A trustee has many obligations
Are you a trustee of a family trust, or considering becoming one? If so, you need to be familiar with the obligations you are taking on when agreeing to act as a trustee. You should also have a clear understanding of the risks that you are exposed to when you agree to act as a trustee.
Before the Trust Act 2019
In its Review of the Law of Trusts in 2013, the Law Commission found that despite the large number of trusts in New Zealand and the number of people acting as trustees, the majority of non-professional trustees had little appreciation of the extent of their obligations.
The commission recommended an overhaul of the Trustee Act 1956 and, in 2019, new legislation was passed. It sets out the obligations of trustees, so that it is clear to both trustees and beneficiaries about trustees’ obligations and what beneficiaries can do if trustees do not fulfil those obligations.
The main obligations for trustees, as set out in the Trust Act 2019, are to:
- 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
- Exercise their powers for a proper purpose
- Exercise the care and skill that is reasonable in the circumstances (particularly where that person acts in their capacity as a professional, such as a lawyer or accountant)
- Invest prudently
- Be impartial as between beneficiaries
- Not exercise powers for their own benefit
- Act without reward (except where otherwise permitted by the terms of the trust), and
- Hold trust documentation.
The obligations on trustees are wide-ranging and there are significant risks for trustees who do not meet their obligations.
Why become a trustee?
In taking on a trusteeship, an individual or company is agreeing to act in the interests of the beneficiaries of the trust, and generally to do so without any expectation of reward for their services. Trustees are also often involved in court proceedings when family relationships break down.
So why would anyone take on a trusteeship?
The settlor/s, who are the people establishing the trust and contributing its initial assets, may wish to take on the trusteeship themselves in order to retain a high degree of control and oversight over the trust’s assets. This arrangement is often attractive to settlor trustees as not only does it allow more control, but it also means that the trust is not incurring the costs associated with instructing a professional to act as an independent trustee. There are, however, risks associated with this arrangement – particularly if a marriage or relationship breaks down and the trust owns property or there is a bankruptcy.
Ask a friend or relative?
A close friend or relative of the settlor/s may also be prepared to take on a trustee role – most commonly in conjunction with the settlor/s. This arrangement can appeal as there is usually a high degree of trust between the settlors and the ‘independent’ trustee. It does, however, run the risk of placing the ‘independent’ person in a difficult position if the settlors have a relationship breakdown or if different groups of beneficiaries take issue with decisions being made affecting their interests in the trust.
It can also be difficult if there are court proceedings relating to the trust; that ‘independent’ professional trustee may be in the firing line, despite having tried their best and not having received a benefit for acting as trustee.
Have an independent trustee?
Independent professional trustees – whether individuals or trust companies – may be prepared to act as trustees, either by consent or by court appointment. Independent professional trustees expect to be paid for their services and the trust funds will need to be sufficient to justify those expenses being incurred. Sometimes these trustees charge an annual fee to account for the risks involved in being a trustee, such as being involved in litigation, as well as fees for their time spent on trust activities. The trust deed will also need to allow remuneration. If the trust funds are sufficient to justify this cost, it can be worthwhile and will help protect trust assets in the event of a relationship breakdown or bankruptcy.
If you are asked
If you are considering taking on a trusteeship, we are happy to discuss with you any potential risks. This can also be a good opportunity for the trustees to consider a review and update of trust structures which are no longer fit for purpose, particularly before new trustees are brought on board.
DISCLAIMER: All the information published in Trust eSpeaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of Edmonds Judd. Articles appearing in Trust eSpeaking may be reproduced with prior approval from the editor and credit given to the source.
Copyright, NZ LAW Limited, 2022. Editor: Adrienne Olsen. E-mail: [email protected]. Ph: 029 286 3650