4.2Trusts are in widespread use in New Zealand and many people with no legal training are involved in trusts as settlors, trustees and beneficiaries. The trust concept is complex, involving relationships that create obligations. The definition of a trust is not readily accessible to many New Zealanders. The Trustee Act 1956 is a collection of administrative and procedural provisions and powers that presumes a certain sort of relationship is in existence. There is no authoritative statement of how that relationship is established or the roles of the parties involved.
4.3We consider that it would be beneficial to include details of the core features of a trust in new legislation because the details would have a significant educative impact on those involved in trusts who do not have legal training. It would also make the legislation clearer on its face because it would explain the type of relationship that is regulated by the Act.
4.4The recommendation is that the new Trusts Act include a list of characteristics of a trust and how a trust may be created. These must be present for the Act to apply. This makes it a definition for the purposes of the new Act, rather than a general definition of a trust for all purposes. We have framed the recommendation and indicative draft provisions in a way that covers nearly every type of trust that is used. The provisions do not prevent the use of trusts or trust-like forms that differ from some of the characteristics and that fall outside of the new Act, if these are accepted as valid by the courts. The provisions will be useful as a clear description of the nature and effect of trusts and the way they are created.
4.6We recommend a provision, like that in draft clause 1(2) below, that makes it clear the courts can have recourse to the general law of trusts and equity in applying these provisions. Our intention is that these provisions are not a codification of the law as to what a trust is, but a statutory statement that summarises and is filled out by the existing and developing body of equitable case law.
4.7We received mixed views from submitters on whether definition provisions should be included in new legislation. While a number of submitters were supportive of the proposal, others questioned the need for a definition. There has been concern the definition and creation provisions could have the unintentional effect of altering the law or excluding some relationships that previously would have qualified as trusts, and that this could limit the development of case law. However, we believe that these concerns can be alleviated by the broad drafting of the provisions, which takes account of only the widely accepted, core features of a trust. The provision encompasses the full ambit of express trusts.
4.11We have considered whether resulting and constructive trusts should come within the ambit of the new Act. There is general agreement that some but not other parts of the new Act will be relevant to these types of trusts. There are two ways that this could be addressed: either by stating that the Act generally applies to constructive and resulting trusts but specifying which parts do not apply; or by stating that the Act does not generally apply but indicating that the courts may have recourse to the provisions of the Act when making directions about a specific constructive or resulting trust. We recommend the latter approach because much of the Act, particularly the new provisions on trustees’ duties and exemption clauses, are not relevant to constructive and resulting trusts. It is better not to attempt to define constructive and resulting trusts or to set out which parts of the Act apply to them because of the considerable variation in their nature. When finding that a constructive or resulting trust exists and determining how it operates, the courts will be able to consider or rely upon certain parts of the Act.
4.12The corollary of having principles of law (whether in statute or not) about what is required for an express trust to be established is that the courts must be able to find that a trust does not exist if those requirements are not satisfied. Consistent with our approach of stating the principles of law in the new Act, we propose that the Act include a provision to remove any doubt that this is an option open to the courts.
4.13There is currently a concern that the law lacks a means of addressing arrangements purporting to be trusts but which lack the fundamental elements of a trust, such as the intention to create a trust, the duties of a trustee, and any separation of beneficial and legal ownership. The law needs to ensure that people who gain the protection and benefits of not being considered the legal owners of property, but who have or will have a beneficial entitlement to the property, are subject to the full legal consequences of the property being in trust; that is, the management by the trustees subject to the duties of trustees for the benefit of the beneficiaries (or purpose of the trust). The property is no longer at the settlor’s beck and call, even if the settlor is a beneficiary.
4.14Our recommended approach to this issue retains significant court discretion. It would not constrain the court’s ability to assess the situation and make appropriate orders, and to find that a trust does not exist on any other basis.
4.16However, we are cognisant that at a time when trusts as a form of property holding are receiving some bad press because a minority are being used for purposes some consider unethical and because they override policies of other legislation, it is essential that the trust concept is seen to have integrity. In other words, if a trust is validly created then all the legal consequences of a trust must flow from that. If a trust is not validly created then the legal consequences from which a settlor or beneficiary may receive an advantage, including the protection of trust assets from creditors and ostensibly lower levels of personal assets and income, cannot apply. This is the case under the current law. If the three certainties are not present when a purported trust is established, the court must find that there is no trust. The consequences of a finding that any of the certainties are not fulfilled would be those available to the court under the current law. We do not consider it necessary to state the effect of a purported trust found not to have met the three certainties.
4.18Inland Revenue submitted that the legislation should allow a trustee, beneficiary or any other party, including a creditor, to apply to the court to confirm a trust’s existence. We consider that this could result in unwarranted interference in a trust.
4.19The recommendation in this chapter should apply to all trusts, whether new or existing at the time of the enactment of the new Act. The provisions reflect current law so will not alter the position of existing trusts.