Contents

Chapter 9
Custodian and advisory trustees

Advisory trustees (special trust advisers)

RECOMMENDATION

R28 The new Trusts Act should re-enact section 49 of the Trustee Act 1956 in modernised form with the “advisory trustee” renamed the “special trust adviser” and with the following clarifications and reforms:
(a) a special trust adviser may advise the trustee on any matter relating to the trust;
(b) a special trust adviser is not a trustee, and does not have the powers and duties of a trustee;
(c) the trustee is not liable for anything done or omitted by the trustee by reason of following the special trust adviser’s advice unless the trustee is acting dishonestly, in wilful breach of trust or grossly negligent in following the advice (replacing proviso (c) to section 49(3) of the Trustee Act 1956); and
(d) the trustee is not liable for a breach of trust merely because the trustee elects not to follow the special trust adviser’s advice.

Role of the special trust adviser

9.9Section 49 of the Trustee Act is a default provision that provides for the appointment of advisory trustees by the settlor, the court, a trustee or a person with a power to appoint a trustee. An advisory trustee is not a real trustee, as he or she does not have legal ownership of the property or the powers or duties of a trustee. The advisory trustee is an adviser to the real trustee. The trust property remains vested in the trustee who retains sole management and administration of the trust. The trustee may consult the advisory trustee on any matter relating to the trust or trust property.

9.10This statute-created adviser (which we recommend should be called a special trust adviser) is still considered a useful part of the New Zealand’s trusts framework. Trustee corporations, including the Māori Trustee, commonly use advisory trustees as they enable family members or advisers to be involved and oversee the administration of the trust while allowing the trustee corporation to do the day to day administration. Submissions also indicated that advisory trustees may be settlors, particularly those with special skills that can help the trustees, and experts, such as financial advisers.

Liability of trusteesTop

9.11The area where there is a need for statutory reform relates to the trustee’s liability when following the adviser’s advice. Currently the trustee is not required to follow advisory trustees’ advice, but the trustee’s liability is limited when following it. There is a lack of clarity about the extent of the protection from liability in proviso (c) to subsection (3) of section 49. The wording is confusing as it could be interpreted as a blanket protection for the trustee from liability when following an adviser’s advice. However, this seems unlikely in the context of the section as proviso (d) implies that the trustee is not entitled to rely on the advisory trustee’s advice if the trustee considers it would breach the trust or the law.

9.12There was some concern from submitters regarding our original proposal to clarify that the trustee is liable if he or she “knew or ought to have known” that the advice of an adviser was unlawful, contrary to the terms of the trust or trustee’s duties, or was advice that no reasonable adviser would have given. Several submitters considered that trustees should be able to rely on the advice of an adviser without fear of liability. A number were concerned about making trustees liable where they “ought to have known” that a course of action was unlawful or would breach the trust because this would impose an unreasonable burden on trustees. Conversely, some submitters were concerned about the gap in accountability that exists where a trustee is absolved of any liability when he or she relies on a special trust adviser’s advice.

9.13The intention with section 49 seems to be to create an adviser with a formal status within the trust arrangement in whom trustees are entitled to have some confidence. The person appointing an adviser is generally the settlor, the court or a person with the power to appoint trustees, although it may be the trustee. It seems appropriate that there is some protection from liability for a trustee relying upon an adviser because of the statutory status of this adviser, but that this should not be a blanket protection or too extensive in order not to dilute the trustee’s responsibility too far. A trustee should still be required to understand the terms of the trust and recognise potential breaches of trust.

9.14We accept that it is overly onerous to remove the protection from liability when a trustee ought to have known that an adviser’s advice was in breach of trust or unlawful. Instead we recommend that the language used in relation to the restriction on trustee exemption clauses is used here: the trustee will not be liable when relying on the adviser’s advice unless in following the advice the trustee is dishonest or is grossly negligent. We think that trustees should be afforded the same degree of protection from liability as they can have under an exemption clause but it should not go as far as a blanket protection from liability.

9.15We recommend that it should not be mandatory for trustees to apply to the court for direction when the adviser’s advice is unlawful, objectionable or exposes the trustee to liability.242
242This is consistent with the Select Committee’s version of the Trustee Amendment Bill 2007 ((144-2) (select committee report)), but differs from what was proposed in the Law Commission’s 2002 Report Some Problems in the Law of Trusts (NZLC R79, 2002) at 24.