How to be a Trustee for a New Zealand Trust

Introduction

The position of trustee is an extremely important one, as trustees are in a "fiduciary" relationship with the trust's beneficiaries. This means that they are in a special position of trust and accordingly have a number of significant duties. If you are a trustee, it is vital that you familiarise yourself with those duties, as you can be liable for "breach of trust" if you do not fulfil them.

This article gives information about the duties of trustees, and also gives practical advice about how to ensure that those duties are complied with.

Once you have understood the subtitles of a Trust formation though reading this and the related articles, you may wish to prepare some of the required documentation yourself.  A number of cost effective Trust Documents are supplied by New Zealand LegalDocuments.
 

Who can be a trustee?

Any person who can own property may be a trustee. A minor (someone under 20) can be a trustee, but a court would have to appoint someone to act as trustee until the minor turns 20.

The main duties of trustees

In general, the main duties of trustees are:

Specific duties when the trust is set up

Trustees should be aware of the following issues when a trust is first created:

Specific ongoing duties of trustees

• maintain a file or diary of correspondence, including copies of contracts with third parties
   
• capital and income accounts
   
• cash books
   
• lists of trust property (which also state where documents of title are kept)
   
• a document containing the relevant details of the trust, including: the date of settlement; the identity of the settlor and trustees; the names, addresses and dates of birth of the beneficiaries; records of the births, deaths, marriages and divorces of beneficiaries; and any indemnities and guarantees
   
• Trustees' meetings & minutes
  If the trust will be actively trading or acquiring assets, then the trustees will probably need to meet regularly. But if the trust is intended simply to acquire and hold assets, then the need for trustee meetings is less. However often the trustees meet, all meetings should be recorded in the minute book, along with all decisions; it is also useful to record the reasons for the decision and background information.
   
• Annual accounts
  The trustees must ensure that proper and professional accounts are prepared each year by the trust's accountant. Even if the trust is simply a passive investor or holder of property, it is desirable that proper books of account be prepared, especially if the trust has a bank account.
   
• Annual income tax returns
  The trustees are required to file separate income tax returns for the trust.
   
• Other files and records
  The trustees should maintain:
   
• Investment of trust assets
  Trustees should develop, maintain and review an appropriate investment strategy for the trust. They should keep accurate and thorough records about the strategy they have adopted. The level of care required of trustees is stated in Part 2 of the TRUSTEE ACT 1956 (as amended by the TRUSTEE AMENDMENT ACT 1988). This requires that they exercise the care and skill that a "prudent" businessperson would exercise in managing other people's affairs. Professional trustees and trustees who invest money for others as a profession are required to exercise the special care and skill that someone in their profession would exercise. A trustee will not be liable for any losses suffered by the trust if he or she acts prudently and considers the interests of all beneficiaries (discretionary or otherwise).
   
• Changes in trustees
  When the trustees change (for example, one retires and another is appointed), it is important that the change be formally documented and that the trust's lawyer be notified. If not, the incorrect trustee names may be recorded on documents of title to new assets that are acquired, and this will mean that when the asset comes to be sold there will need to be an extra round of legal documentation before the sale can be completed. See below for the appointment of new trustees.
   
• Information for beneficiaries
  Trustees should provide the beneficiaries with any information that they request about the operation of the trust and its assets.
   
• Not mixing trust and personal property
  Trustees must not mix their personal property with the trust property. If this happens, the onus is on the trustee to distinguish the separate assets, and to the extent that the trustee fails to do this those assets belong to the trust. To ensure that assets aren't mixed, the purchase price for all assets bought by the trust should be paid for out of the trust's bank account. Similarly, the sale price for all assets sold by the trust, and all income belonging to the trust, should be paid into the trust's account.

Decision-making by trustees

Before making decisions the trustees should acquaint themselves fully with all the relevant facts, and consider whether they need expert advice from lawyers, accountants, investment advisers or other specialists

After considering any expert advice that they think is necessary, the trustees must ensure that they turn their own minds to the question in hand, acting honestly and in good faith. The decision must be theirs, and not that of their expert advisers, as trustees are not permitted to delegate their decision-making power, except when this is authorised by the trust deed.

In general, trustees should not commit themselves in advance as to how they will exercise a discretion in the future.

Trustees can apply to the courts for directions concerning any of the trust property, or the management or administration of the trust property, or the exercise of any power or discretion vested in them. In this way trustees who are in doubt about the legality of an intended course of action can get the court's approval and be protected from any liability for the action.

Trustee decisions must be unanimous, unless the trust deed allows for majority decisions.

The trustees should record all their decisions. They should also record the reasons for their decisions, and attach all the relevant documents including any expert advice given.

Can the beneficiaries challenge decisions of the trustees?

In general the courts won't interfere with decisions made by trustees: if the trustees are exercising their discretion in a proper manner, the courts won't substitute its own decision for that of the trustees.

However, the TRUSTEE ACT 1956 gives beneficiaries a limited right to apply to the court for it to review a decision of the trustees; this applies only when the trustees have exercised a power under the Act, not a power given by the trust deed.

The courts may also interfere in some cases when the trustees have acted outside their powers or have acted capriciously, or have taken into account irrelevant or improper factors, or have made a decision that no reasonable trustee could make.

Trustees are liable for any transactions they enter into that they are not authorised by the trust deed or by statute.

Are trustees paid for their services?

Trustees may be paid for their services only if the trust deed specifically provides for this. The deed often provides for the trustees to be paid, particularly if the trustees include professional independent trustees - for example, lawyers, accountants or financial advisers.

If the trust deed doesn't provide for payment, then the trustees would need the consent of the beneficiaries or of the court to receive payment.

How are new trustees appointed? How are trustees removed?

Usually the trust deed will provide for when and how new trustees will be appointed. But if the trust deed doesn't deal with this, the matter is governed by the TRUSTEE ACT 1956 (any provision in the trust deed overrides the Act). The Act provides that a new trustee may be appointed when a trustee

• is dead
• is unfit to act or incapable of acting
• refuses to act
• is overseas for more than a year
• no longer wishes to be a trustee
• is a company that has stopped trading or been liquidated

The Act says that the new trustee is appointed by the person whom the trust deed nominates to make new appointments, or, if the trust deed doesn't nominate anyone, by the other trustees.

The beneficiaries cannot control the exercise of the power of appointing new trustees conferred on a continuing trustee by the Act.

The court also has a general power to appoint new trustees, whether instead of or in addition to existing trustees, when it is "expedient" to do so. In particular the court can appoint a new trustee in place of an existing trustee who:

• is guilty of misconduct in administering the trust
• is convicted of a crime involving dishonesty
• is mentally disordered
• is bankrupt
• is a company that has stopped trading or been liquidated

Trustees can also be removed under any express power contained in the trust deed.

Cautionary notes

• The duties of trustees are important and often complex. A trustee should obtain legal advice in order to understand them fully.