The legislation governing NZ trusts has remained unchanged for decades as it has been predominantly governed by the Trustee Act 1956. The Act has been criticised for allowing the mismanagement of trusts with no easy legal redress for beneficiaries, however this is set to change. The legal framework has been subject to an in-depth review by the Law Commission, with the Trusts Act 2017 released in draft late last year, followed by ongoing consultation.
The draft bill seeks to clarify core trust concepts, resulting in a more useful piece of legislation that can be applied to fix practical problems and reduce the costs associated with trust administration. This will effectively impose ‘minimum standards’ for the governance of trusts so that trustees and beneficiaries are clear on their precise obligations, duties and rights.
The draft Bill features seven key proposed reforms that vary in nature from clarifying the key features of a trust, to detailing the duties and powers of trustees.
Under the new Act, trustees will be required to know the terms of the trust and act in accordance with them, act honestly and in good faith, to act for the benefit of the beneficiaries and to exercise their powers for a proper purpose. There are a further eleven default duties that apply, unless they are modified or excluded by the terms of an individual trust deed. The default duties cover areas such as the requirement to invest prudently, avoid conflicts of interest and to act for no reward. The formalisation of Trustee duties will provide protection to beneficiaries that assets will be dealt with in their best interests, and provide legal remedies if trustees fail to meet these standards. The Act also requires trustees to disclose certain information to beneficiaries who are reasonably likely to receive property under a trust.
It will be important for all trustees to understand the new law and their individual trust deeds, to ensure they discharge their duties with the appropriate standard of skill and care.
No changes to the tax treatment of trusts are proposed. However, there is additional focus on trusts from a tax perspective following the recent “Panama Papers” scandal and the alleged misuse of NZ foreign trusts, which has resulted in a Government led investigation into whether existing disclosure rules are adequate. In response, the government is beefing up the requirements for foreign trusts in three key areas; registration, disclosure, and annual filing. The proposed changes will require all foreign trusts to formally register with the IRD and be subject to an increased number of disclosure requirements, with sanctions for non-compliance with the new rules.
To some degree, the new Act serves to codify existing case law and current best practice, bringing a degree of consistency to New Zealand’s trust regime. Ideally, this will reduce the frequency with which disputes end up before the courts and benefit all beneficiaries, which is ultimately what a trust is designed for.