Trusts play an essential role in many New Zealand families and businesses. Particularly in the context of family trusts and other sensitive and significant trusts, the trustee must exercise their powers and duties responsibly and appropriately. To protect beneficiaries of trusts, certain legal duties operate on trustees. Some of these duties are mandatory, and some will operate by default. This article will briefly explain:
- what a trustee is;
- their mandatory and default duties; and
- how these play out in practice.
What Is a Trustee?
A trustee is one of the key parties involved in a trust. A trustee is a person (or company) who manages the trust’s income and assets on behalf of its beneficiaries (such as family members). A settlor is a term given to a person or organisation appoints a trustee to manage a trust.
There can be one or multiple trustees depending on the construction of the trust. Trustees must act honestly and in good faith to benefit all the beneficiaries and have a range of other legal duties and obligations. These duties are put in place to ensure that trustees act appropriately in their position of responsibility for a given trust.
What Are a Trustee’s Mandatory Duties?
Mandatory duties reflect a trustee’s fundamental duty to the trust’s beneficiaries, whether they are:
- clients;
- family members; or
- others.
These are duties which the trustee must comply with at all times. The trust deed cannot modify or exclude these mandatory duties by setting out certain terms. Trustees must:
- know the terms of the trust;
- act in accordance with the terms of the trust;
- act honestly and in good faith;
- hold or deal with trust property for the benefit of the beneficiaries; and
- exercise their powers for a proper purpose.
What Are a Trustee’s Default Duties?
Unlike mandatory duties, default duties are not compulsory. This means that the trust deed can modify or exclude certain duties in the trust deed. However, unless the deed expressly excludes a specific duty, they will apply.
Trustees must:
- exercise reasonable skill and care in administering the trust. ‘Reasonable skill and care’ includes any special knowledge or expertise that the trustee has, or any special business or professional knowledge. These skills are relevant if the trustee is acting in the course of a business or profession;
- invest prudently, with the same regard to special knowledge or experience;
- regularly and actively consider whether they should be exercising their powers;
- avoid conflicts of interest;
- act impartially between beneficiaries; and
- act unanimously with the other trustees.
Trustees must not:
- bind or commit trustees to the future exercise or non-exercise of discretion;
- make a profit from being a trustee;
- exercise their power for their own benefit, whether directly or indirectly; and
- take any reward for being a trustee (however, this does not prevent reimbursement for legitimate expenses and disbursements).
There are special rules around default duties in terms of legal advice. For instance, you or your business may choose to pay someone to advise you on structuring a trust or preparing the terms of the trust. In this case, your advisor must ensure that you understand the effect of the modification if they recommend that you modify (or exclude) a default duty.
Key Takeaways
Trustees play a vital role in managing trust assets and any income on behalf of the trust’s beneficiaries, whether:
- family members;
- clients; or
- anyone else.
Because of the responsibility that trustees have, there is a range of legal duties active on trustees. These include mandatory duties, such as the idea that trustees must understand the terms of the trust and act following those terms. Additionally, there are also default duties. These default duties apply unless the trust deed specifically excludes these default duties. They include requirements for trustees to, for instance, avoid conflicts of interest and not make a profit from being a trustee. For more information about trusts, or how they work in more detail, contact LegalVision’s New Zealand business lawyers on 0800 005 570 or complete the form on this page.
Frequently Asked Questions
These are duties that the trustee must comply with; including the most fundamental responsibilities for trustees, such as acting honestly, in good faith, and for the benefit of the trust’s beneficiaries. These mandatory terms are mandatory in that they cannot be modified or excluded.
Default duties are not mandatory but will apply by default as the name suggests. The trust deed can modify or exclude these duties but must make this exclusion explicit. Default duties include to avoid conflicts of interests and to act unanimously with other trustees.
Yes, they can, but this requires explicit exclusion in the trust deed when creating the trust.
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