Part 2: Trusts Act 2019: Trustees' duties

Tuesday 22 October, 2019

This article is the second in our series on the new Trusts Act 2019. Click here to see the first article where we introduce the Act and discuss some important administrative changes.

In Article 1 we explored the purpose of the new Trust Act 2019 and some of the administrative changes that are being made to trusts in New Zealand. This week, we are looking at one of the most important aspects of the new Act: the changes to trustees’ duties. There are two categories of duties: mandatory, which trustees have to comply with, and default duties, which trustees will have to comply with unless the duties are modified or excluded by the trust deed.

Mandatory duties

These are duties which the trustee must comply with; they cannot be modified or excluded by the terms of the trust. The trustee must:

• 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

These duties are not compulsory; they can be modified or excluded by the trust deed, but they will apply unless they are expressly excluded. The following duties apply to existing trusts from 30 January 2021 and to new trusts. 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.

If you are paying someone to advise you on the creation of a trust or to prepare the terms of the trust, and they recommend that you modify or exclude one or more of the default duties, they must make sure that you are aware of the effect of the modification.

Exemption and indemnity clauses

From 30 January 2021, a trust deed can no longer limit trustees’ liability for breach of trust arising from dishonesty, willful 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 Court will 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.

Duty to hold documents

Another significant part of the Act 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:

• The trust deed and any other document that contains terms of the trust;
• Any variations made to the trust terms;
• Records of trust property identifying the assets, liabilities, income and expenses of the trust;
• Records of trustee decisions made during the trustee’s trusteeship;
• Written contracts entered into during that trustee’s trusteeship;
• Accounting records and financial statements prepared during that trustee’s trusteeship;
• Documents of appointment, removal, and discharge of trustees;
• Any letter or memorandum of wishes from the settlor;
• Any other documents necessary for the administration of the trust;
• Any of the above documents that were kept by a former trustee and passed on to the current trustee.

We are working on technology solutions to ensure that our trust clients can easily meet the obligation to keep trust records. 

There are some significant changes to the duties and obligations of trustees in the new Trusts Act 2019. If you have concerns about how the changes may affect you or your trust, contact Peter Fanning, Andrew Orme (Rotorua based), Campbell Stewart or Peter Duncan.