Contents

Chapter 4
Characteristics and creation of a trust

Meaning of a trust

RECOMMENDATION

R1 The new Trusts Act should:
(1) Provide that the new Act applies only to express trusts, but that the court may apply sections of the Act where appropriate to resulting trusts and constructive trusts.
(2) Provide that the characteristics of an express trust are:
(a) it is a legal relationship in which the trustee holds or deals with trust property on behalf of another person or persons (the beneficiaries) or for a purpose permitted at law;
(b) the trustee is bound by a fiduciary duty to deal with the trust property for the benefit of the beneficiaries or for the purposes of the trust;
​(c) any beneficiary, or the Attorney-General in the case of a charitable trust, may enforce the trustee’s duties against the trustee;
(d) the beneficiaries have equitable rights in or in respect of the trust property; and
(e) a trust must not have the sole trustee as the sole beneficiary of the trust.
(3) Provide that an express trust may be created:
(a) by the settlor by words or actions doing the following (collectively known as “the three certainties”):
  • identifying the beneficiaries, or permitted purpose; and
  • identifying the trust property; or
  • indicating an intention to create a trust;
(b) if a statute provides for the creation of an express trust, in accordance with that statute.
(4) Define the terms trustee, beneficiary, discretionary beneficiary, settlor and trust property for the purposes of the Act.
(5) Provide that a trust must satisfy all of the three certainties ((3)(a)) or be created under a statute ((3)(b)) if it is to be an express trust.
​(6) Provide that nothing in the new Act affects any provision of Te Ture Whenua Maori Act 1993 or the jurisdiction of the Māori Land Court over trusts created under that Act.

The New Zealand context

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.

Objective of the recommendationTop

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.

4.5The recommendation reforms the existing law by taking core features of a trust from case law and outlining these in statute. It has been argued that the current case law understanding of a trust has the advantage of flexibility.156 However, there are core, mandatory requirements for a trust to exist. We think it is better to draw these out in statute rather than leave them hidden. Within the bounds of these core characteristics there will continue to be room for different trust structures and purposes, because the nature of the recommended provision is general and inclusive, rather than detailed and prescriptive. We see the benefits of the definition as making it clear to a broader group of people what a trust is and what it does, and conversely providing a clear pathway for finding that something is not a trust.

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.

Recommended approachTop

4.8 We have chosen to base the recommendation on the widely accepted definition in Underhill and Hayton Law of Trusts and Trustees,157 with some elucidation of key concepts and expansion to include purpose trusts.
4.9 Several submitters and consultees raised problems with particular aspects of the definition used in the Preferred Approach Paper. We have taken account of these submissions by adjusting wording in the indicative draft to better reflect the wording of the Underhill and Hayton definition. It includes references to the fiduciary and proprietary features of trusts. We have also followed submitter suggestions to make it more flexible, expand definitions of beneficiaries and trustees, add a definition of settlor and trust property and remove the problematic requirement included in the Preferred Approach Paper proposal that trust property be “identifiably separate” from the trustee’s own property.158
4.10We have added R1(6) to ensure that the provisions on the characteristics and creation of a trust and any other provision of the new Act do not affect or limit Te Ture Whenua Maori Act 1993 or the Māori Land Court’s jurisdiction. As discussed in chapter 3, we intend that the Court would continue to exercise its jurisdiction in relation to trusts, and to apply general trust law in a way that reflects this particular context.159

Non-application to constructive and resulting trustsTop

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.

Finding that no trust existsTop

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.

4.15In this review, the Commission has considered the following alternative legislative interventions: to expand and clarify sham trusts; to restrict the purposes for which trusts can be used; to include a general look-through provision whereby trusts can be set aside or trust property considered to belong to the settlor; and to limit settlor control. We have decided against these approaches. We have concluded that the interface between the principles of trust law and other public policy considerations needs to be addressed on an issue by issue basis within the individual legislative schemes.160 The purpose of this review is to improve the clarity and functioning of trust law, and to strengthen and uphold the concept of a trust, which has been developed over hundreds of years. The courts will still have the ability to find that doctrine of sham or something similar applies independently of the legislation if they consider this law applicable and necessary.

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.

4.17While there have been several recent cases in which the validity of a trust has been in question, arguments and judgments have focused on considering whether a trust was a sham or illusory trust,161 or whether despite the existence of a trust, a settlor or discretionary beneficiary has property rights in trust property.162 We consider that it is worthwhile giving more prominence to the power of the courts to find that a purported trust was never properly established in accordance with the core principles of trust law. A legislative provision is the best way to achieve this.

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.

Application of recommendation to existing trustsTop

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.

156Helen Dervan “Trustee indemnity and trustee liability” (paper presented to Continuing Legal Education, New Zealand Law Society Conference “Trusts – best practice in 2013”, Wellington, June 2013).
157David J Hayton, Paul Matthews and Charles Mitchell Underhill and Hayton Law of Trusts and Trustees (18th ed, LexisNexis, London, 2010) at [1.1] [Underhill and Hayton].
158Preferred Approach Paper, above n 154, at P1(1)(b).
159See [3.50]−[3.58].
160Submitters were asked whether they agreed with the approach that trusts should continue to be addressed in individual legislative schemes, rather than through a uniform “look-through” provision in trusts legislation (Preferred Approach Paper, above n 154, at P57). Most submitters agreed or did not have a concern with this, but a few did highlight issues with particular legislative schemes that they would like to see addressed, such as the relationship between tax trust rules and general trust law, and insolvency.
161For instance, see FMA v Hotchin [2012] NZHC 323; KA No 4 Trustee Ltd v FMA [2012] NZCA 370, and Clayton v Clayton [2013] NZHC 2013.
162The “bundle of rights” doctrine, which argued that the various powers and interests that a discretionary beneficiary has can amount to a property interest for some purposes, see Walker v Walker [2007] NZFLR 772; Harrison v Harrison [2009] NZFLR 687; R v R HC AK FAM-2009-004-1627, FAM-2009-004-1628, 19 November 2009.