- Debate resumed from 11 October.
Dr RICHARD WORTH (National)
: National supports the Trustee Amendment Bill, and in the short time that is remaining to me I will talk about the law of trusts generally and turn to some of the particular provisions in this bill that cause National members some concern. I start by saying that the law of trusts is a complex area of the law, with arcane expressions and difficult concepts. Unsurprisingly, it is studded with case law—case law decisions of the judges in some cases establishing conflicting legal principles.
It is also fair to say that trusts have a very substantial history of use and take a range of forms. Indeed, if one just quickly reflects on how many types of trusts exist, there are to be seen bare trusts, fixed trusts, discretionary trusts, trading trusts, blind trusts, which are known as secret trusts, and, perhaps finally, implied or resulting trusts. So these days it is a real business for law and accounting firms to establish trusts and to be involved in their administration.
I guess as a general comment I would say that people make trusts for a number of reasons. That is why this legislation and the changes that are made to the Trustee Act 1956 are important. One of the reasons for creating a trust is to reduce the personal assets of the settlor, for the purpose of meeting asset-testing or income-testing criteria. There are lots of illustrations of this. One such illustration is the asset-tested benefits in the residential care subsidy scheme for those people over 65 years of age who have been assessed as needing long-term residential care over an indefinite period. That is one reason why a settlor might form a trust. Another reason for forming a trust would be as a means of spreading income and reducing exposure to income tax. That is a common use of trusts today.
A third reason to form a trust would be as a creditor protection mechanism. That is commonly and traditionally employed in the case of professional partnerships—law firms and accounting firms that for a significant period of time did not have the benefit of incorporation. The protection of assets against creditors is a common reason for the transfer of assets to a trust. By transferring assets at the appropriate time from the individual’s personal asset base, those assets need not be later applied to the satisfaction of an individual’s creditors in the event of financial difficulties arising. The family of the debtor will often be beneficiaries of the trust. Therefore, the family will continue to be the recipients of income generated by the trust and will have the use of the assets in the trust, such as the family home.
Another reason, which will be familiar to members, is the divesting of assets to protect against the Property (Relationships) Act 1976. That has an increasing focus in a world in which not only are marriage break-ups common but also financial obligations of quite dramatic proportions can occur, arising from the break-up of de facto relationships. I suppose, finally, one can look at that class of case where a trust is set up to divest assets to protect against claims under the Family Protection Act and the Law Reform (Testamentary Promises) Act 1949.
We have the Trustee Act 1956 and the Trustee Amendment Bill, which is before the House today and which National supports. I noted in my earlier comments that this
particular change in the law is based upon a Law Commission report released in April 2002. The commission saw those changes as being urgently required. Sadly, it has taken 5 years for legislation to now emerge—as this, the first reading of the Trustee Amendment Bill. In the time that remains I would like to just touch on a couple of provisions in the legislation, starting with the power to insure. That has been a vexed issue over the years and is now to be resolved by this legislation.
The current law—the Trustee Act 1956—provides in section 24 for trustees to insure in a variety of circumstances; three broadly. The first was to insure any of the trust property up to the full insurable value. The second, with the consent of the life tenant or the High Court, was to insure any of the trust property on a replacement basis, as distinct from the full insurable value. The third was to insure against any risk or liability against which it would be prudent for a person to insure if that person was acting for him or herself.
Quite clearly, it can be seen that the main difficulty with this provision is the need for the consent of the life tenant rather than the remainderman to replacement cover. Presumably the reason for that restriction was to reflect what was thought to be the unfairness of the life tenant’s income being reduced by the additional cost of replacement cover. That is now to be changed, but the legislation in its present form makes it clear that there is still no obligation on a trustee to insure. That must surely be right, because there can be circumstances whereby a cost-benefit analysis justifies a decision to not insure. The absence of a blanket obligation does not preclude trustee liability in the event of failure to insure in circumstances in which the prudence of so doing is clear. That, in very general terms, touches on this change relating to the power to insure.
Another change is concerned with the issue of delegation, but a limited change is made. I do not think it is of particular circumstance. The general rule is that trustees may delegate what are called ministerial functions—meaning, roughly, the carrying out of decisions. But unless they are authorised by the trust instrument, they cannot delegate the power to decide on the distribution of trust property or the exercise of all those many fiduciary discretions relating to the investment of trust property. The current law, as set out in section 29 of the Trustee Act, empowers trustees to employ agents, including trust corporations, to perform what we could call various commercial functions, but the power to delegate falls short of authorising the delegation of the trustee’s fundamental decision-making powers.
It is generally accepted that the present law is defective in two respects. First, the line between ministerial and other functions is less than clear. Secondly, and more important, trusteeship today is an increasingly specialised task, which often requires professional skills that trustees may not have. That is particularly so when family members are cast in the role of having to exercise trustee duties. The legislation in its current form deals with that issue, too.
PETER BROWN (Deputy Leader—NZ First)
: On behalf of New Zealand First, I intend to take only a short call. I should say from the onset that New Zealand First will certainly support this bill’s referral to a select committee, but we are hopeful that the select committee will look at the ability individuals will have to transfer their financial assets into a trust, and the level for doing that. As I think most people in this Parliament know—and, indeed, as most New Zealanders know—an individual is allowed to transfer only up to $27,000 per year from his or her personal asset base into a trust. The amount has been set at that level since Adam was a boy, and we believe that it should be increased markedly. By looking back we have come up with a figure—and I accept there could be some adjustment—closer to $60,000 than $27,000. We hope that the select committee will take this issue on board and have a close look at it. I listened to
Mr Worth when he spoke a few moments ago. He talked about the transferring of assets, and I felt he was getting very close to saying that $27,000 is not enough. I can see that Mr Worth is nodding his head, so I am hopeful that the National Party will pick up on this issue that New Zealand First has raised.
A second issue that we hope the select committee will take on board, look at very closely, and make recommendations to this Parliament about is the situation that applies, more likely, to elderly folk who have been transferring their assets on a regular basis at $27,000 a year but then who have had to go into care. It is our understanding that if an individual goes into care, Work and Income writes back the $27,000 per year by $5,000 per year for the last 5 years—it writes it back to $22,000 for that previous 5 years. That means, for example, that if a person had a house in the year 1999 valued at $300,000, and for 8 years that person transferred across $27,000, the residue value of that house by 2007 would be $84,000. But if that individual then had to go into care, Work and Income would write back a further $110,000—5 years at $22,000 per year—which means the residue value of that house would be $84,000 plus $110,000, which equates to $194,000. We think that is unfair, and, of course, the calculation of that person’s subsidy would be based on that figure and in that circumstance he or she would lose it pretty much in its entirety. We think that is unfair, and we urge the select committee to take a close look at this sort of legislation.
We hope the Government will react positively. We have advised the Government informally of our concerns, and the feedback we have had is fairly neutral. It has not flattened the idea completely but we are well aware that the Minister of Finance could say that this is a fiscal matter and he could veto the whole thing. So I urge the select committee to take a close look at the ability that individuals have to transfer assets across into a trust, and the level at which they are allowed to do that on a yearly basis. That is our only concern about this bill; we think it goes quite some way towards addressing the technical issues that Mr Worth spoke about.
New Zealand First will support this bill going to a select committee, but we will be urging the members of that committee to take a close look at the value of the $27,000 ceiling. It should be increased markedly, and in our view it should be tagged to Consumers Price Index arrangements in the future. As I said earlier, the amount of $27,000 came into being when Adam was a boy, and it is about time it was adjusted significantly upwards. The write-back regime operated by Work and Income is, in our view, totally unfair and needs to be examined.
TE URUROA FLAVELL (Māori Party—Waiariki)
: Tēnā koe, Madam Speaker. Kia ora tātou katoa, e hoa mā, i tēnei rā. We are here today to see what the problem is with an Act that has been around a little bit longer than I have. The Trustee Act 1956 creates legal entities for specific purposes that were relevant for the days gone by. The problem is that although Māori groups have managed to make these models work, none of the legal entities included in the 1956 Act cater adequately for the multi-purpose objectives of tribal entities. Nor, surprise, surprise, are any of these legal entities specifically based on Māori values and aspirations.
Although I am sure that the Government will be quick to point out that the overarching governance needs of a tribe will be brilliantly catered by means of the “Waka Umanga (Māori Corporations) Bill”, the issue is that the waka umanga bill, no matter how brilliant, is at best a voluntary approach. In effect then, although these entities that are already managing tribal assets may eventually opt to become waka umanga, in the meantime we need to be sure that the deficiencies of trust, company, and incorporated society structures for Māori can be sorted out before then.
Thinking about this notion of trust—meaning we should have confidence and hope that things can work out for us—we acknowledge that there are some aspects of the
Trustee Act that can be quite complementary to tikanga Māori. Trustees do not own the property they are trustees of—instead, they are owned by the trust. Their role is to care for the assets and trusts for the beneficiaries. In some ways it is similar to the role of kaitiaki, for the purposes of future generations. But, of course, for a trust to be successful the trustees must be sufficiently on to it to ensure that they understand the full extent of their legal obligations. It is not just about putting, say, uncle in the position of trustee because he is the key speaker on our paepae, or is worthy of our collective respect because of the dedicated service he has given to our iwi. It is also not about putting one of the cuzzies who is an accountant around the table simply because we think our cuzzy should know what the “haps” is.
The critical issue is that anyone assuming the role of a trustee must be prepared to learn about the powers and responsibilities that come with the position. They need to know about the powers they can exercise and the limitations on these powers, if they are to avoid being in breach of their fiduciary duties—in other words, their duty to act in accordance with the trust deed. That is all good stuff, but, unfortunately, a few issues also need to be attended to.
Although trust deeds can be designed to try to promote participation, essentially the structure of trust deeds is not democratic. The trust structure, more often than not, creates a system whereby tribal members get treated like passive beneficiaries. I cannot speak for anyone else but I am pretty sure that if I were to go home and say to my people of Ngāti Rangiwewehi, or my people of Ngāpuhi, that they could not have a say—“just wait and ye shall receive”—I think I would be told to get out of town, pretty smartly. Being part of a whānau, hapū, and iwi means that one gets involved in the business of iwi politics—for life. It is about leaders being directly accountable to the people. Although a private trust, as set up under the Trustee Act 1956, can be easy and relatively cheap to establish, its basic structure does not reflect the accountability and transparency requirements of a collective entity. To cut it short, it does not fit with being Māori.
Another one of the issues is that the trusts are not corporate bodies in their own right, unless incorporated under the Charitable Trusts Act 1957. This means that where there are several responsible trustees, as is usually the case with tribal trusts, all significant legal documents have to be signed by all trustees, whose own names are shown on share registers and titles to land, even though they hold the property as fiduciaries. I need to say, right from the start, that that would take for ever and a day, believe me! It is a process that is extremely cumbersome, and does not suit who we are.
The other related issue, of course, is that additional legal expense is caused every time a trustee has to be replaced or is unavailable. To enforce the terms of the trust, beneficiaries must apply to the High Court to review the decisions of the trustees. Well, just to state the obvious: the cash-flow problem cannot be ignored. We have to remember that the median income of the New Zealand population is $24,400 but that Māori sit some $3,500 below that—on $20,900. So there is not a lot of extra cash left over to go to court in respect of the technicality of trusteeship.
An earlier Law Commission report entitled
Treaty of Waitangi Claims: Addressing the Post-Settlement Phase, an advisory report to Te Puni Kōkiriin 2002, found that entities such as companies, trusts, and incorporated societies often have limited accountability and transparency requirements, and there was usually no internal disputes resolution mechanism. Most disputes need to be determined by the High Court, which can involve groups in long and expensive litigation, and often fails to deal adequately with the underlying issues. That is not going to work for us either, unfortunately. The beauty of hui is that we are put in a position where we have to sit across the table from
relatives and sort out our stuff. We do not need lawyers. They are usually expensive, and I am not sure about their ability to bring about a resolution, anyway.
What we need is the time to hear the stories of the journey that has ended in our having to meet to sort out our issues. It is not about winning or losing; it is about ensuring that, at the end of the day, whether or not we have resolved our issues, the unseen bonds that tie us—that is, our whakapapa relationships—are sufficiently intact to ensure that in times of crisis we can still awhi each other, we can still hug each other. It all comes back again to this crucial belief in someone or something. “Trust” is defined as “hope or expectation”, and we trust that Labour will pick up on the need to work with Māori in amending the Trustee Act 1956.
KATE WILKINSON (National)
: This Trustee Amendment Bill, of which National supports the first reading and referral for some scrutiny in the select committee process, is, as has been mentioned, the result of a 2002 Law Commission report entitled
Some Problems in the Law of Trusts. It is puzzling that this somewhat technical and probably non-controversial bill has taken 5 years to reach this House, following the pattern of other similarly technical and non-controversial bills, such as the Wills Bill and the Property Law Bill, that have also arrived some 5 years after the Law Commission reports recommending changes. It is also puzzling that not all the problems highlighted by the Law Commission report have been addressed.
The problems highlighted in the report included the trustees’ power of delegation, which has, I have to say, sort of been dealt with. I think my colleague Dr Worth has mentioned some aspects in relation to that. Other problems included the exculpating of trustees, which has not been dealt with; the remuneration of trustees, which has probably been dealt with; the protectors, which has sort of been dealt with; the trustees’ power to insure, which has been dealt with; the trading trusts, which have not even been mentioned; the power of appointment of trustees, which has not been mentioned; and the obligation to give information, which has sort of been dealt with.
I want to talk, firstly, about the role of advisory trustees and protectors. The practice has been growing over some years to make use of advisory trustees and protectors. The major question outstanding was—and actually still is—what the actual obligations and liabilities were of such roles. The Law Commission report noted that the term “protector” is not a legal term of art; it is commonly used to describe a person who is neither a trustee nor a beneficiary but on whom the trust deed confers certain powers. There has been a substantial increase in the provisions in trust deeds for protectors. So we now have the term “protector” included and defined in the bill, in new section 49B(1) inserted by clause 8, as “a person who by virtue of the terms of the trust instrument may give a trustee … (a) a direction that the trustee is obliged to follow …”, or who may give a “(b) consent that permits, and that is necessary to enable, the trustee to exercise a power …”. This, of course, is no different from what could have been provided in the trust deed itself without the necessity for this bill, and indeed does not even have to be defined in law. However, it is there and I have no issue with that. It does clarify the role of a protector for the good of all, and, if it does that, then it is worth while.
But we do have to be careful—and this is where I would like the select committee to give some thought—that the bill does not unnecessarily also restrict the role of protectors. This bill limits the role to two functions only, but in some existing trust deeds protectors may have been given extended roles. I have two questions, which I hope will be duly considered at the select committee level, in relation to this question of protectors. Firstly, what happens to all the existing protectors who have been appointed under existing trust deeds, and who may, as I have said, have different roles as prescribed by those trust deeds, or who may have wider or lesser roles than
contemplated by this bill? What happens to things that the protector has already done but that will not be permitted under this bill? Will those things be rendered null and void, or be rendered unlawful? This provision and the transitional provisions of the bill must certainly be carefully considered and scrutinised by the select committee.
Secondly, and perhaps most important, is the question of the liabilities and obligations of the trustee. The Law Commission report noted: “The Law Commission’s concerns in considering this topic are that the promotion to centre-stage of a player who is neither trustee nor beneficiary necessarily creates uncertainty as to the precise obligations and liabilities of a protector, and as to the effect of the protector’s role on the obligations and liabilities of the trustee. Because there is not much litigation on this topic, it is sensibly arguable that in the interests of certainty there should be statutory intervention.” There is no mention in the bill of the liability of protectors, and consideration should certainly be given to whether, in the very words of the Law Commission, “in the interests of certainty there should be statutory intervention”.
A further omission, I believe, in relation to this bill is the lack of any mention or clarification regarding trading trusts. Again, the use of trading trusts is increasing. It is a sign of the times. Again, I repeat the words of the Law Commission: “There is established a trust, of which the sole trustee is a limited liability company. It is that company that trades, but the assets to which the company has title are beneficially owned by the beneficiaries of the trust, so that if the company fails the only assets available to the creditors of the company in liquidation are the trustee’s right to indemnity out of such assets of the trust as may still be available. While it is probable that this right of indemnity may not be lawfully limited or excluded by the trust instrument, the risks to unsecured creditors remain substantial: ‘This is especially so when persons dealing with the trustee of such a trust do not realise that a trust is involved at all, or that the trustee has no beneficial interest in the assets which he apparently owns. The problems are exacerbated when the trustee is a company of negligible paid-up capital…’ There are also risks to beneficiaries whose only recourse in the event of the failure of the business is against an assetless trustee.”
The major questions relating to trading trusts concern the uncertainty in law: firstly, whether the trustee has that right to indemnity out of the assets of the trusts—that right to indemnity being the only asset of the corporate trustee that may be available to creditors—and, secondly, whether the directors of the corporate trustee should have the same obligations to the beneficiaries of the trust as if they were trustees. Those questions in relation to trading trusts are questions that I believe should be at least asked, and at least considered at the select committee level.
Dr Worth has also mentioned the trustees’ power of delegation. This is one aspect that has been addressed in this bill and should be included in the bill. The general rule is that trustees can delegate or appoint agents for more administrative functions but not for fundamental decision-making powers. The difficulty is in drawing a definitive and certain line between what is an administrative or ministerial function and what is a fundamental decision-making function. This is especially important as fiduciary discretions of trustees previously could not be delegated, but with prudent trustee tests and investment powers and responsibilities becoming more and more sophisticated and increasingly specialised, the obligations of trustees have been becoming more and more onerous.
This bill authorises the appointment of agents, or, in other words, it delegates for those administrative functions. In this respect administrative function is defined in new section 29A(1), inserted by clause 5, as “any function (other than a trustee function) that it is necessary or desirable to perform in executing the trust, administering the trust property,”. The Law Commission report recommended, however, that those functions
included others, including the power to decide whether any fees were payable, the power to decide whether payments received should be appropriated to income or capital, and the power to appoint a person to be a trustee, etc. So unless I am mistaken, on a cursory glance of this bill I believe that while the Law Commission recommends that trustee functions should be delegated, the bill provides only for administrative functions, and not trustee functions, to be able to be delegated.
Just before I conclude I will consider what the honourable member Peter Brown stated in relation to the raising of the gift duty limit from $27,000—the amount of which has been in effect for a long time. Unfortunately, that provision is under the Estate and Gift Duties Act, and it is certainly doubtful whether it is within the scope of the Trustee Act to consider the implications of the Estate and Gift Duties Act.
Trustee law is important. This is an important bill; it is an important issue. The bill should be scrutinised at the select committee, and National supports it at its first reading.
LYNNE PILLAY (Labour—Waitakere)
: I really have very little to add to all the good speeches from other members. We all know that this Trustee Amendment Bill was based on recommendations made by the Law Commission in its 2002 report. The report related to some problems relating to the law of trusts. In its discussion document on that matter, the Law Commission stated: “There is much to be said for the view that the Trustee Act 1956 is, in important respects, confused and confusing”. Clearly this Government—and, indeed, other parties in this House—has taken these opinions on board and sees that there is a need to remedy some of the problems through the Trustee Amendment Bill.
The amendments will change a number of Acts: the Trustee Act 1956, the Administration Act 1969, the District Courts Act 1947, and the Wills Act 1837 from the UK. A number of these Acts, as we can see, go back for a considerable period. Some of the main changes are to what trustees can do. That includes allowing trustees an ability to insure against loss or damage due to any event, allowing advisory trustees to work alongside trustees in the administration of a trust property, and allowing trustees to employ either an agent or an attorney and to be exempted under certain circumstances from liability for acts of default of that agent or attorney. The bill also moves proceedings against a trustee from the District Court, where they are currently held, into the High Court.
I know that Kate Wilkinson mentioned protectors. That is one of the concerns or problems that the bill addresses. A protector is a person with certain powers, such as the power to direct or veto the exercise of trustee powers, or the power to choose or veto the trustees’ choice of beneficiaries of the trust. Trustees under the Act are obliged to act on the direction of the protector, with no statutory provision enabling them to challenge any such direction if it is fundamentally objectionable. A responsible trustee should be able to disregard the fact that advice from an advisory trustee is, or may be, wrong. A responsible trustee should be empowered to challenge a problematic direction from a trust protector. That is one of the issues this bill seeks to address.
I know, as other speakers have said, that when this bill goes to the hard-working and effective Justice and Electoral Committee—although we may have questions from Mr Finlayson in this House around the timekeeping—the committee will, as it always does, give very, very careful scrutiny to this bill and ensure that submitters are heard in a meaningful way. I would think that if changes are to be made, then the Justice and Electoral Committee will make very clear and meaningful recommendations to this House. However, at this point it is with great pleasure that I speak in support of the Trustee Amendment Bill and commend it to the House. Thank you.
referred to the Justice and Electoral Committee.