Maybe you are a trustee of your own family trust (and have been for years). Or maybe you have just been asked to act as a trustee for oneof your friend's, or family member's, trusts.

In any event, while being asked to accept a trusteeship is a great privilege, the role also comes with significant responsibilities (and potential liability).

As such, it is important to ensure you fully understand exactly what the role of a trustee is, and the various duties, obligations, and potential liabilities which come with that role (some of them might surprise you).

Trustee

In essence, a trustee is a person or entity appointed to hold property on trust for the benefit of other people, the beneficiaries.

When someone establishes a trust, they transfer ownership of their assets to the trustee(s). This is a significant point because the person no longer owns the assets. Instead, the trustee becomes the legal owner of the trust property. Trustees own the property not for themselves but rather, for the benefit of the beneficiaries. Although the beneficiaries have what is called an equitable interest in the trust property, they do not own it. These arrangements create what is called a fiduciary relationship – where the trustee owns the assets (for the benefit of the beneficiaries) and is accountable to the beneficiaries for the way they carry out the duties imposed on them by the trust deed, and by the law.

It is this change in legal ownership of the property – where legal ownership passes to the trustee - that goes to the very essence of the trust. Because the person who transferred assets to the trust (or the settlor) no longer owns the property, the asset cannot be pursued by their claimants; that’s' because they no longer own the property; rather it is owned by the trust.

Responsibilities

But with power comes responsibility. A trustee's responsibilities and duties are governed by the trust deed, and by legislation, most notably the Trusts Act 2019, which replaced the Trustee Act 1956 and provides a modern framework for trust law in New Zealand.

Trustees in New Zealand have a range of duties, some of which are mandatory (meaning they cannot be delegated, or modified or excluded under the trust deed), while others may be modified or expanded by the trust deed (referred to as default duties).

A trustee's mandatory duties are set out at sections 22 – 27 of the Trusts Act 2019, and a trustee's default duties are set out at sections 28 - 39 of the Trusts Act 2019.

Every current, or prospective, trustee should familiarise themselves with the nature and extent of all of these duties.

Of particular importance however are a trustee's mandatory duties, as those duties underpin the role of a trustee. We discuss these core duties briefly below:

Duty to know terms of trust (s23 Trusts Act 2019)

• This is a cornerstone of trusteeship – a trustee must ensure that they are familiar with the particular circumstances of the trust (including the nature, and extent of the trust property), and understand terms of the trust deed;
• It is no excuse for a trustee to say that they did not understand the nature of the trust, or the duties imposed on them by the trust deed, or at law.

Duty to act in accordance with terms of trust(s24 Trusts Act 2019)

• A trustee is bound to act in accordance with the terms of the trust deed – this must be strictly adhered to. Again, this concept is fundamental to the role of a trustee, and demonstrates why knowing the terms of the trust deed is so crucial.

Duty to act honestly and in good faith (s25 Trusts Act 2019)

• This duty is integral to maintaining trust and confidence between trustees and beneficiaries, ensuring that trustees act in a manner consistent with their fiduciary responsibilities.

Duty to act for benefit of beneficiaries or to further permitted purpose of trust (s26 Trusts Act 2019)

• Any exercise of any power by a trustee must befor the benefit of the beneficiaries, or to further a permitted purpose of trust – in essence, a trustee must entirely put to one side the interests of themselves, or any other persons/entities when exercising powers;
• When a trust has multiple beneficiaries, orpurposes, needs and interests may vary. Typically, the best interests of the beneficiaries will mean their best financial interests.

Duty to exercise powers for proper purpose (s27 Trusts Act 2019)

• Similar to the duty to act for the benefit of the beneficiaries, the effect of this mandatory duty is that trustees must ensure that any exercise of power is made for a proper purpose – i.e. in furtherance of the purpose of the trust;
• For instance, the exercise of an otherwise legitimate power for any reason which is inconsistent with the purpose of the trust will be improper.

Risks/Liabilities

Claims by beneficiaries

An important concept of trusteeship is that beneficiaries are entitled to have the trust properly administered, and are able to hold trustees to account for their administration of the trust.

Failure to adhere properly to the duties described above may constitute a breach of trust.  

Breaches of trust may be deliberate, or inadvertent; may arise out of actual misapplication of trust property, or merely an unlawful investment/transaction; and might consist of failure to carry out a positive duty, or out of a failure to act with appropriate care and skill.  

In any event however, it is a well-established principle that beneficiaries will be entitled to pursue a trustee for breach of trust, and that trustees may be personally liable for such breach.

Liability to third parties

A trust is not an entity in or of itself (it is a relationship), and cannot contract on its own behalf (unlike a company). Instead, trustees hold and deal with trust property in their names but for the benefit of the beneficiaries. Trustees are also able to enter into contractual relationships with third parties as a trustee (i.e. on behalf of the trust).

In so doing, trustees will become personally liable for any debts or liabilities arising out of those contractual relationships (unless they have successfully limited their liability, discussed below).

Protection from liability

Given the potential risk and liabilities faced by trustees, it is important for trustees to understand the various methods which can be employed to limit their personal liability.

Some of those methods include:

Reliance on exemption/indemnity clauses within the trust deed

• Trusts deeds often include clauses exempting a trustee from liability for certain breaches, and/or entitling a trustee to be indemnified in respect of any liability arising from those breaches;
• However, liability may not be excluded for any breach of trust arising from a trustee's dishonesty, wilful misconduct, or gross negligence (s40 of the Trusts Act 2019).
• Note that relying on such clauses in trust deeds alone will not limit a trustee's liability to third parties.

 Limiting liability within any contract

• When contracting on behalf of a trust, a trustee can agree with the third party that the trustee's liability will be limited to the assets within the trust fund (as opposed to a trustee's personal assets).

Operating as a corporate trustee

• It has become very common for trustees to operate as a corporate trustee (i.e. via a limited liability company) rather than in their personal capacity. Claims against limited liability companies will be limited to a claim against the assets of that company.

Conclusion

The role of a trustee in New Zealand is one of significant responsibility and requires a deep understanding of the legal and practical aspects of trust management.

Whether you are a professional (such as a lawyer or accountant), or simply a trusted family friend, persons taking on this role must be prepared to navigate complex challenges and uphold the fiduciary obligations that come with managing a trust in New Zealand.

If you have concerns, whether about your role as a trustee or your vulnerability to liability as a trustee, contact our Trusts and Private Clients specialists. We are here to help.

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