Contents

Chapter 2
Why a new Trusts Act?

The case for a new Trusts Act

2.26The Commission is convinced that the Trustee Act must be replaced with a new Act. As discussed above, trusts are a core part of New Zealand’s legal infrastructure. There is, therefore, a strong case for ensuring that trust law is in good working order. New legislation is needed in order to achieve this for the following reasons:

2.27Furthermore, as we discuss below, the reforms we recommend are in line with moves from relevant jurisdictions throughout the Commonwealth towards updating and replacing trusts legislation.

2.28In our view it is vastly preferable that a complete new Act is introduced than that the Trustee Act is amended. We are recommending significant changes. The scope of issues that we recommend should be covered by the new Act is much broader than the current Act. Most sections of the Trustee Act would need to be totally rewritten and the structure of the Act would need to be revised.

2.29Throughout the Report we have carefully considered how a new Trusts Act would affect existing trusts. Our changes to the administrative and mechanical provisions of the Trustee Act will be of considerable benefit to existing as well as to new trusts. We have sought throughout to develop reforms that will make the administration of trusts more straightforward. We have seen the current dependence on applications to the High Court as the sole way of remedying problems and resolving disputes as a hindrance to good trusts infrastructure. We are making several recommendations in order to build a more cost-effective, efficient, accessible framework for trusts. This includes modernised, workable processes for remedying difficulties without the resort to court, a supervisory role for the Public Trust in some of these processes, greater opportunity to use alternative dispute resolution and, where a court decision is necessary, a broader ability to have a matter resolved in the District Court and in some circumstances, the Family Court.

2.30A new Trusts Act affords an opportunity to address problems in the law of trusts. It would enable matters that are currently uncertain or not settled to be given certainty. It would allow rectification where the current law is causing unfairness, for instance, in the areas of the availability of the trustee’s indemnity to creditors.58 The new Act would correct the balance between different interests where the law has become skewed towards the interests of some parties, for instance, in relation to trustee exemption clauses.59

Making the Act’s procedures accessible and applicable

2.31One of the important roles of the Trustee Act is to provide administrative procedures to deal with difficulties not foreseen by the trust drafter at the time of formation. Provisions of this nature currently in the Act include the ability to appoint a trustee where there are no remaining trustees, or to allow variation of the terms of a trust. These provisions are not only important for particular trusts that require help but are also central to the integrity of the institution of the trust itself, which depends on such procedures being available if necessary. It is our view, and the view of many who we have consulted, that the procedures provided in the Trustee Act are inaccessible or inapplicable in situations where accessible and applicable law is most needed. These opaque or unsuitable procedures lead to increased costs for trustees and beneficiaries through inefficient trust administration.

How the new Act would address this

2.32Our recommendations for a new Trusts Act provide simplified procedures that enable the business of trusts with minimal expense. Our reforms are aimed at achieving this while balancing the need to preserve the overall integrity of the settlor’s intentions and the rights of the beneficiaries to benefit from the trust, as established by the settlor. We intend that the new Act include processes that are useable and which will fill gaps where there is currently no straightforward way of achieving a desired end.60

Making the Act modern and understandableTop

2.33The Trustee Act is a critical piece of legislation for those who deal on a day to day basis with trusts. It is needed to address some of the difficulties created by settlors in their trust documents, and created by the courts in the way they have developed particular doctrines over centuries. For such an important statute, it is convoluted and needs simplification. Not only are some provisions hard to understand, in some cases they are simply unreadable.61 The Trustee Act sets defaults that are designed to aid drafters of trust documents and it allows trustees to be relieved from the consequences of breaches in appropriate cases.62 Perhaps even more importantly, the default settings which it establishes for the law of trusts in such areas as the description of trustees powers, do not line up with how trusts are actually administered in practice, but rather reflect much older notions of the way things ought to be done, often without modern justification.
2.34Similarly, the Act does not deal with some of the more problematic default settings developed in case law, such as the allocation of receipts or expenses to the historic categories of income or capital, requiring trust deed drafters to remove the difficulties created by old cases.63

2.35Thus, drafters not only need to customise the trust with the settlor’s particular arrangements, but also set out basic and common understandings of trusts. In addition, drafters have to exclude the operation of doctrines that almost everyone concludes should no longer be part of our law, and essentially write in doctrines that almost everyone considers ought to be part of the underlying law. Our view is that a new Trusts Act ought to do this for all trusts.

How the new Act would address this

2.36The recommendations in this Report minimise or avoid the inefficiencies resulting from the problematic and outdated default settings. We propose that the new Trusts Act contain defaults that are in line with modern trust law conventions, including modern deed drafting. This would simplify and streamline the process of drafting trust deeds and reduce the complexity of trust documents. The recommended provisions reflect modern ways of doing business and managing personal affairs. A complete new Act would be drafted in plain English, refer to modern concepts and would be structured in a logical, easy-to-follow manner.

2.37It is vital that New Zealand trust law adequately represent the expectations of those entering into trust arrangements. It is also essential that the default provisions trust deed drafters include in such arrangements reflect modern realities and expectations rather than legal doctrines whose relevance, importance and justification has long since passed, and which are themselves poorly understood.64

Making trust law accessibleTop

2.38It is commonly observed that the use of trusts in New Zealand has vastly expanded over the last few decades.65 Large numbers of people find themselves as trustees or beneficiaries of trusts, or contemplate becoming settlors. This includes many who are not legally trained. There appears to be confusion amongst many of those trustees as to their appropriate role or duties as trustees, and amongst beneficiaries as to what they can and cannot expect of trustees. There is also confusion amongst those who are settling trusts as to what the effect of those settlements are. This has led to a general community misunderstanding as to the nature of the trust. There appears to be, for instance, a decrease in understanding that the trustee holds property on behalf of the beneficiaries, and is bound by important duties to respect the trust obligations and to act on behalf of the beneficiaries.

2.39The current inaccessibility of key parts of trust law and the resultant lack of understanding about trusts can lead to further problems. If settlors and trustees are confused or unclear as to the nature and effect of settling a trust, and their obligations, there is a greater risk of trusts being improperly administered. This can increase the likelihood of disputes and litigation between settlors, trustees, and beneficiaries.

How the new Act would address this

2.40The new Act would aim to remove some of the mystery of trust law by setting out basic principles in the Act. The new Act would draw together key parts of trust law that are presently only accessible in case law. Including the core characteristics of the trust and the duties of trustees would strengthen the common understanding of the institution of the trust and provide guidance to individual trustees who need to understand, without reference to large tomes or compendia of cases, what their basic obligations as trustees are. The clarification the new Act would provide as to the nature of trusts, the duties of a trustee, and processes for revocation and variation, should provide more certainty and minimise the potential for disputes and litigation on these matters. It would also help to maintain public confidence in the institution of the trust. The new Act would be a much more complete source of the law applying to trusts than is the current Trustee Act.

2.41In making these recommendations we are aligned with developments in a number of other areas. The Companies Act in 1993 included a code of directors’ duties to make clear to directors what their obligations might be.66 This articulation of duties has also been a feature of recent finance sector legislation.67 In the recent Report on the Incorporated Societies Act 1908, the Law Commission identifies that one of the significant difficulties facing incorporated societies and their members is the lack of awareness of the obligations that might be associated with being on a committee. A key aim of the reform recommended in that Report was to bring home to those many members what those obligations might be.68 We understand from documents prepared in relation to the current review of Te Ture Whenua Maori Act (the Act governing the holding of Māori land), that trustees in that area also do not understand the obligations that being a trustee impose upon them. There is desire as part of that review to make these obligations clearer.69
58See ch 16.
59See ch 5.
60For example, some recommendations in this Report that aim to make the statutory procedure more accessible and applicable include the appointment of agents and delegates in ch 6, the appointment and discharge of trustees in ch 8, the variation and revocation of trusts in ch 10 and the review of actions of trustees in ch 11.
61Peter Blanchard “Towards a modern law of trusts” (paper presented to New Zealand Law Society Trusts Conference, 2001).
62Trustee Act 1956, s 73. See for example Church Property Trustees v Attorney-General [2013] NZHC 678, [2013] 2 NZLR 428.
63See ch 7.
64For instance, some recommendations in this Report that aim to make the new Act modern and understandable include the administrative powers, powers of maintenance and advancement and power to appoint nominees and custodians in ch 6, the apportionment of receipts and expenses in ch 7 and the powers of the court in ch 12.
65See Law Commission Some Issues with the Law of Trusts: Review of the Law of Trusts − Second Issues Paper (NZLC IP20, 2010).
66Companies Act 1993, s 131–138.
67See for instance the Financial Advisors Act 2008 and the Financial Markets Conduct Bill 2011 (342-2).
68Law Commission A New Act for Incorporated Societies (NZLC R129, 2013).
69Te Ture Whenua Maori Act 1993 Review Panel, above n 49, at 26–31.