Trustees’ Duties under Trusts Act from 2021

New Trust Disclosures for Tax from 2022

Family trusts are an integral part of our New Zealand society. Trusts are set up for a multitude of reasons including to protect assets from creditors’ claims, claims by “undeserving” next of kins not provided for in wills and relationship property claims.

The new Trusts Act 2019 (“the Act”), which came into force on 30 January 2021, is making many trustees of trusts question whether they should take on the role of a trustee or continue as trustee of a trust. This is because the Act imposes stringent responsibilities on trustees.

Trustees should note that effective 1 April 2022 new tax disclosure rules relating to trusts will apply. Any person who has been approached to take on the role of a trustee of a trust should pay close attention to the duties of trustees imposed by the Act and to the new tax disclosure rules before deciding to take on the trustee role.

Creation of Mandatory and Default Trustee Duties

The Act imposes on trustees Mandatory Duties and Default Duties.

Mandatory Duties are that the trustee must:

• Know the terms of the trust
• Act consistently with the terms of trust
• Act honestly and in good faith
• Act for the benefit of beneficiaries in accordance with terms of the trust or to further the purpose of the trust
• Exercise their powers for a proper purpose

Trustees must comply with the Mandatory Duties. These duties cannot be excluded or amended by the trust deed.

Default Duties are those duties that the trustee must:

• Exercise care and skill that is reasonable
• Invest prudently
• Not exercise power for personal benefit
• Actively and regularly consider if the trustees should be exercising their powers
• Not bind or commit trustees to a future exercise of discretion
• Avoid conflict of interests
• Act impartially
• Not profit from their trusteeship of a trust
• Not act for a reward but may receive reimbursement for legitimate expenses
• Act unanimously

Importantly, the Default Duties will apply to trustees unless those duties have been expressly varied or excluded in the trust deed. It is common to exclude the duty to act impartially and the duty to not exercise power for personal benefit in the trust deed when the trustee is also a beneficiary. Another instance is the exclusion of a trustee’s duty to invest prudently in the trust deed to enable a trustee to live in a residential property rent-free.

Other duties of a Trustee

In addition to Mandatory Duties and Default Duties the trustees of a trust must hold a copy of the trust deed, documents that have terms of trust and documents recording any variations made to the trust deed.

Administrative Duties

Trustees must hold all other documents connected with the trust during their period of trusteeship such as:

• Records of trust property
• Records of any trustee decisions
• Written contracts entered into by the trustees
• Financial or accounting statements
• Information about appointments, removals and discharge of any trustee
• Memorandum or letter of settlors wishes
• Any other document necessary for trust's administration

When a trustee retires or his removed as trustee, all the documents must be handed over to the new trustee.

Duty to disclose information to Beneficiaries

Trustees must voluntarily provide beneficiaries with basic trust information such as:

• That they are a beneficiary of the trust
• Names and contact details of all trustees
• Occurrence of and details of each appointment, removal and retirement of a trustee when it occurs
• The beneficiary’s right to ask for a copy of the terms of trust and trust information

The Beneficiaries may also request further trust information such as terms of trust or information on administration of trust and trust property. A trustee should as far as possibly provide the trust information requested by the beneficiary but may in some situations refuse to give certain trust information. Section 53 of the Act sets out the factors trustees must consider before deciding to deny a beneficiary’s request for information. These include beneficiary's age, confidentiality duties, and disclosure's effect on family relations.

No Exemptions or Indemnities for Trustees

The Act prohibit the trust deed from excluding, limiting a trustee’s liability or providing for indemnity of trustee against trustee’s liability arising from dishonesty, wilful misconduct, or gross negligence.

New Disclosures for Trusts to Inland Revenue

Commencing 1 April 2022 new trust disclosures will apply. The new disclosure rules will require trustees to commit more time on administration of trusts. The new rules apply to trusts who have income and are required to file tax returns.

The additional information required to be disclosed by a trust to Inland Revenue are:

• Financial information that include untaxed realised gains, ownership interests in investments, movements in beneficiary accounts and valuation methodology of various assets
• Details of settlements made during the year and years prior to 2022, together with information on the settlor’s name, date of birth, IRD number or overseas tax identification number
• Details of distributions to beneficiaries, including capital distributions, use of trust property for less than market value and movement in beneficiaries’ current accounts, and beneficiaries’ names, dates of birth, IRD numbers or overseas tax identification numbers.
• Names and details of persons who under the trust deed have power to amend the trust deed, to appoint or remove trustees or beneficiaries, their dates of birth, IRD numbers or overseas tax identification numbers.

Please note that the above information is intended to provide general information. The contents contained in this article do not constitute legal advice and should not be relied on as legal advice.