The Law Commission and trusts
New Zealand is unique in its use of family trusts – we almost certainly have more trusts per capita than any other country although we cannot be sure of this because no register of trusts is kept. In any event, New Zealand, unlike other countries has many trusts that have been set up by people of relatively modest means, often with not much thought and, sometimes, not much professional advice.
In spite of the lack of accurate statistics regarding New Zealand family trusts, two things seem to me to be very certain: first is that there is a very high proportion of trusts which have lay people (non- lawyers) as trustees. The majority of trusts in New Zealand have the people who formed the trust (the settlors) as trustees. Although some have a professional as one of the trustees, most of the administration of the trust falls to the family members who established it.
Second, family trusts are very badly managed (I have said previously that by my informal reckoning, about 75% of family trusts are so badly administered that they might not serve the purpose for which they were established).
The first point (the settlors usually take the position of trustee) is connected to the second point (they are badly managed). In many cases, individuals and couples who are forming the trust know little or nothing of trusts nor the duties of trusteeship.
Through the 1990s and 2000s thousands of trusts were formed by people with little knowledge: they were trying to escape Estate Duties, Superannuation Surcharge, Asset Testing for residential care or the effects of the Property (Relationships) Act and they knew that a trust might help.
In many cases, trust formation was driven by people who were relatively unsophisticated in a financial or legal sense – they vaguely knew that there could be a benefit for them by settling a trust, but little about the legality of their trust arrangement and went ahead and did it anyway.
Sometimes, people went ahead with a trust simply because everyone else was doing it.
Poor trust administration comes from a lack of understanding of trusts and the role of the trustee. In my experience, some who have formed trusts do not know that the trust is for the benefit of all the beneficiaries, not just the people who settled it.
Hence we have a situation in this country where there are up to 500,000 family trusts involving one million or more people holding the most valuable assets of many families and administered largely by people who do not really know much trust law or administration.
Moreover, the law on trusts is a smorgasbord of many pieces of legislation (including the unreadable Trustees Act) and a good amount of case law from New Zealand and elsewhere.
Given this situation, it is little wonder that the Law Commission has decided to take a long, hard look at trusts and has come up with recommendations for a new Trusts Act which will clarify trusts and the role and duties of trustees .This would be a welcome addition to the law.
I have long thought that that the duties of trustees needed to be set out so that people without a legal or business background can understand them and know what they should be doing. This is not to say that there should be a rigid code in the law but with so many lay people effectively running trusts, the law has to be both as clear and as accessible as it can be.
There are certainly changes to trust law recommended by the law Commission. However the main thrust is the clarification and modernisation of the law, bringing it into line with how many trusts operate today.
Most important for me is the restatement of the duties of trustees: trustees cannot manage the trust’s assets for themselves rather than the beneficiaries
The Law Commission’s review is in plain, easy to understand English: it will not change the law greatly but make it more accessible. If you have settled a trust you should look at it as the sections on duties of trustees and retention of information (record keeping) set out the principles of what you ought to be doing now. As such make a good guide to current trust administration and management.
I hope that Government will pick up the Law Commission’s recommendations and that we will see a new Act to clarify trust law. This Act will sharpen up trust administration – it needs to because the management of trusts is often abysmal.
Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at
www.martinhawes.com. This article is of a general nature and is not personalised financial advice
Originally published in Sunday Star Times 29 September 2013