Contents

Summary

Part 5 General trust issues

Areas relating to corporate trustees to be considered in later review

54Various proposals made in the Preferred Approach Paper have been deferred in order to consider them in the Commission’s later corporate trustee review. These include proposals relating to:

55We believe that more consideration is needed of the wider implications of proposals in these areas and the interaction of companies acting as trustees with company and insolvency law. Nonetheless, the Commission remains of the view that reform is needed to strengthen the position of creditors and prevent unfairness to those dealing with trusts who have given value to the trust. Therefore, while we are deferring consideration of some proposals made previously in the Preferred Approach Paper, we recommend in chapter 16 other changes that do fit more appropriately within the rest of this review.

Trustee’s indemnity, receivers, and standing of the Official Assignee Top

Trustee’s indemnity

56Chapter 16 sets out recommendations relating to the trustee’s indemnity, and others relating to insolvency. Recommendations in this chapter are intended to clarify and modernise the law, and make certain features of trust law more accessible. Well-understood principles relating to the trustee’s indemnity are to be set out in legislation, including the personal liability of the trustee, the trustee’s entitlement to be reimbursed or pay directly out of the trust property, and that the indemnity cannot be limited or excluded by the terms of the trust.

57We also recommend a provision for the trust deed to rank the order in which the trust property may be used to meet the trustee’s expenses through the indemnity. We anticipate this mechanism will provide some level of protection for specific property if for some reason it is inappropriate that the trustee or creditors could potentially acquire an interest in the trust assets through recourse to the indemnity. For example, this may be the case if the property is significant for cultural or commercial reasons.

58We recommend giving a creditor a limited claim to satisfy a liability through the trustee’s indemnity, even where the indemnity is impaired and the trustee would not be entitled to rely on it. This would only be available if the creditor has acted in good faith and given value, and the trust property retains the benefit. This prevents beneficiaries from receiving a windfall, based on an unjust enrichment approach.

59Clauses 45 to 49 of the indicative draft provisions illustrate our recommendations in this area (see Appendix A).

Standing of the Official Assignee

60A further recommendation provides for the Official Assignee to have standing to challenge the validity of a trust, which will require an amendment to the Insolvency Act 2006. This provision would clarify and provide more certainty about the position of the Official Assignee in proceedings that involve challenging a trust.

Receivers

61The High Court’s ability to appoint a receiver will be confirmed in legislation. The court currently has this ability under its inherent jurisdiction but this is rarely exercised. We consider it will be useful to set out this jurisdiction in the Trusts Act to make this feature more accessible and modern. The statutory provision would specify some key elements of the process including:

The rule against perpetuities and the maximum duration of a trustTop

62Chapter 17 addresses the rules against perpetuities and accumulations, which have the effect of setting a maximum duration for a trust. We recommend reform to simplify and modernise the law in this area. The current law is complex and causes considerable problems in practice. It causes uncertainty and there is a risk it may invalidate legitimate dispositions. It is not well understood, and so trust deeds may inadvertently fall foul of its requirements.

63We consider that extending the maximum duration of trusts is more appropriate than permitting trusts to continue indefinitely. In our view, there are strong policy reasons to retain some form of limit on the duration of private trusts.

64Our recommendation is to replace the current judge-made rules and the Perpetuities Act 1964 with a clear, simple maximum duration rule for trusts of 150 years. The rule against accumulations and the Property Law Act 2007 would also be updated to reflect the abolition of the rule against perpetuities and remoteness of vesting. The new law would be much easier to understand and would improve certainty in trust dealings. There are advantages to a bright line rule that provides certainty at the outset of the creation of the trust. The 150 year period will allow a high degree of flexibility for settlors to dispose of property as they choose.

65Trusts that are subject to existing statutory exemptions to the perpetuities rules will need consequently to be exempted from the rule limiting the duration of trusts, including those exempted in the Perpetuities Act, and trusts exempted in their own legislation.

66Existing trusts will continue to operate according to their own terms. They will not automatically gain the benefit of the 150 year period, and must abide by the period set out in their trust deed unless that period can be validly changed. Our view is that it is not appropriate to be able to easily alter the period for existing trusts because this will also alter beneficial interests. Extending the period automatically would risk upsetting the balance chosen by the settlor between different classes of beneficiaries. Once settled, trusts should be binding unless flexibility is provided for in the terms of the trust.

Relationship property and trustsTop

67Chapter 19 addresses an issue that arises at the interface between trusts and relationship property. Although our overall approach to this review of the law of trusts has been to address matters of core trust law rather than problems that arise at the point where trust law interacts with other policy areas, we have included two reforms to address problems at the interface between relationship property and trusts, because of the potential for injustice under the current law.

Section 44C of the Property (Relationships) Act 1976

68After carefully considering the competing arguments, we determined that section 44C does not currently strike the right balance between the interests of a partner whose rights have been defeated by a transfer of relationship property to a trust and those beneficially interested in the trust. The constraints on the compensation powers mean that it is too easy for one partner to circumvent the framework of the Property (Relationships) Act 1976 and place relationship property beyond the reach of the court.

69We have recommended that section 44C(2)(c) be amended. We think the courts should have the power to make an order requiring the trustees to pay a specified sum or transfer property of the trust to compensate the partner whose rights were defeated by the disposition of relationship property to the trust. That power to order compensation would only be available where it was not possible to otherwise compensate the defeated partner and would be restricted to the current value of the relationship property that was transferred to the trust. This recommended change would essentially give effect to the original proposal that was put forward by the Ministerial Working Group on Matrimonial Property and Family Protection in 1988 to address dispositions to trusts.

Section 182 of the Family Proceedings Act 1980

70Under section 182 of the Family Proceedings Act 1980 the court may vary the terms of ante- and post-nuptial settlements, including trusts, when the marriage or civil union of the parties comes to an end. Section 182 jurisdiction is separate from the Property (Relationships) Act rules and the concept of equal sharing in the Property (Relationships) Act is not directly relevant to a determination under section 182.

71Whether or not section 182 was overlooked at the time the Property (Relationships) Act was enacted, it provides an additional and alternative option in some circumstances where property has been settled on a trust as an ante- or post-nuptial settlement. It, however, applies only to married and civil union couples. It does not apply to de facto relationships so rather unfairly only provides a remedy for some couples and not for others. We consider that this inconsistency in the treatment of de facto couples is now an anomaly that must be addressed. We, therefore, recommend amending section 182 so it applies to de facto partners as well as married and civil union partners.