Government Response to Law Commission Report on
Review of the Law of Trusts: A Trusts Act for New Zealand

Presented to the House of Representatives

Government Response to Law Commission Report on
Review of the Law of Trusts: A Trusts Act for New Zealand

Introduction

The  Government has considered the  Law Commission’s Report, Review of the  Law of Trusts:  A Trusts  Act for New Zealand (NZLC R130)  (the Report)   presented to the House of Representatives on 11 September 2013,  and  responds to the  Report  in accordance with Cabinet Office circular CO (09) 1.

Executive Summary

The Trustee Act 1956  (the Act) and  case law regulate the administration of trusts  in New Zealand.   The  Law Commission has  reviewed the  core  institution  of the  trust  in New Zealand and  has  made 51 recommendations to modernise and clarify trust law.

The Government agrees with the Law Commission’s key recommendation to replace the Act with a  new  Trusts  Act. However, further  work is required on  the  detail of the  new Trusts  Act.

Background

Trust law is a core  part of New Zealand’s legal system.  The Report  estimates that there may be between 300,000 and  500,000 trusts  currently  in New Zealand and  that trust use here  is considerably greater than  that of comparable countries.

The  Report  has  highlighted that,  while trusts  are  widely used in New Zealand, there  is widespread misunderstanding about  what  a  trust  means and  the  accompanying rules. These   misunderstandings  can    lead    to   disputes   between   settlors,  trustees   and beneficiaries, and increase the risk to individuals of undesired legal consequences.

Trustee Act 1956

The  Act is more  than  50 years old,  and  issues with New Zealand trust  law are  due,  in part,  to  the  complexity  and  age   of  the  Act.    The  Act  does not  reflect  modern trust practice, is  unnecessarily  complex   and   difficult to  understand  and,   in  some places, simply unreadable.

Law Commission review  of the Act and trusts

The  Law Commission began a review of trust  law in March  2009  and  the  Report  is the product  of the first of three  stages of the Law Commission’s wider review of trusts.  The Report  focuses on  express private  trusts,  which  are  created by a  person transferring property  into a trust.   Private  trusts  are  generally created for the  benefit  of one  or more individuals.   Other  types of trusts such  as charitable or purpose trusts, where  a trust  is

created, for example, for religious or educational purposes, will be dealt  with in stage 2. Corporate trustees will be reviewed in stage 3 of the Law Commission’s review.

Government Response

The  Government wishes to thank  the  Law Commission for the  Report  and  for its work throughout its comprehensive review of trust law and  the Act.

A new  Trusts Act

The  Law  Commission  recommends  that  a  new  Trusts   Act,  to  replace  the  Act,  be enacted. The Government agrees with this recommendation.

A new  Trusts Act will modernise the  law  of trusts   making  it clearer and  more  user- friendly for individuals and business.

Recommendations need further analysis before a Government view  is possible

Apart from the  recommendation for a new  Trusts  Act, further  analysis of the  regulatory impact of the recommendations is required, including:

Broadening the scope of the legislation

The  Law  Commission  proposes to  broaden  the  legislation  so  that  it  would  include general trust concepts and relationships imported  from the case law.

Modernising the existing  trusts framework

The  Law Commission recommends  that  the  new  Trusts  Act be  designed to make  the trust law rules reflect modern trust practice.

Accessibility

Much  of the  statute and  case law is unclear, especially around the  powers, roles  and requirements of the participants in a trust.   People don’t always  understand the roles and duties of trustees, especially trustees who  are  not  legally  trained.   Beneficiaries  don’t know what  they  can  expect from trustees.  For example, the  Commission recommends clearly articulating  the obligation of trustees to provide information to beneficiaries.

Simplifying administration of trusts

The  Law  Commission  identifies   that  the  administrative  machinery  for  trusts   can   be inaccessible in practice and recommends simplification.

Jurisdiction of the courts

Currently  the  District Court has  jurisdiction to determine breach of trust  claims within its monetary limit, but cannot exercise any  powers under  the  Act.  These are  exercised by the  High Court.   The Law Commission recommends giving the District Court concurrent jurisdiction  with the  High Court  under  the  new  Act.   The  Report  also  recommends that the  Family Court’s  powers be  supplemented to give the  court  more  powers to deal with trust law, allowing it to make  any orders necessary to effectively deal  with all issues that are properly before  it.

Interface  with case law

The Law Commission’s recommendation for a new Trusts Act is not intended to create a complete codification  of trust  law.   There  is likely to be  a complex  relationship between the  status of existing  case law and  the  proposed new  Trusts  Act.   Further  analysis is needed on how such a relationship would work.

Relationship of a new Trusts  Act with other statutory trusts

Further  analysis is  required regarding how  a  new  Trusts Act would apply  to  specific legislation governing trusts, including Financial  Markets  legislation.

Public Trust

The  Law  Commission is  proposing new  administrative  powers for  the  Public  Trust.1
Therefore, further work is required in this area before  the  Government is able  to form a view.

Insolvency

The Commission is proposing a new power  for the Official Assignee to be given the right to apply to the court to challenge the validity of a trust, notwithstanding that the bankrupt person would have  been unable to exercise that right prior to bankruptcy2.

Perpetuities

Reforming  and  simplifying the  law by setting a  “bright  line” maximum  duration  of 150 years for the duration  of a trust.   Currently  there  is a complex  set  of rules under  existing law as to the maximum possible duration  of a trust.

1 Recommendations 12, 21, 22, 23, 26, 43 and 44.
2 Recommendation 45.

Relationship property and trusts

There  are  two  recommendations relating to  relationship property3  that  require  further investigation before  the  Government is able  to form a  view.   These recommendations would  allow  trusts  to be  set  aside and  assets  distributed to a  partner in a  relationship property  claim.  These recommendations will make  significant changes to legislation; will have  regulatory implications  that are  more  than  minor; and  will have  flow on effects  that need to be carefully analysed.

Transitional provisions

The  Law  Commission’s general approach is  that  the  new  Trusts Act should  apply  to existing  as well  as new  trusts   from  the  date   it comes into  force.    There   are  a  few provisions for which a transition  period of two years is proposed.  Consideration needs to be given to the identification  of, and  compliance costs impact  on, existing  trusts  to make them  compatible with a new Trusts Act.  Comprehensive communications and  guidance on any changes would also be essential.

Next Steps

The  Government has  directed the  Ministry of Justice to analyse the  Law Commission’s recommendations and  report  back.    Once  this  work is completed, the  Government will form a  final view on  all of the  Law Commission’s recommendations.  Because of the significant  number of  substantive  recommendations,  this  work  will take  considerable project  resources and  the timing for the report  back  and  a new Trusts  Act will need to be balanced alongside other  competing Government priorities.

3 Recommendations 50 and 51.