Contents

Chapter 2
Core principles
of trust law

Definition and creation of a trust

Proposal
P1
(1) New legislation should define “trust” for the purposes of the Act. The definition should be confined to express trusts. It should describe a trust’s core features and make it clear what types of trusts are covered by the Act. The definition should comprise the following:
(a)A trust is an equitable obligation binding a person or persons (the trustee) to deal with property (the trust property) for:
(i) the benefit of the beneficiaries, any one of whom may enforce the obligation owed to them; or
(ii) such purposes as are permitted at law.
(b)Trust property is held by the trustee in a way that is identifiably separate from his or her own private property.
(c)The trustee has the power and the duty, in respect of which he or she is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the duties imposed on trustees by law.
(d)A trust may take effect either within the settlor’s lifetime or upon his or her death.
(e)A trustee may have a beneficial interest in the trust property.
(f)No trust exists if the sole beneficiary is also the sole trustee.
(2)The legislation should include a provision restating the general principles of how a trust may be created, including that a trust may be created:
(a)by a person (settlor) when he or she indicates with reasonable certainty by any words or actions the following (collectively known as “the three certainties”):
(i)the settlor’s intention to create a trust;
(ii)the beneficiary or beneficiaries, or permitted purpose; and
(iii)the trust property; or
(b)in accordance with any statute.
The requirements for the creation of a trust are subject to the Wills Act 2007 and the Property Law Act 2007 where applicable.
(3)The new legislation should define “trustee” and “beneficiary” broadly in a way that explains their role, for instance:
A “trustee” should include anyone who holds property under a trust.
A “beneficiary” should include anyone who has received or who will or may receive an interest in trust property under a trust in accordance with a trust deed. It should include a discretionary beneficiary, that is, a person who may benefit under a trust at the trustee’s discretion or power of appointment, but who does not hold a fixed, vested or contingent interest in the trust property, and a trustee or settlor may also be a beneficiary.
Note: in these proposals “settlor” includes a will-maker.
Please give us your views on this proposal.

Current law

2.3Section 2 of the Trustee Act 1956 defines “trust” for the purposes of that Act as follows:

trust does not include the duties incidental to an estate conveyed by way of mortgage, but with this exception it extends to implied and constructive trusts, and to cases where the trustee has a beneficial interest in the trust property, and to the duties incidental to the office of an administrator within the meaning of the Administration Act 1969, or a manager or person authorised to administer the estate of any person under the Protection of Personal and Property Rights Act 1988, or a manager of a protected estate appointed under the Protection of Personal and Property Rights Act 1988;

2.4Clearly this definition is not intended to explain what a trust is. It is more a statement of what trusts are covered by the Trustee Act and is necessary to the functioning of the Act. The Trustee Act does not explain the core principles of what a trust is and the nature of the relationships it establishes. However, the judge-made law on the key features of a trust is generally accepted.

2.5“Trustee” is defined in section 2 of the Trustee Act as having a corresponding meaning to “trust” and includes a trustee corporation and every other corporation in which property subject to a trust is vested. “Beneficiary” is not currently defined in the Act.

Issues

2.6Trusts are in widespread use in New Zealand and many people with no legal training are involved in trusts as settlors, trustees and beneficiaries. The trust concept is complex, involving several relationships which create obligations. While lawyers may understand what a trust is or have ready access to texts that explain the concept, the definition of a trust is not readily accessible to many New Zealanders. The Trustee Act is a collection of administrative and procedural provisions and powers that presumes a certain sort of relationship is in existence. There is no authoritative statement of how that relationship is established and the role of the people involved. Some of the issues discussed here were raised in the Introductory Issues Paper.55

Options for reform

2.7The options considered were to include a definition that explained the key features of the trust in proposed new legislation or to continue the status quo. We have considered whether the provision outlining the key features of a trust should be a definition of what a trust is for the purposes of the Act, or whether it should be a restatement of the case law position that is separate to a definition like the existing definition.

Discussion

2.8We consider that it would be beneficial to include explanatory provisions about the core features of the trust in new legislation as they would have a significant educative impact among those involved in trusts that do not have legal training. It would make the legislation much clearer on its face because it would explain the type of relationship that is regulated by the Act. We have heard evidence that the concept of a trust is not widely understood by the general population or even the business community. If new trusts legislation is to restate established principles of trust law, improve the clarity and accessibility of trust law, and have an educative impact on trustees, beneficiaries and settlors, the requirements for creating a trust should also be clearly set out.

2.9Unlike the current Act, the proposal would not cover implied and constructive trusts. We consider that attempting to include implied, constructive or resulting trusts unnecessarily complicates the definition in the proposed Act. Implied, constructive and resulting trusts are created by the court or by operation of law, and have little in common with express trusts. Most provisions of the trusts statute will not be relevant. Excluding these forms of trust from the definition would not prevent the courts making reference to trusts legislation when making a decision or giving a direction in relation to an implied, constructive or resulting trust.

2.10There might be some concern the definition and creation provisions could have the unintentional effect of altering the law or excluding some relationships which previously would have qualified as trusts, and that this could limit the development of case law. However, we believe that these concerns can be alleviated by carefully drafting the provisions broadly so they encompass the full ambit of express trusts. While in general, New Zealand statutes do not define or explain general concepts, such as a contract or defamation, but rely on judge-made law to do this, the complexity combined with the ubiquity of trusts mean that a definition is warranted. We recognise that a definition for the purpose of a trusts statute does not define a trust for every aspect of trust law, as some trust law will remain outside of the Act. However, we do not expect that this will cause problems. The definition is intended to cover any express trust that is covered by trust law. The definition in the Act will also be available as a guide for what a trust is under all trust law in New Zealand.

2.11Submitters mostly favoured the approach of restating general trust law principles in legislation because of the helpful educative impact it would have. The New Zealand Law Society’s (NZLS) view was that, although potentially difficult to achieve, it may be worthwhile to restate these principles in statute. It was less convinced about the benefits of a formal definition of a trust, however. The submission detailed many arguments for and against including a definition,56  before giving the view that it did not consider a definition was necessary and that it would have little practical impact. The Trustee Corporations Association considered that the educative impact of restating key trust law concepts in legislation would be valuable and that a definition could assist lay trustees and beneficiaries to understand the trust better.
2.12We presented several options for the definition of a trust in the Introductory Issues Paper, including some that attempted to set out the generally understood equity-based definition of a trust (such as Hayton’s definition)57  and others that were not limited to beneficiary trusts, but included purpose trusts (such as the Hague Convention definition).58
2.13The proposed explanatory provisions are a combination of aspects of these two definitions. The aim is to encompass the variety of express trust forms that are used, including express beneficiary trusts (such as discretionary family trusts), testamentary trusts, purpose trusts (such as charitable trusts), and trusts created under other statutes (such as Māori land trusts). We consider that the legislation should make it clear that a trust can be for the benefit of beneficiaries or for a purpose. At this stage of the review, we are not considering the ambit of permitted purpose trusts.59  As purpose trusts are only lawful for certain purposes, the legislation should explain that trusts may be for a “permitted purpose” and define this term. It is intended that if the decision is made to alter the law regarding which purpose trusts are permitted following stage two of our review, the definition of “permitted purpose” could be altered.
2.14We also asked the question of whether the traditional description of the concept of a trust, the title split into a legal interest held by trustees and an equitable or beneficial interest held by beneficiaries, should be included in a definition. This understanding of the trust arises from the history of trusts and their development in the courts of equity. The interest of a beneficiary in trust property was called equitable because it was originally only recognised by these courts.60  Equitable interests are not so much carved out of a full legal interest, but are new rights “engrafted” upon it.61
2.15The split legal and beneficial title description is a useful way of understanding what happens in a trust and makes it clear that it is something quite different from usual ownership of property. The difficulty with including this in a definition is that the concept is not seen as fitting all trusts. Sometimes the trustee does not hold the legal title to the trust property.62  The title split concept does not work easily with discretionary trusts. A beneficiary under a discretionary trust does not have a full equitable proprietary interest. If a discretionary beneficiary’s interest is subject to the trustee’s discretion, all he or she has is a mere hope or expectancy of an interest in the property, which gives the beneficiary some personal rights against the trustee to ensure that the trustee distributes within the class.63  This expectancy is not an equitable property interest. Most submitters considered that the title split concept no longer accurately portrays the trust, but some, including the NZLS, did consider that this was an important element of what makes a trust a trust. It may be possible to include the flavour of this understanding of the trust, without stating that beneficiaries have the beneficial ownership.

2.16The issue of whether New Zealand should ratify the Hague Convention was raised in the Introductory Issues Paper. The convention is intended to clarify which law will apply where trusts cross international boundaries. In its 2002 review, the Law Commission recommended ratification of the convention, although it indicated that doing so may indirectly permit the establishment of a much greater range of non-charitable purpose trusts because these are legal in other jurisdictions and are contemplated within the Convention’s definition. We consider that the question of ratification of the Hague Convention could be revisited following stage two of the Commission’s review of trusts. The Commission would consider as part of stage two whether all purpose trusts permitted elsewhere should be recognised in New Zealand.

2.17The option of including a standard definition of trust in the nature of the definition in the current Act and having separate explanatory provision that restate the case law on what a trust is was rejected because it could create confusion about the status of the explanatory provision. It would be similar to a definition but without being authoritative. We consider that it is better to propose a firm and comprehensive definition of trust for the purpose of the new Act.

2.18We consider that definitions for “trustee” and “beneficiary” should be included in the interpretation section also. The definition of “trustee” can be made more useful by including a brief explanation of the trustee’s role. We suggest that it would be helpful to define “beneficiary” also. Many of our proposals refer to beneficiaries and we are consistently taking a broad view of who a beneficiary is for the purposes of the Act. The definition of “beneficiary” in this Act should include a discretionary beneficiary.

55Law Commission Review of Trust Law in New Zealand: Introductory Issues Paper (NZLC IP19, 2010).
56Including: advantages − clarifying the type of legal relationship, providing the general public with a better understanding of what a trust is and is not, assisting with interpretation and administration of thousands of trusts in New Zealand by providing guidance as to what those relationships comprise; and disadvantages – tension between the purpose and role of the legislation and what have always been private unregulated legal relationships, unduly restricting the court’s findings and ongoing development of the law, creating difficulties for more specific statutory notions of trust, might constrain judges in cases from finding the existence of a trust.
57David J Hayton, Paul Matthews and Charles Mitchell Underhill and Hayton Law of Trusts and Trustees (17th ed, LexisNexis Butterworths, London, 2007) at [1.1] [Underhill and Hayton].
58Hague Convention on the Law Applicable to Trusts and On Their Recognition 1664 UNTS 92 (concluded 1 July 1985, entered into force 1 January 1992), art 2.
59This question will be addressed in stage two of the review.
60Underhill and Hayton, above n 57, at [2.1].
61Andrew S Butler “Basic Concepts” in Andrew S Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) 21 at 23 [Equity and Trusts] citing K Gray “Equitable property” [1994] CLP 157 at 163.
62Underhill and Hayton, above n 57, at [2.5].
63At [2.14]; Andrew S Butler “The Trust Concept, Classification and Interpretation” in Butler (ed) Equity and Trusts, above n 61, 43 at 52.