New landscape for trusts

For the first time since the 1950s, New Zealand trust law is being overhauled – and one of the country’s leading legal specialists says it’s going in the right direction, but financial advisers and other professional services providers who work as trustees will need to step up and move quickly to help their clients.

The new Trusts Act 2019, which comes  into effect on January 30, 2021, replaces the Trustee Act 1956 and the Perpetuities Act 1964. The new Act aims to make trust law more accessible, to clarify and simplify core trust principles and essential obligations for trustees and preserve the flexibility of the common law to allow trust law to continue to evolve through the courts. It is important to note that the new Act provides more beneficiary rights than ever before.

Henry Stokes, general counsel for Perpetual Guardian, says the Trusts Act 2019 contains mandatory and default duties of trustees, a first for New Zealand. “The whole landscape of trust law has changed significantly in the last five to 10 years, with lots of changes in case law that have crystallised trustee duties and highlighted some large gaps and inconsistencies in trust law. Many trustees are laypeople, not trained professionals, and there was previously no single source to tell them what they needed to know about their responsibilities – in plain language.” 

Five key things for professional trustees to consider under the Trusts Act 2019:

• For financial advisers, lawyers and accountants who serve as professional trustees, holding that role will become increasingly difficult with new requirements for more accountability from trustees. The costs of running a trust properly will be much higher as each trust will require more attention than in the past. As a professional you will need to ask yourself, is the cost of administering this trust in balance with the benefit to the beneficiaries of having the trust?
   
• The cost of indemnity insurance is going up as insurers start to push back on the degree of responsibility in trustee services on top of normal advisory obligations. For some professionals the ability to even get cover is in question. In the new environment indemnity clauses contained in trust deeds may not be as reliable as in the past. Many professionals are starting to talk to trust companies like ours about collaborating so they can preserve their client relationship while mitigating all the risk that has arisen in the new legislative environment. 
   
• Professional trustees with a number of clients will need to be well resourced. A single trust can take months to update based on the requirement to engage with all other trustees and follow through, and many advisers and firms have trust books in the hundreds and thousands so will need a full-time team for an extended period just to get trusts to the point of being compliant with the new law, let alone what will be required from a "business as usual" perspective beyond that point.
   
• A common scenario in New Zealand trusts is what Stokes calls “Mr and Mrs Trusts” – couples who are trustees of a family trust and may be acting alongside an independent trustee, possibly a professional. They need to look at the new requirements and ask: How does our trust need to be run in comparison with how we have been running it? Does the reason why the trust was set up in the first place still even exist? There are people who have set up a trust and never done anything, versus those who meet regularly, record changes and generally do the job properly – and everything on the spectrum in between. Now is the time for action – professional trustees need to be getting their clients to not just think, “I need to look at my trust”, but to actually do it.

• One of the biggest new obligations for trustees is in relation to disclosure; under the current Trustee Act, trustees are not specifically required to tell people that they are beneficiaries of a trust, or even that a trust exists. Under the new Trusts Act, beneficiaries have more power as disclosure will be required as of right without a beneficiary even having to ask.

Stokes says, all existing trusts in New Zealand – the number is estimated at up to 400,000 – have 18 months to become compliant with the new law. “This is a massive time of change and significant work is involved, so as an industry we need to be getting onto this now. 

“The new Trusts Act is definitely a good thing, but requires a significant shift in thinking and approach from the current way the industry deals with trusts to a new proactive, on the ball form of trusteeship.

“Many professional trustees are starting to talk to trust companies like ours about collaborating to preserve their status quo client relationship while mitigating all the risk that has arisen in the new legislative environment. 

“The only way to be ready is for the industry to cooperate and work together. Professionals have enough on their plate with their core work and maintaining a practice without the trustee responsibilities on top of it. That’s why over the years trusts haven’t had the level of attention that they’ve required, and many are not even compliant with existing law, let alone with what is coming. The next 18 months will disappear in a flash and professionals need to act now to ensure that they and their clients are ready for the changes to come into effect on January 30, 2021.”

As for trusts and any implications of the Property (Relationships) Act, about which the Law Commission has made a number of recommendations, Stokes says more will become clear over the next couple of years, but it is obvious that further change is yet to come.

Finally, Stokes says, “In the past, the lack of obligation around openness of information enabled a certain degree of secrecy. Now everyone with a stake in a trust will be able to go to the Trusts Act to see what a trustee should be doing in their role. This is not a one-stop shop that sets absolutely everything out, because our legal system doesn’t work that way, but it represents a major improvement in the New Zealand trust environment because basic information for both beneficiaries and trustees is free and accessible via the internet on the government legislation website.”