees document in writing the following:
- Make a summary of all the assets and liabilities of the trust and check the assets are properly insured.
- If the trustees appointed an investment manager to manage an investment portfolio, it’s important that the trustees consider the reports twice a year or, at least, on an annual basis and record they’ve reviewed the reports.
- Where are all the records of the trust kept?
- Is there is a history of the trust’s activities?
- There should be a process to ensure that meetings take place regularly, at the least annually.
As trustees, it’s important to consider these things carefully. If you need help with the process, we are always on hand to assist you. Just contact our Senior Legal Advisor: Trusts, Helena Austen.