The new Trust Act modernises trust law and makes significant changes to the way trusts are currently administered in New Zealand. The Act aims to update trust law and make the law accessible to all (not just lawyers). The Act came into force on 30 January 2021, and will apply to all existing written trusts, as well as any new written trusts established. It could also apply to statutory trusts or other types of non-express trusts (such as constructive or equitable trusts) if the Court decides that the Act should apply.
Before the changes came into effect a family trust had a time limit of 80 years. Then you have to wrap it up and distribute the assets. The new legislation extends the life of a trust to 125 years, which involves significant succession planning adjustments.
The quality of governance and administration of trusts is often well below the standards of other countries. This new law will be targeted towards those that are poorly governed, but it will result in a higher level of scrutiny on all trusts. Up until now, a trustee’s job description has been clear as mud with many families getting into strife unaware of their trustee’s responsibilities. Since the new bill came into place, a trustee’s role are clearly outlined, and include the following mandatory duties:
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Knowing the terms of the trust
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Acting according to the terms of the trust
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Acting honestly and in good faith
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Acting for the benefit of the beneficiaries or the permitted purpose of the trust
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Exercising trustee powers for a proper purpose.
Default trustee duties (which can be modified or excluded by the terms of a trust) include:
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The general duty of care
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The duty to invest prudently
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The duty not to exercise a power for a trustee’s own benefit
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The duty to consider the exercise of a power
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The duty not to bind or commit trustees to future exercise of discretion
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The duty to avoid a conflict of interest
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The duty of impartiality
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The duty not to profit
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The duty of a trustee to act for no reward
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The duty to act unanimously
The most controversial aspect of the new law is the obligation to make available ‘basic trust information’ to beneficiaries. In New Zealand, it’s common for not all (or sometimes any) beneficiaries to be properly engaged with trustees and often beneficiaries are unaware of trusts under which they may have an interest. As a general principle, the new law requires there to be at least a basic level of reporting to all the adult beneficiaries and to the parents/guardians of all the minor beneficiaries.
Other changes include:
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Obligations on trustees to keep certain information about trusts
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The age of majority has changed from 20 to 18 years of age.
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A mechanism to request the court to review the decisions and actions of trustees
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Flexible powers for trustees to manage trusts
The new Act also places a restriction on indemnity clauses. Where a trustee is dishonest, demonstrates wilful misconduct or is grossly negligent, a trustee cannot rely on exclusion from liability under the indemnity clause.
If a trustee wishes to retire they must seek a discharge in writing from the person able to authorise the discharge. The Act also simplifies the process for removing a trustee who becomes mentally incapable of performing their trustee duties. Note, a trustee retiring from their role is not automatically discharged from liability.
Trustees are also meant to know the terms of the trust and to act in accordance with the terms thereof. This means that ALL trustees are required to hold a copy of the trust documentation. It is not sufficient, by way of example, for just one copy to be held in one location e.g. the Accountants office.
From the 2021-22 tax year it is proposed that trusts include additional information in their annual tax return such as:
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The amount and nature of any new settlement on the trust
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The name, date of birth, tax residence and tax number of any person making a settlement
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The amount of any distribution made by the trust during the year (capital as well as income distributions)
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The name, date of birth, tax residence and tax number of any person receiving a distribution
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The name, date of birth, tax residence and tax number of any person with the power to appoint or dismiss a trustee, add or remove a beneficiary, or to amend the trust deed
In addition it is proposed that the IRD will have the power to request the information for the previous 7 years.
These changes have many implications, especially for those who set up their trusts under the less burdensome legislation.
It may now be the situation for many where:
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As a result of increased compliance duties, the increased cost of administering a trust may no longer be a cost-effective option
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Greater transparency obligations to beneficiaries will put things in the open that some trust settlors/trustees may prefer to keep private
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A trust may no longer suit your needs and situation.
As your accountant and/or Independent Trustee we believe it is of vital importance for you to schedule a trust review with us or your lawyer to ensure compliance with the new act. If we have not heard from you by the end of February 2021, we will be contacting you for an appointment.