The new Trusts Act
The importance of the settlor’s intention
3.31During the consultation process we often heard the view that since a trust is created by a settlor with property that had previously been the settlor’s, priority ought to be given to the settlor’s intentions. There have always been active debates over how best to give effect to a settlor’s intention once a trust has been formed, even if those wishes subsequently prove to be foolish, nonsensical or against widely accepted public policy, and in some cases against the very nature of the trust itself. Some settlors will always try to keep a degree of control or influence that is compatible with the existence of a trust; others will seek to give discretion to trustees, or seek to immunise their failures in ways that are compatible with the trustees’ duties. Debates over what settlors can appropriately control cannot be resolved completely, and this Report does not seek to do that. These debates are fought over at a theoretical level in law journals, and also play out in the very practical advice that solicitors, and other advisers, give to settlors establishing trusts. During our consultation process, the issue of the appropriate place for settlor control featured in our consultation on very practical issues, such as the amount of information that ought to be provided to beneficiaries, and which beneficiaries ought to be provided with that information.
3.32The view that settlors can set up their trusts under whatever conditions they choose is sometimes referred to in literature as “contractarian”. The contractarian assumption being that because at the root of the trust is a contractual obligation between the settlor and trustees in terms of how the trustees deal with the property, a settlor ought to be able to impose whatever conditions in that contract the settlor wishes to impose. In the academic literature, the contractarian model of the trust is often associated with John Langbein of Yale University who has written a number of important and influential articles. The law ought to respect the ability to give away property absolutely, or the ability to enter into contracts with others about how those others might use the property. However, the law should also take seriously the proposition that when establishing a trust, the settlor intends something different from a simple gift or the simple establishment of a contractual relationship with the trustee in relation to the property.
3.33We have approached this final Report from the principle that people are entitled to hold and dispose of their property in the way in which they wish, including by settling it on a trust. It is this that informs not only our sense of what ought to be done in the preliminary provisions of a new Trusts Act (setting out the characteristics of express trusts and the duties owed by trustees) but also in the more administrative and mechanical parts of that Act. Both types of provisions, in our view, ought to reflect the central tenet of trust law that, above all, courts ought to strive to give effect to the intentions behind the trust. But it cannot be that settlors can simply choose from a laundry list of benefits that they seek, without also having to take the essential elements of the trust that confer those benefits.
3.34It is for this reason that we have insisted in this Report that there be an articulation of the duties that cannot be waived by a settlor (“mandatory duties”). If the settlor can waive those duties, particularly the duty of good faith, then it is not clear to us how the settlor is intending to create a trust. A far more likely interpretation of such an arrangement is that the settlor was simply intending some kind of gift where the supposed trustee holds the property absolutely for the trustee’s own benefit, but perhaps constrained by contractual restriction. Indeed, one way of understanding the rather confusing, and confused New Zealand case law, which considers “sham”, “illusory” or “alter ego” trusts, is the sense that just because the word “trust” is used in relation to a particular kind of conveyance or contract does not mean a trust has been created.
3.35This Report is written to be consistent with the proposition of the law giving effect to the settlor’s intention to create a trust, within the common understandings of what a trust is. Moreover, we have attempted to be clear in the statute, in a way that case law and textbooks are sometimes not, as to which duties can be modified or excluded by the settlor when creating the trust. The express recognition of such duties as being “default” is very much intended to emphasise the legitimate role that settlors have in making decisions about how the trust will operate in the future. Similarly our proposals in relation to the variation and revocation of trusts reflect already well understood principles, such as the rule in Saunders v Vautier.
3.36Interestingly, Langbein makes a similar point in a number of his more recent articles, that there must be some things settlors cannot provide for in their trust deeds because they would interfere with the role that they are establishing for their trustees to hold property for the benefit of the beneficiaries. Judges and legislators have always been alive to the difficulties created by too much settlor control in terms of how a trust is administered, especially when dealing with the “dead hand” problem where constraints that may have made sense to the settlor at the time the trust was settled no longer make particular sense going into the future. For example, a clause in a trust document that says a Rembrandt painting is to be destroyed by the trustees should not be enforceable because it conflicts with the prime obligation that the trustee holds that property for the beneficiaries. If one is to take the trust model seriously there needs to be some limits at the margins as to what settlors can prescribe or excuse.
3.37An area where we have been conscious of the need to balance the importance of the settlor’s intention with the concern not to allow the “dead hand” of the settlor to have too much enduring control is in relation to the rule against perpetuities. Our approach is to allow newly created trusts to endure for up to 150 years, which extends the potential reach of the settlor’s influence. We have taken care in formulating the approach to existing trusts not to allow the settlor’s intention with regard to the duration of the trust to be too easily ousted, so the duration of existing trusts will only be able to be extended to 150 years in limited circumstances.
3.38Three particular sets of proposals have been raised during consultation as potentially transgressing the primacy of settlor intention. First, those relating to the provision of information to beneficiaries where the settlor may not wish to give information to those beneficiaries. Second, those relating to the review of a trustee’s discretion. Third, those that would prevent settlors from excusing trustees from gross negligence (we used the term “recklessness” in the Preferred Approach Paper).
3.39In relation to the provision of information we are still of the firm view that any definition of the trust requires that beneficiaries be able to enforce that trust. To do that, beneficiaries need access to information. However, we have been mindful of those submissions that state that a settlor might be wary of such requirements and may have good reasons why particular beneficiaries are not to receive either general or particular information. For instance, we have often heard of settlors’ concerns that the revelation of the existence of a trust might set a particular beneficiary on the wrong track in life or that some settlors may recognise a particular beneficiary for private reasons that would disrupt families or other relationships if they were revealed. At the same time, there are less convincing reasons for refusing to provide beneficiaries with information, which we do not think should be taken into account. We have taken these concerns about our original proposals seriously and have modified the recommendation regarding the obligation to provide information. While maintaining the prime obligation of trustees to provide sufficient information to sufficient beneficiaries to enable the trust to be properly enforced, modification will be allowed so that trustees can take account of a broad range of factors, including settlor intention, when deciding to reveal particular information to certain beneficiaries, or indeed provide any information to some beneficiaries.
3.40In relation to the review of the exercise of trustee discretion, we have continued with our proposed redrawing of the current section 68 of the Trustee Act, but have sought to emphasise that review ought not to enable courts to substitute their views for those of trustees. Under our proposed new section, review of the exercise of trustee discretion should continue only to occur where the trustee has made a decision that no reasonable trustee could make.
3.41We have continued with our proposal that a settlor should not be able to immunise trustees from liability for deliberate breaches of trust, as such clauses strike at the very nature of the trust itself (something recognised in current case law). We have also recommended that settlors not be able to immunise trustees against liability for gross negligence. However, in deference to those concerned about settlor intentions, we have changed the recommendations so that settlors would be able to exclude liability for a merely negligent breach of a mandatory duty.