Into the 21st century: Trust Law changes
From January 2021 a new Trustee Act will come into effect bringing with it new expectations on trustees. A number of the changes are around the duties, obligations and responsibilities of the trustees to the beneficiaries. With somewhere between 300,000 - 500,000 trusts in NZ, these changes will have a wide-ranging impact.
There are some common misconceptions about what a trust is. In simple terms, it is an obligation placed on the trustees to manage assets on behalf of a group of beneficiaries. We often see poorly-managed trusts where the people who have created the trust treat it as another source of personal funds. With the new Trustee Act some behaviours will need to change or the trustees may risk challenges from the beneficiaries.
The changes are expected to make trust management more efficient, provide better guidance for trustees and beneficiaries and make it easier to resolve disputes. The main changes include:
Mandatory trustee duties to ensure the effective and professional management of trusts. Failure to meet these duties could undermine the
integrity of the trust (ie open it up to attack) and may expose the trustees to personal liability. The mandatory duties are:
- To know the terms of the trust
- To act in accordance with the terms of the trust
- To act honestly and in good faith
- To act for the benefit of beneficiaries or to further permitted purpose of trust
- To exercise powers for proper purpose
- To know the terms of the trust
- Clarification around the core documents trustees must maintain such as the trust deed, variation documents, records of trust property and trustees’ decisions, accounting records and financial statements.
The requirement of trustees to provide basic information to beneficiaries annually and the obligation to provide additional information on
request of the beneficiaries. The basic information includes:
- The fact that the person is a beneficiary of the trust
- The name and contact details of the trustees
- Notification of any subsequent appointment, removal or retirement of trustees as they occur
- The right of the beneficiary to request a copy of the trust deed and trust information
- Making it clear that trustees have general powers to manage trust property as well as specific powers for such things as the ability to invest and use trust property to meet beneficiary welfare needs. The aim of the changes is to improve trustees understanding of their obligations and provide clear, useful and flexible powers. The trustees will be able to delegate their powers and functions in specified circumstances.
- Provisions to support cost-effective establishment and administration of trusts
- Options to remove and appoint trustees without going to court. These provisions will make it changes of trustee more straightforward and remove the cost of complexity of needing to apply to court when trustees die or lose their marbles.
The trustees will have the power to refer specific trust matters to an alternative disputes resolution (ADR) process such as mediation or
arbitration to facilitate resolution. This process will mean that disputes can be dealt with in a more timely and cost-effective manner
and can be used for:
- A dispute between a trustee and beneficiary, a trustee and third party or between two or more trustees, that may give rise to a legal proceeding
- A legal proceeding brought by or against a trustee in relation to the trust.
- Extending the maximum life of a trust from 80 years to 125 years.
How will it affect my Trust?
One of the things that we notice time and time again with trusts is that they are often poorly managed. The most common problems we see are:
- There is little or no documentation of trustee decisions,
- financial records may be non-existent,
- often one or two dominant trustees (usually the settlor) may make the decisions and expect those decisions to be rubber-stamped by the remaining trustees,
- there has not been much thought about investment of trust funds or long-term goals for the trust,
- things like wills, powers of attorney, memorandum of wishes and personal insurances are often not reviewed alongside the trust assets.
In other words, the trust assets are often managed as if they were personal assets.
We also think that many people are missing out on improving their personal wealth by not really spending any time focusing on what they own and what they spend, including the trust assets. We’re currently beta testing a tool that might help in this regard, but we’ll save that for a later blog post.
The law changes will put some serious responsibility on those non-experts who are carrying out roles with trusts. All trustees will be held to the same standards of care as an expert would. If you are found waiting, the repercussions could be serious.
The ability for beneficiaries to question and challenge the decisions of trustees has not been the norm, up to now. Many beneficiaries may not even know of the trusts’ existence, something that will change now the trustees have a fundamental responsibility to inform beneficiaries. The proposed disputes resolution process may make it easier for beneficiaries to challenge trustee decisions and hold them accountable for their actions.
Those trustees who have not engaged an investment professional to assist with investment decisions, but taken on that role themselves, may run the most risk. By taking on both the investment management and governance responsibilities, you’ll be judged against the standard of investment professionals on the job you have done.
Many family trusts may not diversify their investments but instead have a single significant investment in a private business run by a trustee. While the trust deed may enable the trustees to not follow the usual prudent investment strategy of diversification, the trustees should review the performance of that business on a regular basis.
How should I prepare for these changes?
Like many of the law changes that have come into effect in recent years (think health & safety, rental investments, body corporate law changes), you could already be managing your trust well and not have to make many process changes at all. However, many lawyers or accountants acting as independent trustees may take the opportunity to re-evaluate their continued involvement with trusts, especially if it is outside the core services they provide.
Things you may wish to consider are:
- What is the purpose of the trust and is its current structure and investments the most appropriate for your needs? Is a trust the best vehicle?
- Who are the beneficiaries, and do you wish to notify them that they may be entitled to ask for financial support? Are the trustees aware of their needs?
- Do all trustees know and understand the trust deed?
- Do all trustees participate in decisions and are they properly documented?
- How are Trust payments for beneficiaries determined and documented? How do trustees ensure that payments to beneficiaries are fair to all beneficiaries?
- Are all documents relevant to the trust, its assets and obligations freely available and accessible to all trustees? How frequently are these reviewed to ensure they are still relevant?
- Do all trustees understand the financial position of the trust and the level of risk inherent in the trust assets held?
- Have the trustees developed an investment policy statement which takes into account the level of risk they wish to carry, and is there evidence of regular monitoring financial investments and service providers against relevant benchmarks?
- Does the trust hold satisfactory insurance cover to mitigate any risks that the trustees are carrying?
- Do the trustees review the strategic goals of the trust on a regular basis and create plans to achieve those goals?
- Should the trustees obtain the services of professional experts to assist in the management of the trust and its investments?
- Have the settlors created a memorandum of wishes, and are all other documents (eg wills, enduring powers of attorney etc.) consistent with the trust deed?
What actions can YOU take?
If, after reviewing your Trust you want to make some changes, here are the three main alternatives for action.
Wind up the Trust. We’ve certainly had a love affair with trusts in the past, perhaps driven by a need to avoid estate
taxes or to mitigate business risks. We’re of the view that there are only two main reasons to have a trust:
- To safeguard personal assets from potential business risks. If you are running a business then your role as director does carry some personal risk. By having assets held in a trust you are creating a barrier against actions brought against you as a director. However, when you cease to be a business-owner, do you still need that level of protection? And if you wish to freely access the trust assets to maintain your lifestyle, do you wish to seek approval from your co-trustees prior to accessing trust funds?
- For intergenerational wealth transfer. If you have pot loads of money and a desire for your wealth to benefit more than one generation then a trust is a good vehicle for ensuring that outcome. Most people, though, have a more modest nest egg to pass on to future generations. While keeping your assets in a trust may provide some safeguards against relationship property claims a relationship property agreement is a much better.
- Remove Beneficiaries. We’ve come across examples where a trust might potentially have over 30 identifiable beneficiaries and where some of those beneficiaries are unlikely to ever receive any benefit from the trust. With annual disclosure to all beneficiaries now required, communication with those beneficiaries could become a major burden. The beneficiaries can also ask for further information about the trust, although the trustees do not necessarily have to provide that information, especially if the beneficiary is unlikely to benefit. The easiest option might be to remove certain beneficiaries or classes of beneficiaries by Deed.
- Resettlement of the Trust. If the existing Trust Deed is no longer fit for purpose and it is allowed under the terms of the trust, there might be some merit in resettling the trust into one or more new trusts. This option is likely to be the most expensive option and will require changing ownership of existing trust assets.
Whatever option is best for you, our advice is to act soon. This year has been disjointed with the Covid-19 lockdown and a number of additional financial pressures being placed on all of us. We expect a bit of a mad rush towards the end of the year as the deadline comes into view.
If you want some independent advice, we’re here to help. We have the skills & knowledge to help in the following areas:
- Determining whether a trust is the best vehicle for you.
- Helping with the winding up of the trust, if you decide it’s no longer relevant.
- Assisting with the writing of a memorandum of wishes for trustee guidance.
- Ongoing assistance around trust management and documentation of trustee decisions. Advice on good trust financial management processes.
- Providing regular one-on-one financial coaching to improve your personal wealth situation. We also work with a number of financial advisors who are able to do long-run financial forecasts so you have confidence that you will achieve your personal wealth goals.