Major changes in NZ Trust Rules from 30 January 2021 – Trusts Act 2019

Changes to Trust legislation have been made, with the provisions of the new Trusts Act 2019 coming into effect on 30 January 2021. Now is the time to take action to ensure that you are prepared for these changes.
The Trusts Act 2019 is the first major rewrite of trustee legislation since the Trustee Act 1956. The new Act is intended to update existing Trust law, making it more accessible for all New Zealanders and ensuring that beneficiaries have enough information so that the terms of the Trust are being carried out properly.

Major ChangesTrustee DutiesThe new law differentiates between mandatory duties and default duties. 
Mandatory duties include

• Know the terms of the trust;
• Act in accordance with the terms of the trust;
• Act honestly and in good faith;
• Act for the benefit of the beneficiaries, and hold or deal with trust property for their benefit; and
• Exercise the trustee’s powers for a proper purpose.

Default duties
Default duties will apply to existing trusts from 30 January 2021 and to new trusts. Please ensure that your advisors are fully explaining the consequences of modifying any of the following terms. The trustee must:

• Exercise reasonable skill and care in administering the trust, having regard to any special knowledge or expertise that the trustee has, or to any special business or professional knowledge or expertise if the trustee is acting in the course of a business or profession;
• Invest prudently, with the same regard to special knowledge or experience as above;
• Not exercise their power for their own benefit, whether directly or indirectly;
• Regularly and actively consider whether they should be exercising their powers;
• Not bind or commit trustees to the future exercise or non-exercise of their powers;
• Avoid conflicts of interest;
• Act impartially between beneficiaries;
• Not make a profit from being a trustee;
• Not take any reward for being a trustee (this doesn’t prevent reimbursement for legitimate expenses and disbursements); and
• Act unanimously with the other trustees.

Beneficiaries
Under the new rules all trustees have a positive duty to inform every beneficiary they are a beneficiary of the Trust. They must be informed of the names and contact details of the trustees, whether there are any changes to the trustees, and of their rights to request trust information. This is a very significant change as the settlors may have wished for the trust information (like existence of it, assets in it and distribution terms etc) remain confidential from the beneficiaries due to family dynamics. All those trusts will have to be amended if the Settlors continue to wish for the information to remain confidential, instead opting for it to be in their Will instead.

Disclosure of Trust InformationThis is defined as information regarding the terms of the Trust (i.e. the deed of trust and all amendments), the administration of the trust and the trust property but does not include trustee decisions. There is a presumption towards disclosure to beneficiaries unless there is exceptional circumstances and this is following modern common law principles.  

Increase to the Trust PeriodThe law changes revoke the Perpetuities Act and increases the trust period from 80 years to 125 years.  

Duty to hold documentsA significant amendment clarifies for trustees what documents they must hold. Often trust documents are held by just one trustee, or by the trust’s lawyers or accountants. The new Act provides that each trustee must keep the following documents, so far as it is reasonable, and pass them on to at least one continuing or replacement trustee when they stop being a trustee. There is a technological solution to this - eg a shared drive etc that may solve this issue but we can advise when you're ready. These are the documents that must be held : 

1. The trust deed and any other document that contains terms of the trust;
2. Any variations made to the trust terms;
3. Records of trust property identifying the assets, liabilities, income and expenses of the trust;
4. Records of trustee decisions made during the trustee’s trusteeship;
5. Written contracts entered into during that trustee’s trusteeship;
6. Accounting records and financial statements prepared during that trustee’s trusteeship;
7. Documents of appointment, removal, and discharge of trustees;
8. Any letter or memorandum of wishes from the settlor;
9. Any other documents necessary for the administration of the trust;

Exemption and indemnity clausesFrom 30 January 2021, the trust deed can no longer limit trustees’ liability for breach of trust arising from dishonesty, wilful misconduct or gross negligence (rather than ‘ordinary’ negligence), nor can trustees be indemnified out of trust property for such breaches. If there is a clause in your trust deed that tries to do this, the clause will be invalid. This applies to existing trusts, as well as new trusts, so we encourage you to look at your exclusion and indemnity clauses to make sure that they comply with the new legislation. We can assist you with this if you have concerns.

In deciding whether a trustee has been grossly negligence, the factors that the Courts may consider includes:

• The circumstances, nature and seriousness of the breach;
• The trustee’s knowledge and intention relating to the breach;
• The trustee’s knowledge and skills and whether the trustee has been paid;
• The purpose for which the trustee was appointed;
• The type of trust, including the degree to which the trust is part of a commercial arrangement, the assets held by the trust, how the assets are used, and how the trust operates.

These changes have the potential to affect a significant number of trusts and trustees. Although the threshold for gross negligence has been set very high, it is important that trustees are aware of changes in their exposure to liability.

What are the practical implications to existing trusts you need to think about?
For existing trusts, the deed of trust and trust structure should be comprehensively reviewed, and varied if necessary, for the following:
​
Do you really need a trust? There are a lot of trusts in New Zealand that are really not required and the changes to New Zealand’s trust law is likely to be a good reason for trusts to be wound-up. As a start please call to have a thorough discussion / debate of why's, what's, when's, who's of your trust. If the conclusion of the debate is to wind up, then we proceed with winding up, otherwise,

• decide what part of the trust deed requires amendment or deletion to remain consistent with the objectives of the Trust / Settlors etc.
• Review the trustee duties that need to be amended to include mandatory and perhaps opting out of the default ones.
• Identify the beneficiaries going forward the will need to be informed of the Trust details. Clearly this has some major issues with this. Older style deeds have a ‘kitchen sink’ class of beneficiaries to include extended families like nieces, nephews, spouses etc. In some older trust deeds there may be no power to remove or appoint new beneficiaries.
• What information should be provided to beneficiaries once any changes to the beneficial class are complete and the implications of providing that information. For instance a beneficiary may have amounts sitting in tha beneficiary's current account that is repayable on demand. We believe that due to the presumption of disclosure in the new rules, trustees will need to provide to ALL beneficiaries a copy of the deed of trust and the annual financial statements for the trust. This point alone will result in some significant changes to beneficial classes of trusts in New Zealand.
• Can the deed of trust be amended to take advantage of the increased time period for a Trust? It is likely this will not be possible in some older deeds, but more modern deed may have some flexibility to allow this.

---

Disclaimer
The above publication discusses income tax & other issues generally and is not intended to be specific tax or other advice. Whilst every effort has been made to provide valuable, useful information, Core Business Services Ltd, any related suppliers, associated companies & practices accept no responsibility or any form of liability from reliance upon or the use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only. Please do consult with your tax advisor or call this firm for information / advise specific to your circumstances before finalising any particular course of action