Contents

Chapter 7
Investment

Powers and duties

RECOMMENDATION

R14(1) The new Trusts Act should provide that:
(a) a trustee should have the power to invest any trust funds in any property;  
(b) the power of a trustee to invest in any property set out in (a) above should apply only to the extent that it is not overridden or excluded by the terms of the trust or the terms of the trust do not otherwise limit or modify it; and  
(c) when exercising the power to invest in property a trustee should comply with any relevant requirements contained in the terms of the trust, including any requirement relating to obtaining consent or compliance with any direction with respect to the investment of the trust fund.
(2) The new Act should provide that:
(a) when investing a trustee should have a duty to exercise the care, diligence, and skill that a prudent person of business would exercise in managing the affairs of others;  
(b) where a trustee has any special knowledge or experience or holds him or herself out as having special knowledge or experience, the trustee should have a duty to exercise the level of care, diligence, and skill that it is reasonable to expect of a person with that special knowledge or experience; and  
(c) the duties in (a) and (b) apply to a trustee to the extent that they are not excluded or modified, explicitly or implicitly, by the terms of the trust.
(3) The new Act should make it clear that the power to invest in property and the duty to do so prudently do not of themselves preclude trustees from taking account of other relevant matters when determining how to manage trust funds, or from purchasing or retaining property for purposes other than investment, where this is appropriate to give effect to the objectives or purpose of a trust.
(4) The powers and duties set out in R14(1) and (2) above should replace sections 13A−13D and sections 13F−13H of the Trustee Act 1956.
(5) Section 13E of the Trustee Act 1956 (which lists the matters trustees may have regard to when investing) should be re-enacted in the new Act. It should be redrafted to provide that trustees may take into account their overall investment strategy when exercising their powers of investment (as well as the other matters currently listed).
(6) Section 13M of the Trustee Act 1956 (which lists a number of matters the courts may take into account when considering whether a trustee should be liable for breach of trust in respect of an investment) should be re-enacted in the new Act.
(7) Section 13Q of the Trustee Act 1956 (which provides that in an action for breach of trust the court may set off a loss arising from an investment against a gain from any other investment) should be re-enacted in the new Act. For the avoidance of doubt, the new Act should clarify that the rule of general trust law that requires the assessment of the decisions of a trustee on an investment by investment basis if the decisions are called into question (the anti-netting rule) is abolished.
(8) Sections 13I, 13J, 13K, 13L, 13N, 13O and 13P of the Trustee Act 1956 should not be re-enacted because these provisions are now unnecessary.

Maintaining the status quo

7.3The Commission’s recommendations in this area do not significantly change the current position in respect of the breadth of the power to invest and the duties governing investment.

7.4Part 2 of the Trustee Act currently provides that a trustee may invest in any property201 but must exercise the care, diligence, and skill that a prudent person of business would exercise in managing the affairs of others when investing.202 If the trustee’s profession, employment or business involves acting as a trustee or investing money for others, the trustee must exercise the level of care, diligence and skill of a person engaged in that profession, employment or business.203 A professional trustee thus has to meet a higher standard. The current position is that the duty of a trustee to invest prudently (in section 13B) and the duty of a professional to exercise the level of care and skill of a person engaged in their profession (in section 13C) apply, subject to any contrary intention expressed in the trust instrument (section 13D).

7.5Section 13G imposes a duty on the trustee to comply with any requirement imposed on investment by the terms of the trust, including any requirement relating to obtaining any consents or requiring compliance with any directions with respect to investment of trust funds. Section 13E sets out a non-exhaustive list of factors a trustee may have regard to when investing, including diversification, maintenance of the real value of capital and income, capital appreciation, and inflation. Finally, section 13F preserves the rules and principles of law that impose duties on trustees, including the duty to act in the best interests of present and future beneficiaries, the duty of impartiality, and the duty to take advice. These apply to the exercise of investment powers subject to any contrary intention expressed in the terms of the trust.

7.6As already noted, the Commission recommends preserving the current position in this area. We do not favour any substantive changes to these provisions (sections 13A−13G). This is the approach we intended in the Preferred Approach Paper,204 but we did not clearly state that the duty to invest was a default duty so was subject to modification by the trust instrument. Some submitters were uncertain as to whether the duty to invest prudently and the higher duty of care and skill imposed on professional trustees would still be able to be modified by the terms of the trust instrument. The recommendations in this Report now make this clear. The duty to invest prudently and the duty of certain trustees to exercise special skill will apply to a trustee if and only so far as a contrary intention is not expressed in the trust instrument. We have also spelt out how the mandatory and default duties discussed in chapter 5 apply to powers of investment.

7.7In response to a concern raised in submissions, the recommendation also now states that when exercising any power of investment, a trustee must comply with any requirements of the trust deed, including any requirement relating to the obtaining of consent or compliance with any direction with respect to investment of trust funds.

Clarifications and amendmentsTop

7.8The Commission recommends a few changes to other provisions currently in Part 2 of the Trustee Act. These changes address existing uncertainty or deal with specific, relatively contained issues. A number of the existing provisions are also largely historic and are no longer necessary.

7.9The current provisions do not make it sufficiently clear that the power to invest does not preclude trustees from purchasing or retaining property for purposes other than investment, where this is appropriate to give effect to the objectives of a trust. In respect of Māori land under Te Ture Whenua Maori Act 1993, the primary role of the trustees may be to retain and protect land assets and taonga Māori for future generations. The purpose of other trusts may include providing a home for a beneficiary. In practice, to ensure that trustees are able to purchase property for the use and enjoyment of beneficiaries without considering the test for prudent investment, many trust deeds already specify this power. It would be helpful if the new Act was clear that trustees may take account of other relevant matters without needing to meet the standard of prudence that applies to investments. We recommend that the new Trusts Act be drafted in a manner that makes it clear that trustees can do this.

7.10Section 13C of the Trustee Act requires professional trustees to meet a higher standard of prudence. Submitters raised questions over who is a professional trustee for the purposes of the section. We have recommended that the higher standard should apply where a trustee has special knowledge or experience or holds him or herself out as having special knowledge or experience. In these circumstances the trustee should be required to exercise the level of care, diligence and skill reasonably expected of a person with that special knowledge or experience. Also, where a person acts as a trustee in the course of a business or profession, it is reasonable to expect a person in that business or profession to have special knowledge or experience. This is the same approach we have taken to the higher standard of the care imposed on professionals who accept office as trustee (see [6.33] to [6.41]).

7.11Section 13Q of the Trustee Act provides that in an action for breach of trust, the court may set off a loss arising from one investment against a gain from any other investment. This section does not expressly revoke the anti-netting rule which operated before 1988 to prevent a loss on one investment by a trustee being offset by a gain on another. Allowing the court to take into account profits from one investment and adjust losses from another was arguably an implicit repeal of that rule. However, there has been some uncertainty as to whether the anti-netting rule has been fully abolished. For the avoidance of any doubt we have recommended that it now be expressly abolished in New Zealand.205

7.12Section 13M of the Trustee Act lists a number of matters courts may take into account when considering whether a trustee should be liable for breach of trust in respect of an investment. The section provides useful guidance and we recommend that it be retained.

7.13As already noted, we think that section 13E (which lists the matters trustees may have regard to when investing) should also be retained. However, we recommend that it be redrafted to state that trustees may take into account their overall investment strategy when exercising their powers of investment (as well as the matters currently listed in the section).

7.14We recommended in chapter 6 (R7) that new trusts legislation should give trustees the broad powers of a natural person to administer the trust and deal with trust property. Many of the specific powers currently in Part 2 are consequently not needed. We have therefore recommended repealing sections 13I, 13J, 13K, 13L, 13N, 13O and 13P because these provisions are now either historic or unnecessary.

Application to existing trustsTop

7.15The reforms discussed here should, when enacted, apply to all existing and new trusts covered by the new Trusts Act.

201Trustee Act 1956, s 13A.
202Trustee Act 1956, s 13B.
203Trustee Act 1956, s 13C.
204Preferred Approach Paper, above n 200.
205This is the approach that was taken in cl 30 of the proposed Trustee Act in British Columbia Law Institute, Committee on the Modernization of the Trustee Act A Modern Trustee Act for British Columbia (BCLI Report No 33, 2004) at 49 [A Modern Trustee Act for British Columbia]. The Uniform Law Conference of Canada resolved in 2012 to adopt and recommend for enactment the Uniform Trustee Act based on the 2004 Report of the British Columbia Law Institute. See cl 33 of “Uniform Trustee Act” (Uniform Law Conference of Canada, Whitehorse YK, August 2012) accessible at <www.ulcc.ca> [Uniform Trustee Act of Uniform Law Conference of Canada].