Custodian and advisory trustees
R27 The new Trusts Act should re-enact section 50 of the Trustee Act 1956 in modernised form with the following clarifications, additions and reforms:
(a) continue to provide for the appointment of a corporation as a custodian trustee;
(b) provide that, subject to the terms of the trust:
(i) the role of the custodian trustee is to hold the trust property, invest funds and dispose of the assets as the managing trustee directs in writing;
(ii) the trust property vests in the custodian trustee as if the custodian trustee were the sole trustee;
(iii) the management of the trust property and exercise of all powers and discretions exercisable by the trustee under the trust remain vested in the managing trustees as if there were no custodian trustee;
(iv) the custodian trustee has all the administrative powers of a trustee but none of the discretionary powers;
(v) the custodian trustee has the power to execute any documents or perform any administrative action directed by the managing trustee; and
(vi) the custodian trustee may be appointed over part of the trust fund.
(c) provide that the custodian trustee must act on the instructions of the managing trustee and is liable for loss caused by:
(i) failing to execute the instructions of the managing trustee; or
(ii) acting without the authority of the managing trustee;
(d) provide that the custodian trustee is not liable for executing instructions of the managing trustee where the managing trustee is in breach of trust; (e) provide that the custodian trustee may apply to the court for directions if it receives instructions from the managing trustee that it suspects are in breach of trust, but shall not be liable for a failure to do so;
(f) provide that, in addition to any remuneration or commission payable to the custodian trustee, the custodian trustee has the benefit of the right of indemnity in respect of costs incurred by the custodian trustee; and
(g) provide that the appointment of a custodian trustee must be in writing.
What are custodian trustees?
9.2Custodian trusteeship is a mechanism that allows for the appointment of a corporation as an ongoing bare trustee to hold assets on behalf of managing trustees. If a custodian trustee is appointed, the custodian trustee’s role is to hold and administer trust property on the instructions of the managing trustees. The custodian trustee must accept the instructions of a majority of the managing trustees as if they were given by all the managing trustees. If the managing trustees change, there is no need to change the legal ownership of the trust assets. This mechanism allows for a separation between legal ownership, management, and beneficial interest. We understand that it is widely used in Māori land trusts, and trusts with overseas assets or an overseas managing trustee. Section 225 of Te Ture Whenua Maori Act 1993 applies when a custodian trustee of a Māori land trust is appointed.
9.3We recommend that the role of custodian trusteeship is spelt out to a greater extent than it is in the current Act. This includes clarifying that custodian trusteeship is essentially an administrative role, and imposing duties and restrictions on liability. We do not propose changing the nature of the custodian trustee’s role. The duties and liabilities included are consistent with the current conception of the role. Submitters on the Preferred Approach Paper did not have any issues with what was proposed.
9.4We recommend clarification in relation to when a custodian trustee receives unlawful instructions from the managing trustees. The role of the custodian trustee is to act on the instructions of the managing trustees. It is not to check whether these instructions are valid. An injured beneficiary can recover from the managing trustees directly. We consider that the custodian trustee should only be liable where:
- the custodian trustee, on its own initiative, perpetrates a fraud against the trust;
- the custodian trustee fails to execute the instructions of the managing trustees, and thereby causes loss to the trust; and
- the custodian trustee acts independently of instructions from the managing trustees (but not fraudulently), and thereby causes loss to the trust.
9.5These situations would arise only where the custodian trustee acted without the authority of the managing trustees. The new Act should provide that the custodian trustee is liable for failing to execute the instructions of the managing trustees and acting without their authority. These should be mandatory provisions for which liability cannot be excluded. The legislation should also provide that the custodian trustee has the duty to act on the instructions of the managing trustees and has all the administrative powers of a trustee, although is not able to exercise discretion.
9.6In order for custodian trustees to efficiently deal with property and to improve clarity, we recommend that the new Act provide that a custodian trustee is entitled to indemnity from the trust fund. We also recommend that a custodian trustee be able to be appointed over part of the trust property as the default position, as this may be useful in some circumstances and is consistent with the purpose of custodian trusteeship.
9.7The recommendation differs from the original proposal in the Preferred Approach Paper by not extending the role of custodian trustee to natural persons. We now consider that it is better to retain the current scope of the custodian trustee role. The appropriateness of retaining this role for corporations may be reconsidered in the context of the Law Commission’s corporate trustee review. We also are no longer proposing to allow multiple custodian trustees, because of the need to be cautious about altering this role when we are not aware that there are any problems with the current approach.
9.8These changes mean that the new Act, like the Trustee Act, will differ from Te Ture Whenua Maori Act in the nature of custodian trusteeship. In the Māori land trust context it is appropriate to allow multiple custodian trustees and natural person custodian trustees because the custodian mechanism is relied upon to enable those trusts to be managed effectively and efficiently where there are large numbers of trustees. Our recommendations are not intended to affect the application of section 225 of Te Ture Whenua Maori Act.