The Trusts Bill began with a Law Commission report in November 2010 and finally made it into the House this month – a long gestation but with good reason.
Trust law is hard to get right because of the need for flexibility and – in this case – because of the ambition of the task being taken on. Inevitably, the Bill is still a work in progress and further refinement will be required.
The policy objectives behind the Bill
The Bill aims to make trust law more accessible to everyday users and trusts easier to administer by:
- setting out the core principles relating to express trusts, including:
- essential features
- mandatory and default trustee duties
- requirements for record keeping
- rights of beneficiaries to information
- abolition of the rule against perpetuities, and
- substituting a bright line maximum duration limit of 125 years
- repealing and replacing the Trustee Act 1956 while updating many of its provisions, in particular, those relating to trustee powers and to the rules around the use of delegates and agents.
The legislative challenges
Express trusts are used across the economy in a wide range of circumstances - from trustees who are largely unpaid volunteers to highly resourced professionals with regular access to expert advice, and from unsophisticated beneficiaries reliant on trustee decision-making to the beneficiary who is an investor with highly prescribed rights under the trust and/or other investment related legislation.
Uses include: family wealth management (e.g. the family trust); the management of community assets (e.g. energy trusts); mercantile transactions (e.g. retentions in the building industry); as a funding device for banks and businesses (e.g. wholesale debt raising); as an investment “vehicle” (e.g. KiwiSaver schemes); as settlement devices for objectors to resource consent applications, for local authority related community purposes; in industry; for charitable purposes; and as a preferred model for collective ownership of Māori land and receipt of settlement resources.
What might be suitable in one area of trust law use (say the family trust) may have limited utility and considerable costs in another area. A balance must be struck between certainty as to the features that capture the universal essence of an express trust and flexibility to ensure that trust arrangements are able to address the specific context and purposes they are used for. We are not persuaded that the interface between the new legislation and other trust legislation, in particular, Te Ture Whenua Māori Act 1993, the Charitable Trusts Act 1957 and the Charities Act 2005 has been fully resolved.
The difficulty of this challenge may explain why New Zealand will be the first major common law jurisdiction to set out in legislation the core principles of the law relating to express trusts.
How the bill seeks to balance certainty and flexibility
The main ways the policy process has attempted to address these risks is to:
- largely limit the Bill to a legislative statement of the common law and an update of the existing provisions in the Trustee Act 1956 (we say “largely” because there are areas where the Bill moves beyond the common law – e.g. the limitations on the ability of a trustee to be indemnified and clause 80, which provides greater certainty to creditors as to the circumstances in which they can obtain the benefit of indemnity from the trust property. Also, the very process of turning common law principles into legislative drafting raises the risk that the law has been “re-stated” as opposed to “recorded”)
- take a slow and highly deliberative approach to change - a long gestation period with various stages of public consultation (including a 2016 exposure draft of the Bill)
- allow for certain provisions to be modified or excluded by the terms of any express trust (these are set out in Schedule 2 of the Bill), and
- enable greater scope of modifications or exclusions for specified commercial trusts (discussed further below).
The concept and benefits of the specified commercial trust
If a specified commercial trust arrangement was created before the commencement of the Act (currently 18 months from the date it receives Royal Assent), it will be exempt from some of the provisions in the Bill. This could reduce the need to amend existing terms (e.g. requirements that certain documents are kept by trustees and that certain information is provided to beneficiaries).
Specified commercial trusts created after the commencement of the Act will have additional flexibility compared to other trusts, to modify or exclude provisions in the Act - e.g. exclude the ability of beneficiaries to terminate the trust by unanimous consent, where this would upset financing arrangements designed to ensure the rights of lenders and borrowers are adequately addressed.
What is a specified commercial trust?
Broadly two types of arrangements are contemplated:
- wholesale trusts relating to offers of financial products or lending or borrowing of money, and
- commercial trusts where each beneficiary is acting in trade and becomes a beneficiary by entering into a commercial transaction of the type that the trust is intended to facilitate (e.g. certain custodial arrangements for securities).
The definition of specified commercial trust is limited in its policy scope - it is unlikely to capture all of the commercial trading trusts it was intended to capture, where the beneficiaries may well be experienced commercial participants but are not acting in trade or participating in commercial transactions that the trust is intended to facilitate.
As with all complex definitions, there are a number of technical issues that may result in inconsistent or arbitrary distinctions being made (e.g. wholesale financing trusts with “nominal” beneficiaries who receive distributions during the trust’s life do not fall within the definition but will if the distribution occurs on termination of the trust).
Finally, certain express trusts that are subject to the requirements of the Financial Markets Conduct Act 2013 (FMCA) are relieved from various requirements of the Bill. In addition, the FMCA will be amended to reflect the Bill's wording in respect of various duties relating to supervisors' and managers' functions.
Now is the time to engage
If you use or interface with trust arrangements, you need to take time now to engage on the content of this Bill. There will be limited opportunity to obtain relief after it is passed because the regulation making power under the Bill is restricted to transitional matters and expires after two years.