Duties & Responsibilities as a Trustee

5 March, 2014 | Peter Smith

The Law Commission has released its report on the review of the law of trusts.  While recommendations have not yet been made law, the proposed changes are likely to proceed and all trustees of trusts should be aware of their possible new responsibilities and how this may affect how they manage the trust.

Certainties of a trust

One thing that has not changed but has been reinforced is that every express trust must have:

• identification of the beneficiaries;
• identification of the trust property;
• intention to create a trust

If you fail to have all three certainties the Court could find no true Trust was ever in existence.

Treatment of beneficiaries

There is also a continued requirement to consider the needs of all beneficiaries but no need to treat them equally, and a default duty not to be unfairly partial to some beneficiaries to the detriment of others. So, if trustees do not show that they considered all the beneficiaries  then there will be a default duty imposed which requires the trustees not to be unfairly partial to some beneficiaries to the detriment of others.

Notifying beneficiaries

One change that may happen due to the Law Commission’s review is that as a trustee you would have the responsibility to notify “qualifying beneficiaries” of their status and of their right to request a copy of the trust deed and any related information. A qualifying beneficiary is defined as those the settlor had intended to have a realistic possibility of receiving trust property under the terms of the trust.  Trustees who fail to do so would not be meeting their mandatory obligations.

Retention and supply of information requirements

You should, as a trustee, ensure that you meet the requirement to retain and provide sufficient information to beneficiaries to enable the trust to be enforced.  It is highly likely that when the law change comes into force you will need to have your trust paper work in place or risk falling short of your duty as a trustee.

Level of expertise expected of trustees

Ensure that as a Trustee you exercise such care and skill in exercising trust powers you have.  A trustee whose day job is a plumber would be expected to have less skill than a trustee whose day job is an accountant.  Breach of this default duty may result in personal liability for you.

Personal liability for a trustee

You should be aware that under the new law change, a trustee would assume personal liability for expenses and liabilities incurred and are entitled to be reimbursed from the Trust property.  Liability cannot be excluded or limited by the terms of the Trust Deed so it is vitally important that as a trustee you make sure you are aware of the extent of the trustee’s duties.

Power to appoint investment managers

Another change the Law Commission has recommended is that as a Trustee would have the power to appoint investment managers and give them authority to make investment decisions subject to certain safeguards.  This absolved responsibility allows you the trustee to do so with more confidence.  As it stands liability sits with the trustees so there is a real reluctance to hand over authority to investment managers.

Perpetuities Act 1964 / Creating generational wealth

The Law Commission has made recommendations to extend the perpetuities period from 80 to 150 years.  This will cater for those wanting long term planning, more flexibility and certainty.  The law change will better support the modern investment portfolio and be more conducive to creating generational wealth.

Trust property versus relationship property

Trustees should be aware that recommendations to change the relationship property law to provide relief to a disadvantaged spouse or partner when property has been transferred to a trust.  In the past, trusts have been used to shield from relationship property claims. A Contracting Out Agreement (also known as a prenup) is the only legal way to legally clarify both parties’ respective future entitlements.  Careful thought about the impact of relationship property and trust property is needed. The family trust is no longer a safe guard against relationship property claims.

New process for disputes

A change that may happen due to the Law Commission review and that you should be aware of is that the courts would have broadened power to review the actions of trustees through the introduction of a new two-stage process.  This requires applicants firstly to provide evidence which raises a genuine and substantial dispute and secondly, when the court has been satisfied that the applicant has established a real and genuine dispute, the trustee must be given the opportunity to respond.

As of March 2014, these changes have not yet been passed into law, but all trustees should be aware of how these possible changes impact how they currently administer the trusts they act for.

To discuss these impending changes or anything to do with the administration of discretionary family trusts, please contact experienced family trust law expert, Peter Smith by phone on 09 837 6882 or email peter.smith@smithpartners.co.nz