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Family trusts are very common in New Zealand. Trustees are the people who ‘run’ and direct the trust. They must comply with a wide range of duties and obligations. This article focuses on one of those duties, that is, the duty to treat beneficiaries of a trust impartially. This article sets out:

  • the details of that duty; 
  • what it means in practice; and 
  • the main exception, which is trust deeds. 

What Is the Duty to Treat Beneficiaries Impartially?

In short, trustees must act fairly towards all beneficiaries when managing or distributing trust property. This means they cannot unfairly favour one set of beneficiaries over the other, they must act in an even-handed way. 

However, this does not mean that trustees need to treat all beneficiaries the same way. It may often be impossible to do so. Their underlying obligation is to act fairly. This rule was recently included in the Trusts Act 2019. Section 35 of the Act requires trustees to act impartially between beneficiaries. Further, they must not be unfairly partial to one beneficiary or group of beneficiaries to the detriment of others. However, that section is explicit that it does not require a trustee to treat all beneficiaries equally. 

What Does This Duty Mean in Practice?

In general, this duty means that trustees must put aside their personal interests and consider the overall best interests of beneficiaries. There are a lot of examples where this duty comes into play. One of the most common examples is the need to balance the interests of ‘capital’ beneficiaries and ‘income’ beneficiaries. A capital beneficiary will receive any capital that the trust holds. Therefore, they will be most interested in how the trustees act to increase the value of capital assets. However, an income beneficiary will receive the fruits of trust income. Therefore, their priority will be maximising their income and they will prefer investments that do this. 

The court has said a number of times that a trustee must act with ‘strict impartiality’. In one very famous case, trustees were found to have breached their duty of impartiality. This was because they only invested trust assets in income-earning assets that did not result in any capital gain for the capital beneficiaries. This meant the trustees were not acting impartially, as they acted in a way that clearly favoured one class of beneficiary at the expense of the other. 

Main Exception – Trust Deeds

A trust deed may give a trustee the explicit power to treat beneficiaries differently and favour or prefer one class. There is nothing that prevents a trust deed from doing this. In fact, it is very common. However, before relying on this exception, you need to be sure that the trust deed‘s terms are clear. If the intention of the deed is to prefer some beneficiaries over others, then the trust deed needs to state this. 

For example, it could define ‘primary’ and ‘secondary’ beneficiaries and state that the interests of primary beneficiaries are to be preferred. 

Key Takeaways

The law imposes a general obligation of trustees to act impartially between different beneficiaries. This means a trustee must act fairly and with even-handedness. They must not make certain decisions that clearly favours one group at the expense of the other. However, you need to make sure you read your trust deed carefully, as clear words of a trust deed can override this duty. If the deed intends to allow a trustee to treat beneficiaries unequally, it needs to state this clearly. Whether or not a trustee has acted impartially turns on the specific facts and circumstances at the time the trustee made their decision. If you want to know more about issues relating to trustees and family trusts, contact LegalVision’s trust lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

How do I avoid beneficiaries from claiming I have acted without impartiality?

You can do a number of things to avoid a case being brought against you in court for the way you have distributed trust assets. The first step would be to seek the written approval of the beneficiaries of a trust before making any potentially controversial or difficult distributions or transactions. If this is not possible, you might want to consider applying to the court to seek directions about the best way to proceed.

Who is a beneficiary, and what are the different types of beneficiaries?

A beneficiary is a person who can benefit from a trust, often by receiving a form of capital or income. There are different types of beneficiaries. For example, a discretionary beneficiary can only benefit at the trustee’s discretion. A final beneficiary is a person who benefits when a trust comes to an end.

What processes should I follow as a trustee if I am making a distribution that might be unequal?

If you are exercising your powers and allocating trust funds amongst beneficiaries in an unequal way, the most important thing is ensuring you can prove you have followed fair and impartial processes when managing, investing and gathering information before making your decision. You need to be able to defend any decision and show why it is fair.

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