New Trusts Act - Changes to Trust Deeds?
Those who have set up trusts or who are trustees will be interested to know, as a result of the new Trusts Act (which comes into existence 31 January next year), whether there will need to be changes made to the trust documents that govern the trust, mainly the trust deed which sets out the terms of the trust.
The new Trusts Act sets out mandatory duties and default duties. The mandatory duties cannot be changed and are mainly things you would expect i.e. hold or deal with the Trust property for the benefit of the beneficiaries in accordance with the terms of the Trust Deed.
But the default duties can potentially be modified by the Trust Deed. Here are a few default duties that trustees may consider changing;
The default duty says a trustee may not exercise trustee power directly or indirectly for the trustee's own benefit. This is problematic if the trustees and the beneficiaries are the same person as it would prevent such a person from making a decision for their own benefit. Also, the use of the words 'directly or indirectly' widens the possibility of a trustee being caught by this default rule. The standard clause in trust deeds may need to be amended.
Duty to avoid conflicts of interest
The default rule says a trustee must avoid a conflict between the interest of a trustee and the interests of the beneficiaries. But it is often desirable to allow a trustee (who is also a beneficiary) to take part in decisions despite a conflict of interest. Most trust deeds already have a clause which enables a trustee to act where there is a conflict, but this should be checked as well.
Duty to act unanimously
The default rule says that if there is more than one trustee, the trustees must act unanimously. This is not controversial, however, the new Act allows this default rule to be changed. People who set up trusts (called Settlors) sometimes have reservations about involving an independent trustee because they lose control of their decision making ability. To guard against this, parties could change the default rule so the trustees would be able to act with a majority in respect of any particular decision.
Duty to act for no reward
The default rule says a trustee must not take any reward for acting as a trustee, but the trustee can be reimbursed for trustee's expenses and disbursements. Most trustees do not act for reward, but if you have an independent professional trustee, they are likely to be paid for their services. Therefore, you will need to make sure the Trust Deed allows for this possibility if the trust has an independent trustee.
Duty of impartiality
The default rules says a trustee must act impartially in relation to the beneficiaries and must not be unfairly partial to one beneficiary or group of beneficiaries to the detriment of the others. However, that does not mean that a trustee must treat all beneficiaries equally. The majority of trust deeds would have a very wide discretion for the trustees to benefit certain trustees more than others if they consider it appropriate. However, this should be checked. The words in the default rule "to the detriment of others" could cause an issue. If you are the settlor of a trust, you could, for example, state in the trust deed that the trustees are able to purchase depreciating assets for the settlors such as retirement village units.
This list of possible changes is not intended to be exhaustive, and certainly the disclosure requirements in the new Act need separate attention (see our earlier post).
Please let us know if you want to discuss any possible changes to your Trust or Trust deeds.