Administration of Trusts and the Trusts Act 2019

Appointment of Trustees

• Definition of a Trustee: To be legally recognised as a trustee, a person must be intended to hold the property for the benefit of others, rather than for their own personal gain (Westdeutsche).

• Acceptance of the Role: Appointment as a trustee is not automatic upon nomination. It must be accepted by the individual. Acceptance can be either express (explicitly stated) or implied through their actions ($s\,99(2)$).

• Liability Limitations: If a person has not formally or implicitly accepted their appointment, they cannot be held liable for any neglect of duty regarding the trust property (Ward v Ward).

• Original Trustee Appointment:

  • The original trustees are typically appointed through the trust deed ($s\,98(a)$).

  • There are legal limits and restrictions on exactly who is eligible to serve as a trustee ($s\,96(2)$).

  • The Court also has the power to appoint trustees (Re Lysaght). In the case of Re Lysaght, the Court specifically removed a restriction against Jewish trustees before proceeding with an appointment.

• New and Replacement Trustees:

  • Trust Deed Authority: A trust deed may grant specific persons the power to appoint or remove trustees ($s\,98(b)$).

  • Duty of Exercise: Any person exercising the power to remove or appoint a trustee is under a mandatory duty to do so honestly, in good faith, and for a proper purpose ($s\,94$).

  • Skeats Principle: It is considered extremely improper and not in the best interests of the beneficiaries for a trustee to select themselves for appointment (Re Skeats’ Settlement).

  • Corporate Appointments: It was found not to be a breach of duty where a company was appointed as trustee (as authorised by the deed), the individual then resigned, and used the company to receive property (Legler v Formannoij).

  • Delegation Constraints: The power to appoint trustees cannot be delegated to another person unless the trust deed explicitly allows for such delegation (New Zealand Maori Council v Foulkes).

  • Statutory Appointment: Trustees may be appointed under statute; otherwise, a retiring trustee may perform the appointment, with the potential for court guidance under $s\,93$ if necessary ($s\,92(2)$ and $s\,113$).

  • Court Appointment Criteria: If no other methods are available, the court may appoint a trustee ($s\,114$). According to Re Tempest, the court must consider:

    1. The specific wishes of the settlor (the person who established the trust) or the testator (if established via a will).

    2. Beneficiary consensus: If some beneficiaries desire a specific person, but others oppose them, that person should not be appointed.

    3. Administrative efficiency: Whether the specific appointee will realistically promote or impede the smooth administration of the trust.

Removal of Trustees

• Removal via Trust Deed Power: Trustees can be removed by the exercise of specific powers granted in the trust instrument. Parties can apply to the court for directions regarding this process ($s\,93$).

• Removal by Remaining Trustees:

  • In situations where no specific person is authorised to remove trustees, or the authorised person is unable or unwilling to act, the remaining trustees may exercise this power ($s\,92(1)(b)$).

  • Compulsory Grounds for Removal: A person with the power to remove trustees must act to remove a trustee if that trustee loses the capacity to perform their duties and has not delegated their powers ($s\,104$).

  • Optional Grounds for Removal ($s\,105$): A trustee may be removed if it is desirable for the proper execution of the trust and at least one of the following conditions is met:

    • The trustee repeatedly fails or refuses to act.

    • The trustee becomes an undischarged bankrupt.

    • The trustee is a corporation facing an insolvency event.

    • The trustee is no longer suitable due to conduct or circumstances (e.g., conviction of a dishonest offence or becoming unreachable) ($s\,105(2)$).

• Removal by the Court:

  • The court holds statutory power to make an order for removal if assistance is required ($s\,112$) and can appoint a replacement ($s\,114$).

  • Inherent Jurisdiction and Welfare Principle: The ultimate consideration for the court is the welfare of the beneficiaries (Kain v Hutton). This focuses on their objective welfare (usually financial) rather than just their personal wishes (Wallace v Naknok).

  • Endangerment of Property: A trustee must be removed if their failures in duty endanger the trust property (Letterstedt v Broers).

  • Proper Administration:

    • Removal is warranted for breaches that make it difficult for the trustee to act in the beneficiary's interest (Kain v Hutton).

    • In Oldfield v Oldfield, the court removed both trustees because they were in a deadlock, preventing any decisions from being made.

    • Conversely, in Powell v Powell, a son charged with assault for charging his father with a knife was still substituted as a trustee for his father because the incident did not bear on his objective ability to administer the trust.

  • Neutrality: Trustees must maintain the ability to remain neutral between different beneficiaries (Green v Green).

Remuneration and Reimbursement

• Duty Not to Act for Reward: Generally, trustees have a mandatory duty not to act for reward ($s\,37$).

• Court-Ordered Remuneration: The court has the inherent and statutory power to allow a commission or percentage to a trustee if it is "just and reasonable" ($s\,139$). Factors include:

  1. Total amounts already paid to trustees.

  2. Liabilities and risks the trustee was exposed to.

  3. The skill and success demonstrated by the trustee.

  4. The total value of the trust property.

  5. The time and services reasonably required to manage the trust.

  6. Any conduct that might warrant a reduction in payment.

  7. Any other relevant circumstances.

• Reimbursement for Expenses: A trustee is entitled to be reimbursed for expenses incurred while acting reasonably on behalf of the trust ($s\,81$).

  • Reasonableness Principles (Re O’Donoghue):

    1. Hiring qualified professionals for tasks the trustee is not qualified for is reasonable.

    2. Seeking judicial rulings is only required if properly necessary; there is no limitless requirement to resort to law.

    3. A trustee cannot claim expenses resulting from their own misconduct.

    4. The burden of proof for showing expenses were unreasonable lies with the party making the allegation.

  • Litigation Expenses: Courts consider the trustee's level of self-interest in a proceeding. Even if costs exceed the disputed sum, defending an estate for the benefit of all beneficiaries is considered reasonable (Pratley v Courteney; McCallum v McCallum).

  • Unreasonable Expense Example: In Kellerman v Kellerman-Thornton, spending $\$178,000$ out of a $\$560,000$ estate on business class travel and hotel lunches was ruled unreasonable.

Duties of Trustees

• The Irreducible Core: The essential, non-negotiable obligation of a trustee is to perform the trust honestly and in good faith for the benefit of the beneficiaries (Armitage v Nurse).

• Mandatory Duties (Cannot be modified/excluded by the trust deed):

  • Duty to know the terms of the trust ($s\,23$).

  • Duty to act in accordance with those terms ($s\,24$).

  • Duty to act honestly and in good faith ($s\,25$).

  • Duty to act for the benefit of beneficiaries or to further the permitted purpose ($s\,26$).

  • Duty to exercise powers for a proper purpose ($s\,27$).

• Default Duties (Can be modified or excluded by the trust deed):

  • General duty of care ($s\,29$).

  • Duty to invest prudently ($s\,30$).

  • Duty not to exercise power for own benefit ($s\,31$).

  • Duty to avoid conflicts of interest ($s\,34$).

  • Duty of impartiality ($s\,35$).

  • Duty not to profit from the trust ($s\,36$).

• Fiduciary Duty and Self-Dealing:

  • Trustees must avoid conflicts between their interests and those of the beneficiaries ($s\,34$).

  • The Self-Dealing Rule states that if a trustee sells trust property to themselves, the sale is voidable by any beneficiary as a matter of right, regardless of how fair the market price was (Chellew v Excell).

• Standard of Care ($s\,29$):

  • A trustee must exercise the care and skill reasonable in the circumstances, regarding any special knowledge they hold themselves out as having.

  • Ordinary Prudent Man of Business: Trustees must conduct trust business as an ordinary prudent person would conduct their own business (Speight v Gaunt).

  • Investment Standard: A prudent person makes investments for the benefit of others for whom they feel morally bound to provide (Re Whiteley).

  • Professional vs. Lay Trustees: Professionals (like a trust corporation) are held to a higher standard than unpaid laypeople (Bartlett v Barclays Bank Trust Co Ltd; Re Vickery).

  • Hindsight Rule: Trustees should not be judged with the benefit of hindsight; the focus is on the decision at the time it was made (Nestles v National Westminster Bank).

Investment Prudence and Strategy

• Standard for Investment ($s\,30$): Trustees must use the care and skill that is reasonable, considering their professional background and the "morally bound" standard from Re Whiteley.

• Requirements for Strategy: Trustees must formulate an appropriate investment strategy and review investments periodically, changing them if they become unsuitable (Bartlett v Barclays Bank).

• Objectives: Trustees must seek to maximise both prospective income and capital appreciation (Jones v AMP Perpetual Company NZ Ltd).

• Factors to Consider ($s\,59$):

  • Objectives of the trust.

  • Diversity of investments.

  • Real value of capital/income and inflation.

  • Risk/potential for capital loss.

  • Expected income and term/duration of the trust.

  • Marketability/Liquidity.

  • Tax liabilities.

• Duty to Seek Advice: Trustees have a duty to seek advice on matters they do not understand, though they are not bound to follow it if doing so would be imprudent (Jones v AMP; $s\,8$).

• Ethical Considerations:

  • The best interests of beneficiaries are usually financial (Cowan v Scargill).

  • Trustees must not refrain from an investment due to personal views (Cowan v Scargill).

  • Charitable Exceptions: Charitable trustees may exclude investments that conflict with their specific charitable purpose if it doesn't cause significant financial detriment (Butler-Sloss; Harries v Church Commissioners).

Impartiality and Even-Handedness

• General Rule ($s\,35$): Trustees must act impartially and not be unfairly partial to the detriment of some beneficiaries. This does not mean equal treatment, but treatment in accordance with the trust terms.

• Income vs. Capital: Trustees must be even-handed between those entitled to income (e.g., a widow receiving interest) and those entitled to the capital (e.g., children receiving the remainder) (Re Mulligan).

• Discretionary Beneficiaries: They only have a legal expectation to be considered for a benefit, not a right to a specific portion (Dever v Knobloch).

Court Review of Trustee Actions

• Grounds for Review ($s\,126$): The court may review an act, omission, or decision if it was "not reasonably open" to the trustee.

• Burden of Proof ($s\,127$):

  1. The applicant must provide evidence raising a "genuine and substantial dispute" as to reasonableness.

  2. If established, the burden shifts to the trustee to prove the decision was reasonably open.

• Trustee Failures (Pitt v Holt):

  • Excessive Execution: Acting beyond power.

  • Inadequate Deliberation: Failing to consider relevant matters. This must be material and serious enough to be a breach of duty (Unkovich v Clapham).

  • Mistake: A causative mistake of sufficient gravity that leaving it uncorrected would be unconscionable. The court considers the centrality of the mistake and the seriousness of the consequences, such as tax implications.

Exemption, Indemnity, and Delegation

• Exemption Clauses: A deed can exempt a trustee from liability for breaches unless those breaches involve dishonesty, wilful misconduct, or gross negligence ($s\,40$; Armitage v Nurse).

• Indemnity: A trust cannot indemnify a trustee for dishonesty, wilful misconduct, or gross negligence unless all beneficiaries consent and have independent legal advice for gross negligence ($s\,41$, $s\,82$).

• Gross Negligence Definition ($s\,44$): Conduct so unreasonable that no reasonable trustee would have considered it consistent with their role.

• Relief from Liability ($s\,131$): The court may excuse a trustee if they acted honestly and reasonably and it is fair to do so.

• Delegation:

  • General rule: Trustees cannot delegate duties and must act unanimously ($s\,38$; Re Mulligan). There is no such thing as a "managing trustee" (Rodney Aero Club v Moore).

  • Exceptions: Permitted for necessity ($s\,70$), business usage ($s\,67$), or implementing policy decisions made by trustees (NZ Maori Council v Foulkes).

Rights of Beneficiaries

• Right to Information ($ss\,49-55$): There is a presumption that basic trust information must be provided to every beneficiary ($s\,51$).

  • Basic Information: The fact they are a beneficiary, trustee contact details, trustee changes, and the right to request trust documents.

  • Trust Information: Data necessary for enforcement of the trust, excluding the reasons for trustee decisions ($s\,49$).

  • Refusal: A trustee may refuse to provide information based on factors in $s\,53$ (e.g., confidentiality, family relationships).

• Beneficiary Categories: Includes discretionary beneficiaries ($s\,9$). "Close" beneficiaries have a higher expectation of disclosure (Erceg v Erceg).

• Information Types (Lambie Trustee Ltd v Addleman):

  • Trustee Information: Held for trust purposes; disclosable for accountability.

  • Personal Information: Held by trustee personally; not disclosable.

  • Disclosable Information: Essential accounts and the trust deed.

• Right to Terminate ($s\,121$): If all beneficiaries (who together hold the entire beneficial interest) are in agreement, they can require the trustee to terminate the trust and distribute property. This codifies the rule in Saunders v Vautier, stating that absolute owners of the property can demand payment once they are of age (typically $21$, even if the will specifies $25$) (Gosling v Gosling).