Powers of maintenance of and advancement to beneficiaries
R8 The new Trusts Act should:
(1) Re-enact section 40 of the Trustee Act 1956 in modernised form with the following reforms:
(a) defining the phrase “maintenance, education, advancement or benefit” in the legislation in a way that ensures they are interpreted broadly and include the concepts of “comfort” and “wellbeing”;
(b) removing the current test for the exercise of power in section 40(1)(a): “as may, in all the circumstances, be reasonable”; and
(c) removing the requirement in section 40(1)(a)(i) to take into account other trust funds to which a beneficiary may have access.
(2) Re-enact section 41 of the Trustee Act 1956 in modernised form with the following reforms:
(a) defining the phrase “maintenance, education, advancement or benefit” as in (1)(a) above;
(b) removing the limits on the amount of the advancement; and
(c) clarifying that those who hold contingent interests under a double or multiple contingency are not eligible.
(3) Provide that this is a default provision capable of being overridden by the terms of the trust.
Distribution for advancement, education, maintenance or benefit
6.11Current sections 40 and 41 of the Trustee Act, which empower trustees in private trusts to distribute to beneficiaries outside of the explicit distribution requirements in a trust deed for the beneficiary’s advancement, education, maintenance or benefit, are overly complex and restrictive. The requirements in section 40 to apply an objective “reasonableness” test and to consider other trust funds that may provide for a beneficiary, and in section 41 to limit the amount that may be advanced to a beneficiary to the greater of $7,500 or half of the beneficiary’s total share, are often overridden in trust deeds.
6.12We are satisfied that the recommendations remove confusion and uncertainty from the current default provision. All submitters commenting on the proposals in the Preferred Approach Paper were supportive of the approach taken. It is desirable to retain the current terms “maintenance, education, advancement or benefit” because their meaning is settled and a change could bring unnecessary uncertainty. The courts have interpreted these terms broadly to encompass payments that enhance a beneficiary’s comfort and wellbeing. One submitter was concerned that defining these terms broadly and explicitly and including the concepts of “comfort” and “wellbeing” would risk abandoning current guidelines when the meaning is certain. We consider that using the same words as the current provision will ensure that courts do rely upon current interpretations. Defining the terms will simply add clarity for those less familiar with the body of current case law.
6.13The New Zealand Law Society commented that the current mix of a subjective test (“at his sole discretion”) and an objective test (“as may, in the circumstances, be reasonable”) in section 40(1)(a) results in confusion and is difficult for trustees to apply. We agree that the objective test unhelpfully limits trustees’ discretion and should be removed. This is in line with our general approach of removing restrictions on trustees’ discretion in the default provisions and relying on clear trustees’ duties and a standard of care to regulate the exercise of trustees’ powers.
6.14The same principle applies to the requirement in the proviso to section 40(1) that where the trustee has notice of another trust fund from which a minor beneficiary may benefit, the trustee should apportion the payment to this beneficiary accordingly. We consider that it should be removed because it is a significant fetter on trustees’ discretion, and is impractical and potentially costly to carry out in practice. It is almost always overridden in trust deeds.
6.15We intend that sections 40 and 41 are rewritten in modernised form and that aspects of the provisions that are not discussed in this chapter are continued in the new Act. For instance, section 41(c) preserves the rights of life and other interest beneficiaries where the application of capital for maintenance may prejudice their interests.