The trusts context in New Zealand
Types of trust
1.6At points in this review we have focussed on express private trusts, and in particular family trusts, in the discussion of the issues and possible reforms to trust law. We want to make it clear that trust law applies to a variety of types of trusts and to emphasise the variety of circumstances in which trusts can be involved.
1.7Trusts may be public (charitable) or private. Private trusts benefit individuals and may be enforced by the beneficiaries. Charitable trusts aim to benefit the public by achieving a charitable purpose and are enforced by the Attorney-General. Charitable trusts are a form of purpose trust. New Zealand law only allows limited purpose trusts other than charitable trusts, such as trusts for animals or for the maintenance of monuments.
1.8Express trusts are created deliberately because of a settlor’s intention to create a trust. Some express trusts are intended to come into effect after the settlor’s death (testamentary trusts). Testamentary trusts are nearly always created by a will. An express trust that takes effect during a settlor’s lifetime is known as an inter vivos trust. Express trusts may also be either fixed or discretionary. In a fixed trust, the trustee has no discretion about which beneficiaries will receive trust property and in what shares, while in a discretionary trust, the trustee does have these discretions. Family trusts are a form of express trust. They can be fixed or discretionary, but are commonly discretionary. They are set up by families for a range of purposes that benefit family members. Some family trusts and other express trusts are established to run a business. In these business trusts, the trust holds the shares in a company which owns the business assets. Protective trusts, which can prevent a beneficiary’s interest from being lost in the event of bankruptcy, are a form of express discretionary trust.
1.9Different types of trusts for commercial purposes, including unit trusts and trading trusts, were discussed in the Introductory Issues Paper. Trusts can be used as a vehicle for managing collective investments. Superannuation trusts are trusts for managing retirement benefits for employees. All superannuation schemes that register under the Superannuation Schemes Act 1989 must have a trust deed. A member of a scheme is effectively a beneficiary of the trust. Trustees are responsible for the management and investment decisions. Other sorts of employer trusts are used for holding long term benefits for employees, such as shares or share options. These trusts enable shares or options to be held until a distribution date, held in individual packages within the trust, or held for long-term dividend income for the benefit of existing or retired employees. KPMG said in its submission on the Second Issues Paper that employer trusts can be more flexible and have fewer administration costs and reporting obligations than superannuation trusts.
1.10Energy trusts were formed after the Energy Companies Act 1992 required all municipal electricity departments and power boards to be incorporated and allowed individual communities to determine how the shares in the new energy companies were to be held. Many local communities allocated shares to a local energy trust. Energy trusts vary considerably. Some are charitable trusts where the income of the trust, which is principally in the form of dividends from its shareholding in the electricity lines company, is used for charitable purposes. Others distribute directly to electricity consumers or members of the local community, for instance, through an annual rebate.
1.11Trusts may also be simple or special. The classification of a simple trust (bare trust) is legislatively created and so can vary from one statute to another, but there are several views of what bare trusteeship involves. The most common view of a bare trustee is that it refers to a trustee who has no duties, or if he or she did originally have duties the trustee can be compelled in equity by the beneficiary to convey the trust property to the beneficiary or by the beneficiary’s direction. Bare trusts are often used in the acquisition of assets where it is desirable that the legal owner’s identity remains undisclosed during the acquisition process. A special trust is one where the trustee has duties.
1.12Statutory trusts are created or implied by statute. Examples include trusts created under section 77 of the Administration Act 1969 for children of the deceased when he or she dies intestate or partially intestate, trusts relating to land held by local bodies for public purposes, and community trusts established to acquire the shares in the capital of the trustee banks’ successor companies for community benefits. In addition, trusts are established for Treaty of Waitangi settlement claims and utilised by the statutes carrying out these settlements.
1.13There are also trusts that are not express trusts in that they do not require an express intention to create a trust. Resulting trusts occur when a transferor of the property can be presumed not to have intended the recipient of the legal title to be the beneficial owner. As a result the recipient of the legal title must retain the property for the transferor, in the absence of any contrary intention. Palmer places resulting trusts in two categories: “apparent gifts” which covers voluntary conveyance and purchase of property in the name of another person, and “failing trusts” which covers express trusts that fail because of uncertainty and other invalidating reasons, and incomplete disposal of a beneficial interest. Constructive trusts arise when no trust has been declared, either directly or indirectly, but it would be unconscionable for the person on whom the court imposes the trust to assert a beneficial ownership. An institutional constructive trust arises on the happening of certain events by operation of the principles of equity. The court recognises its existence in a declaratory way but does not create the trust. A remedial constructive trust is imposed by the court as a remedy in circumstances where previously no trust existed, and so depends on the court for its very existence. While they are covered by the current Trustee Act, the Act’s provisions and most of the matters discussed in this review are of little relevance to resulting and constructive trusts. It seems likely that the courts will continue to develop the law in this area.
Māori land trusts
1.14Māori land trusts are unique to New Zealand and make up a significant proportion of New Zealand’s trusts. Unlike the express trusts discussed above, Māori land trusts are generally not settlor-made but are created by order of the Māori Land Court. They are primarily land management structures. They continue in perpetuity and are mostly fixed trusts.
1.15Māori land trusts have a different historical origin from other trusts. There is evidence that trusteeship of Māori land may have arisen from the cultural institution of rangatira who made decisions in relation to land and communities on behalf of the communities, which means they are more akin to implied trusts.
1.16Under Part 12 of Te Ture Whenua Māori Act 1993 (TTWMA), the Māori Land Court has exclusive jurisdiction to constitute the following five types of Māori land trusts:
- Whānau trusts – discretionary trusts primarily aimed at enabling interest in Māori land or general land owned by Māori to be held in perpetuity under the name of a tupuna (ancestor). The beneficiaries are the descendants of the tupuna, though none have a fixed interest. The trust is intended to prevent ongoing succession to land interests and their consequential fragmentation.
- Ahu whenua trusts – fixed trusts that are the primary land management trusts under the Act. The trustees hold the land and assets on trust for the beneficial owners in proportion to their several interests and the beneficial owners are free to deal with their interests independently of the trustees, subject to the Act.
- Whenua topu trusts – discretionary land management trusts that operate to promote and facilitate the use and administration of land in the interests of the iwi or hapu, rather than specifically for the persons beneficially entitled to the land.
- Putea trusts – fixed share management trusts for managing impractical or otherwise undesirable minimal value interests, or interests where the beneficiary is unknown.
- Kaitiaki trusts – fixed trusts that can constitute Māori land or other land or property. Any persons under a disability, including minors under 20 years, are beneficially entitled.
1.17The Registrar of the Māori Land Court maintains a record of the legal and beneficial ownership of Māori land. The Court has advised us that there are currently 9,230 whānau trusts, 5,575 ahu whenua trusts, 33 whenua topu trusts, three putea trusts, and 2,726 kaitiaki trusts. TTWMA provides much of the law regarding the constitution and administration of Māori land trusts and powers of the court in relation to these trusts. The provisions of the Trustee Act and general trust law are applicable to Māori land trusts where TTWMA is silent. The Government has announced a review of TTWMA to consider legislative intervention to enable the best use of Māori land.
1.18A number of the trusts in New Zealand are settled by settlors who are resident overseas. Like other “onshore” trusts jurisdictions, such as the England, Canada and Australia, New Zealand has a long tradition of resident trusts and a taxation system that imposes tax on income from those trusts. Since 1987 the New Zealand Government has made the policy decision to allow trusts to be settled by non-resident individuals and administered by trustees within New Zealand without incurring New Zealand tax. This means that New Zealand is an attractive jurisdiction for foreign individuals wishing to make investments through the use of trusts. New Zealand has traditionally been seen as an “onshore” trusts jurisdiction where the traditional plurality of trusts has been for domestic as opposed to foreign wealth. However, in not imposing tax on foreign trusts, New Zealand has a feature in common with the “offshore” jurisdictions that have traditionally been used for the settlement of trusts by foreign investors with foreign wealth, such as jurisdictions in the Channel Islands and Caribbean. Unlike some of the offshore jurisdictions, New Zealand has retained the traditional concept of a trust without extending its bounds far outside its historical starting point and has relatively light regulation of the trust industry. New Zealand is considered to have sophisticated levels of advice from lawyers and accountants and a judiciary that is relatively advanced in understanding trusts.
1.19Tax legislation requires the disclosure of details of foreign trusts by New Zealand resident trustees of foreign trusts. The Inland Revenue advise that since October 2006 when a registration requirement for foreign trusts was introduced there have been 7,738 foreign trust registrations. The New Zealand resident trustee must belong to an approved organisation, such as the New Zealand Institute of Chartered Accountants, the New Zealand Law Society and the Society of Trust and Estate Practitioners (New Zealand branch). The trustee is also required to keep financial and other records relating to each foreign trust for New Zealand tax purposes and is obliged to provide these details to the Inland Revenue if requested. If the trustee does not comply with these requirements he or she may be subject to sanctions, such as prosecution for knowingly failing to disclose or keep the required information. In certain circumstances, the resident foreign trustee may be taxed in New Zealand on the foreign trust's worldwide income.