Part 2 Core trust concepts in the new Act

Characteristics and creation of a trust

20Chapter 4 presents our recommendation that new legislation include provisions setting out the characteristics and requirements for the creation of an express trust. These provisions would set out the key features of a trust as drawn from traditional trust law and represent the current legal position. They would act as a statutory definition for the purposes of the new Trusts Act. The intention is that these provisions would summarise in one place what makes a trust a trust, but would not override the existing case law. Rather than being words intended to stand completely on their own, the characteristics and requirements for the creation of a trust should be read against the history of equitable flexibility and principle that has given rise to trusts. This recommendation is central to fulfilling one of the core aims of this review: to make the law of trusts clearer and more accessible to those who are involved with trusts. We have included indicative draft provisions (clauses 1 to 6, see Appendix A) to illustrate how this recommendation could be translated into legislation.

21One of the important effects of having a statutory statement of what a trust is would be that it would be clear to the courts that, if an arrangement does not accord with the statutory characteristics and requirements for the creation of a trust, the court should find that there is no trust. Our view is that this is likely to be the best approach for handling cases where there is a question regarding the validity of a trust, rather than using potentially problematic causes of action such as “sham trust”, “alter ego”, “bundle of rights” or “illusory trust”. We have not recommended statutory intervention in relation to these causes of action.

Trustees’ dutiesTop

Mandatory and default duties

22We recommend, in chapter 5, that the new Trusts Act should state the duties of trustees. As with the statement of the characteristics and requirements for the creation of a trust, the statute should set out the duties in a way that summarises and restates well-accepted principles of trust law and would not preclude recourse to rules of equity to add detail and shades of meaning. The function of the duties provisions would be to educate by making the law clear and accessible, and to enable clear and comprehensive deed drafting that addresses matters essential to the trust relationship and the role of a trustee.

23We recommend expressly providing for six mandatory duties that are essential to the existence of a trust. These duties must be present in every trust. If a trust deed attempts to exclude the mandatory duties, they will either override the exclusion or provide evidence towards a finding that there was no intention to create a trust. We also recommend including 11 default duties, which are present in a trust unless the terms of the trust indicate otherwise by excluding or modifying them.

Trustee exemption and indemnity clauses

24Chapter 5 also addresses clauses in trust deeds that attempt to avoid or modify the consequences of a breach of trust. If the new statute is to assist people in clearly understanding the extent of trustees’ duties, it needs to address potential limitations to liability through trustee exemption or indemnity clauses. These clauses potentially undermine the importance and real effect of the duties if they are not restricted. We recommend that the terms of a trust must not limit a trustee’s liability or grant a trustee an indemnity against the trust property in respect of a breach of trust arising from the trustee’s own dishonesty, wilful misconduct or gross negligence. This limitation is an advance upon the current law by making it clear that such clauses cannot exclude liability for gross negligence. The line we propose between valid and invalid exemption and indemnity clauses balances the need to protect trustees with the need to uphold the reality of the trust. We also address the concern that many settlors are not aware of the meaning and effect of exemption and indemnity clauses by requiring trust advisers of new trusts to take reasonable steps to ensure that the settlor is aware.

Obligations relating to information

25The trustees’ duties are integrally related to how a trustee handles information about the trust. We include recommendations in chapter 5 that state the types of information that a trustee must retain and that provide a process for how a trustee should manage the disclosure of information to beneficiaries. These recommendations will aid the clarity of trust law in this area and will enable trustees to better carry out their role. The disclosure of information to beneficiaries, in particular, is an area that is difficult for trustees and is of some concern in many trusts. The recommendation is not intended to significantly alter the law, but rather to present the current law in a way that is more applicable to trustees with some clarification about the presumptions that apply and the factors that can be considered in deciding to withhold information.

26Clauses 7 to 43 of the indicative draft provisions give effect to the trustees’ duties recommendations (see Appendix A).