Contents

Summary

Part 1 Background and conceptual issues

Why review the law of trusts?

5The trust is a central piece of the legal infrastructure of New Zealand and other jurisdictions that share our common law heritage. Trusts provide an effective way to separate the ownership of property from those who are to benefit from that ownership, and enable assets to be held collectively rather than individually. While the exact number is unknown, and probably unknowable, estimates of the number of trusts currently in New Zealand range between 300,000 to 500,000.

6Use of the trust form reaches from the modest family home through to high finance. Māori make extensive use of trusts as a mechanism for the holding of Māori land,2 and as a way to govern and hold assets from the Treaty settlement process.3 It is clear that trusts form an important part of economic and social life. A new Trusts Act is, therefore, very important. Our aim for the new Act is to ensure the law supporting this central piece of legal infrastructure is fit for purpose in 21st century New Zealand.

Principles underpinning the reforms

7The Law Commission’s approach in both the Preferred Approach Paper and in this final Report was guided by three core principles:

The case for reform

8An important role of the Trustee Act has been to provide administrative procedures to deal with unforeseen circumstances where the existing structure and processes of a trust fail or become unsatisfactory. This includes issues like the appointment of a trustee where there are no remaining trustees, or to allow for variation to the terms of the trust to deal with unforeseen difficulties. Such administrative machinery is not only important for the particular trusts that need to use it, but is also central to the integrity of the institution of the trust, because this depends on such procedures being available if necessary. Our view, shared by many whom we consulted, is that the procedures currently in the Trustee Act are inaccessible or inapplicable in situations where accessible and applicable law is most needed.

9The Trustee Act is important legislation used on a day to day basis by those dealing with trusts. For such an important statute, it has become outdated and convoluted. Not only are some provisions unnecessarily complex and difficult to understand, but some are simply unreadable.4 Even more importantly, the default settings that the Act establishes, such as the default powers of trustees, no longer line up with how trusts are administered in practice. Many of these reflect practices of an earlier time.

10We believe a new Trusts Act is essential. It should provide simplified procedures to enable the business of trusts at minimal expense. It is also vital that the default provisions reflect modern realities and expectations rather than legal doctrines whose relevance, importance and justification have long since passed. Our recommendations are aimed at achieving this while balancing the need to preserve the overall integrity of the settlor’s intentions and the rights of the beneficiaries to benefit from the trust, as established by the settlor.

11A new Trusts Act should set out the core characteristics of the trust, and the duties of trustees, thereby strengthening the common understanding of the institution of the trust and providing guidance to individual trustees who need to understand, without reference to large tomes or compendia of cases, what their basic obligations as trustees are. In making these recommendations we are aligned with developments in a number of other areas of New Zealand law. The Companies Act 1993 included directors’ duties to make clear to directors what their obligations might be.5 This articulation of duties has also been a feature of recent finance sector legislation.6

Nature of the new Trusts ActTop

12We propose a Trusts Act that is not simply an updated, revised and reformulated Trustee Act, although such updating or reformulation is also envisaged. Rather, we propose an enlarged statute that, in addition to covering the matters currently dealt with in the Trustee Act, will cover such matters as the duties of trustees and the circumstances in which such duties may be avoided. The new Act would also set out a more comprehensive characterisation of what a trust is.

Flexibility of equity preserved

13However, it is not our intention to create a code that completely supplants the case law, principles of equity or the creative role of judges. Courts will continue to have flexibility to deal with situations that do not fit neatly within the terms of the new statute. We do not intend the new Act to be a code to be interpreted simply on its own terms without recourse to equitable principles and case law. Rather, the characteristics of the trust and the duties set out in the new Act should be read against that history of flexibility and principle that has given rise to them. Courts will continue to have flexibility to deal with situations that do not fit neatly within the terms of the new statute. Also the supervisory jurisdiction of the courts over trusts will not be affected by our proposals. The Trusts Act will be the primary source of trust law in New Zealand, but it will not contain everything that conceivably needs to be known about the law of trusts in New Zealand.

Ambit of the new Act

14We recommend that the Act include a provision that sets out the characteristics of an express trust. This means that the courts would be able to find, on rare occasions, that arrangements that fall outside the definition used for the application of the Act are still trusts. Rather than preventing the courts from recognising trusts outside this Act, our definition is intended to act as a “gatekeeper” for access to the provisions of the Trusts Act. The advantages of falling within the scope of the proposed Trusts Act will be considerable.

Relationship with other statutes

15It is important to ensure that the interrelationship between the new Trusts Act and other statutory schemes involving trusts continues to be clear. Our general principle is that the general trust law presented in the new Act will be the baseline of the obligations that apply wherever the express trust form is used, but that specific legislation or case law can establish a context-specific approach to particular duties, obligations or procedures. The interaction between the proposed new Act and other statutory schemes is particularly important in relation to three types of trusts.

Trusts under the Financial Markets Conduct legislation7

16Financial markets legislation applies an additional layer of regulation to some commercial trusts, such as debt securities, KiwiSaver and retirement schemes. Some provisions of the Financial Markets Conduct Bill mirror, overlap and in some cases extend the obligations and regulation of those acting in the position of a trustee, for the protection of investors. Specific regulation of commercial trusts by financial markets legislation takes precedence over other trust law, including the new Trusts Act. However, because the provisions do not completely overlap or oust general trust law, it remains the back-stop for financial instruments structured as trusts.

Māori land trusts

17Te Ture Whenua Maori Act 1993 provides a specific statutory regime for land owned by Māori, including land held in Māori land trusts. Māori land trusts are generally not created by settlors, but by order of the Māori Land Court. There are a number of provisions under Te Ture Whenua Maori Act that differ from the proposed new Act and general trust law. It is our intention that the Māori Land Court and Appellate Court would continue to exercise its current jurisdiction in relation to trusts, and would continue to apply general trust law in a way that reflects this particular context. We are making a recommendation to ensure this continues.

Treaty settlement trusts

18Trusts are the most commonly used mechanism for holding and managing property following a Treaty settlement. These trusts are established by deed, but are enabled by legislation. In many respects, these trusts reflect traditional trust law principles and much of the new Act will be applicable to them in the same way it is to other large trusts. However, aspects of general trust law do not apply, such as the limit to the duration of a trust. Also, because these trusts have large numbers of beneficiaries, these trust deeds will make alternative provision to some of the recommended default provisions in the new Trusts Act. The courts, and those involved in the administration of the trusts, will continue to be able to apply the general law of trusts to Treaty settlement trusts in a manner that acknowledges and incorporates cultural values and the particular purpose of these types of trusts.

Application to existing trusts

19Generally our approach is that the new Act should apply to existing trusts as well as new trusts, as many of the recommendations restate the existing case law rather than altering it. There are a few provisions for which we have proposed a transition period in order that there be sufficient opportunity for those involved to be able to adapt to the changed obligations.

2At [1.14]–[1.17]. 
3Office of Treaty Settlements Post Settlement Governance Entities: A Guide (2012) <www.ots.govt.nz>.
4Peter Blanchard “Towards a modern law of trusts” (paper presented to New Zealand Law Society Trusts Conference, 2001).
5Companies Act 1993, ss 131–138.
6See for instance the Financial Advisors Act 2008 and the Financial Markets Conducts Bill 2011 (342-2).
7Financial Markets Conduct Bill 2011 (342-2). Changes are currently being made to the Securities Act 1978, the Units Trusts Act 1960, the Superannuation Schemes Act 1989 and the KiwiSaver Act 2006 by the major reforms to be introduced by the Financial Markets Conduct Bill 2011 (342-2).