Trusts and the Importance of Record Keeping

 

The discretionary family trust is a popular way of protecting property and, managing assets and it provides wide discretions to trustees to distribute to a wide class of beneficiaries. 

Trusts also provide advantages in terms of confidentiality, protection from the fiscal demands of tax, insolvency, rest home care subsidies and they allow for the greater freedom of what would otherwise need to be testamentary dispositions.

TRUSTEES’ DUTIES

Trustees owe certain duties and core obligations as part of their role in administering a trust. Beneficiaries can enforce these duties and core obligations against the trustees holding them accountable for their administration of the trust.  It is recognised that trustees owe the following key duties:

  • familiarise and understand the terms of the trust;
  • follow the terms of the trust;
  • identify and distribute only to proper beneficiaries;
  • act with even handedness between beneficiaries in the same class;
  • invest prudently;
  • keep proper accounts and provide information;
  • keep record of all financial transactions
  • act in the beneficiaries best interests;
  • act personally and not delegate;
  • act unanimously; and
  • not act in breach of the no profit or no conflict rules except so far as the trust instrument may allow, and to the extent permitted without undermining the core obligations the trustee owes the beneficiaries.

KEEPING ACCOUNTS AND PROVISION OF INFORMATION

Trustees have a legal duty to keep and render proper accounts.  It is intended that this achieves transparency, accountability and a check on trustees with respect to the due and proper administration of the trust. 

In addition to the imposition of the duty on the trustees, a beneficiary has a right to trust information but this is a qualified right.  Accordingly, a beneficiary may request information and a trustee will provide that information unless it is reasonable for the trustee to refuse the request, for example, the information is commercially sensitive. 

A beneficiary does have the right, however, to call upon the Public Trust to audit or appoint a person to audit the accounts of the trust (section 83B of the Trustee Act 1956).  This is can be used by beneficiaries concerned about certain transactions but who have insufficient knowledge or evidence to identify in detail what has been occurring. 

TRUSTEES’ MINUTES AND TRUSTEES’ RESOLUTIONS

It is imperative that trustees when managing the trust and making decisions prepare minutes or resolutions which are signed, or acknowledged and accepted in writing, by all of the trustees and filed in a safe place.  These minutes and resolutions should be accompanied by appropriate evidence which shows that the trustees have considered all relevant factual and commercial matters in reaching the decisions, and that the decisions are in the best interests of the beneficiaries of the trust.

From a practical point of view, it is suggested that:

  • All trust documents, particularly the trustees’ minutes, resolutions and evidence, are kept in a trust minute book/folder.  
  • All resolutions and minutes are signed, or acknowledged and accepted in writing, by all of the trustees. 
  • All trustees’ correspondence is kept in the minute book, or alternatively in a trustee correspondence book/folder. 
  • The trustees should continuously communicate about trust matters and the administration of the trust and this should, where possible, be in writing such as by email.  This is a separate function to recording decisions of the trustees in minutes or resolutions. 
  • Annual financial statements in accordance with the appropriate accounting standard or, at a minimum, a balance sheet should be prepared.  This will assist the trustees in complying with their duties (as above) and save time and cost in the future when the trust assets are distributed.  It also acts as an independent check on the trustees activities.  
  • If a lawyer is acting as a professional/independent trustee, that trustee is the most appropriate person to hold and control the minute book/folder and trustee correspondence book/folder of the trust.

PROFESSIONAL/INDEPENDENT TRUSTEES

The advantages of having a professional trustee such as a lawyer is that professional advice and opinion is easily accessible and, the other trustees will have peace of mind that their duties and obligations as a trustee are being complied with.

CASE LAW ROUNDUP

Case law provides an interesting and practical view of the law in this area.  Some cases of interest and relevance are:

  • Armitage v Nurse [1998] CH 241

Lord Justice Millet held that “every beneficiary is entitled to see the trust accounts, whether his interest is in possession or not”.  Without proper accounts the trustees cannot answer to the beneficiaries for their performance of the trust.

  • Schmidt v Rosewood [2003] 3 ALL ER 76

The Privy Council held that the basis for a beneficiary’s right to trust documents and information, and the trustee’s obligation to provide trust documents and information, is not a proprietary interest of the beneficiary.  Beneficiaries are entitled to receive information which will enable them to ensure the accountability of the trustees in terms of the trust deed and to have the trust property properly managed.

  • Foreman v Kingstone [2004] 1 NZLR 841 (HC)

Justice Potter identified the following matters as relevant to disclosure of information:

    • whether there are issues of personal or commercial confidentiality;
    • the nature of the interests held by the beneficiaries seeking access;
    • the impact on the trustees, other beneficiaries and third parties;
    • whether some or all of the documents can be withheld in full or in edited form;
    • whether safeguards can be imposed on the use of the trust documentation, including but not limited to, undertakings, professional inspection to limit any use of the documentation beyond that which is legitimate;
    • whether (in the case of a family trust) disclosure would be likely to embitter family feelings and the relationship between the trustees and beneficiaries as a whole.
  • Erceg v Erceg [2014] NZHC 15

Justice Venning held the beneficiaries’ right is to have the Trust property properly managed and there are corresponding obligations on the trustees to properly manage the trust and to meet the fiduciary obligations they owe to all beneficiaries.  The beneficiary’s ability to apply to the court to access trust documents and the court’s discretionary authority to direct access, is ancillary to the primary right to have the trust property properly managed.  What information may be required to enable the beneficiaries to hold the trustees to account in a particular case will depend on the obligation at issue.

PROPOSED REFORM

The Law Commission proposed a new Trusts Act and produced a report in 2013.  The Government in its response to the report advised that it “agrees with the Law Commission’s key recommendation to replace the existing legislation with a new Trusts Act but further work is required on the detail of the new Trusts Act”.  In the same response, the Government “directed the Ministry of Justice to analyse the Law Commission’s recommendations and report back”.  Upon receipt of the report, the Government will form a final view on the recommendations.  This will take considerable time and Government has indicated that the new Trusts Act will need to be “balanced alongside other competing Government priorities”.

If you would like further information on any issue raised in this update please contact:

Krystle Gardner, Associate

DDI: 09 965 2662

Email: krystle.gardner@clendons-ns.co.nz

Alessandra Loi, Solicitor

DDI: 09 965 2661

Email: Alessandra.loi@clendons-ns.co.nz

Disclaimer: Further advice should be taken before relying on the contents of this summary.  Clendons North Shore accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material in this summary.