Interaction of trusts with other policy areas
Reform options considered
Each of the statutory regimes outlined in the Second Issues Paper
takes a different approach to trusts. The Second Issues Paper
set out a number of possible options for reform to harmonise the approach to how trust property and income is treated across the different legislative provisions. These options included:
(a)central look-through provision in new legislation replacing the Trustee Act that sets out factors that would be considered in assessing whether a disposition of property to a trust can be disregarded in assessing a person’s obligations to another person or the Government, or in assessing eligibility for government assistance; and
(a)leaving it to individual statutes to address dispositions of property or income to trusts (the status quo).
16.27Further options of a provision in new legislation containing principles about the uses to which trusts can be put, and administrative guidelines for agencies when considering the implications of trusts in particular policy contexts were also discussed.
16.28Submitters were asked whether the solution was to strengthen the current provisions or whether a stronger, more uniform solution was called for. They were asked, if they thought there should be a single provision in trusts legislation, what factors should be included in this provision.
Single uniform provision in trusts legislation
The majority of submitters did not favour having a uniform provision in trusts legislation, and preferred that trusts continue to be addressed in the individual statutes governing each area. Comments made by submitters against a uniform provision in trusts legislation included the following:
(a)Trust law is mainly aimed at protecting beneficiaries, while other bodies of law seek to achieve different aims, so a provision of general application would not be viable. Having a consistency of approach across various areas is not necessarily an appropriate policy objective.
(b)A uniform provision is unlikely to operate effectively in practice, and could result in confusion, uncertainty and potential dispute, for example in the tax area. It could complicate trust law and undermine the integrity of trusts. Such a provision may also involve some increased compliance costs; wholesale reforms could impose significant costs with little benefit. The consequences of looking through or disregarding trusts in any given area would also need to be considered fully, and the same outcome may not be appropriate in all areas.
(c)Issues with the use of trusts are not trust-specific; other legal arrangements can be used for the same purpose and achieve the same outcomes. A uniform trusts provision would encourage the use of alternative legal arrangements instead of trusts.
16.30A few submitters supported having a uniform provision in trusts legislation. This included the MSD and KPMG, with some conditions. The ADLS reserved its view on the issue but acknowledged that a new statutory regime could provide increased certainty and less cost associated with litigation. KPMG considered there was some merit in model rules which can be switched on or off by legislation in specific circumstances, to allow third parties to “look through” a trust or claim priority. KPMG’s preference is that such model rules would not affect the validity of a trust. A specific rule was preferred over a general one, due to the uncertainty and problems in application of a general rule.
16.31The MSD favoured a consistent approach to be applied in trusts legislation, enabling the existence of the trust to be ignored, and the assets and income to be treated as those of the settlor, if the trust has a purpose or effect that is unlawful or inconsistent with specified public policy objectives (including income and asset testing for access to state assistance).
Leaving trusts to be addressed by individual statutes
16.32This was the preferred approach of most submitters. Submitters considered that it is preferable to allow individual statutes to address the impact of trusts, and concerns about the use of trusts, in those particular legislative contexts. Submitters considered that any possible review and amendment should occur in the context of specific legislation, rather than via an overall trust law rule.
16.33Several submitters, including the NZLS and Chapman Tripp, noted that many of the existing provisions that can be relevant to trusts are of general application; that is, they apply to a range of persons and entities and not just to trusts. The TCA preferred the use of provisions that were “entity-neutral” and targeted transactions instead of trusts, such as the provisions found in the Insolvency Act.
16.34Regarding the overall approach to be taken in legislation, we agree with the majority of submitters that it is preferable to continue to address the impact of trusts in each individual legislative scheme. The overall view of submitters is that the different approaches taken to trusts in the different statutory and policy areas are appropriate. Individual policy areas, such as tax and insolvency, require different approaches to the use of trusts because they involve different problems, objectives and priorities which necessitate their own criteria and responses. On this basis, increasing consistency across the various areas was not considered a desirable aim.
16.35We considered whether it would be desirable to have a uniform look-through provision in trusts legislation, to bring consistency in how trusts are regarded in different policy areas. There was only limited support for this position. Generally a coordinated, uniform approach was favoured by government agencies, while members of the legal and accounting profession, professional and industry organisations did not favour such an approach.
16.36The strong view of the majority of the submitters is that a uniform provision would not be helpful or effective in practice, as there would be great difficulty in formulating a provision that would be suitable to apply across a range of policy areas. We acknowledge submitters’ concerns that imposing a uniform arrangement in trusts legislation would cut across the tailored responses currently available in each area, and could create new difficulties in the interface with other legislative schemes. On the whole, submitters’ perceptions of a uniform provision were that it would complicate trust law and create uncertainty rather than increase clarity and certainty. In this respect, a uniform provision does not align well with the objectives of this review and the preferred approaches.
16.37There may be broader conceptual reasons as to why trust interface issues should be dealt with in each individual area, rather than in trusts legislation. Some aspects of the use of trusts only present difficulties when they interact with other policy areas, and do not necessarily in themselves contravene trust law principles or undermine the trust concept; for example settlor control can be legitimate (as long as the trustee is accountable to beneficiaries). Furthermore, a general look-through provision does not seem to be appropriate in trusts legislation because it undermines the law of trusts, which is about establishing and managing this property holding mechanism. A look-through provision too easily allows a trust to be unwound and trust law overridden. It would also lead to the question of why there should be a look-through provision for trusts and not for other forms of property holdings.
16.38We also considered variations on a look-through provision, including a provision in new legislation containing principles about the uses to which trusts can be put, and administrative guidelines for agencies when considering the implications of trusts in particular policy contexts. However, there was limited interest in them among submitters, who generally considered these approaches were too general to work effectively across different areas of the law, although the principles provision was the Ministry of Economic Development’s (MED) preferred option because it would give the courts flexibility to make judgments taking into consideration the facts of each case. We do not see benefit in pursuing either of these since they suffer from the same difficulties as a look-through provision in legislation; it would be too difficult to develop a set of principles or guidelines that would be suitable for working across a range of policy areas while still providing useful guidance.