Contents

Chapter 2
Core principles
of trust law

Purpose restriction

Proposal
P4 New legislation should not include a provision restricting the purpose for which a private trust may be settled.
Please give us your views on this proposal.

Current law

2.41The Trustee Act is silent about why a person might want to establish a trust. Trusts created by way of contract are subject to the general rule in the Illegal Contracts Act 1970 that it is of no effect if the contract is illegal at law or in equity.

2.42At common law, other trusts can be void if they have a purpose contrary to public policy. Generally “contrary to public policy” in this context is equated with illegality or unlawfulness. Certain other purposes are generally not enforceable under the common law, including a trust imposing a condition that is a restraint on marriage, an invasion on the sanctity of marriage, a trust calculated to bring about the separation of a parent and child, conditions against entering the armed forces or public office and conditions as to religious faith.82

Issues

2.43We have considered this issue because of an apparent concern among some in the general public that trusts are being used for objectionable purposes. Addressing these concerns by expressly limiting the purposes for which trusts may be created was an option we raised in the Second Issues Paper. It has become apparent to us that the real concerns about the misuse of trusts relate to some of the interactions of trusts with other areas of law. Our findings about the reasons that New Zealanders establish trusts is discussed in chapter 1 and our approach to the ways trusts interact with other areas of law, where the interface may cause problems or create unfairness, is discussed in chapter 16.

2.44The question remains whether there is any benefit to making the case law principles clear by restating them in legislation in this instance.

Options for reform

2.45The options considered are:

(a)not including a statutory provision;
(b)including a provision codifying the judge-made law, such as the United States’ Uniform Trust Code (section 404):83
A trust may be created only to the extent its purposes are lawful, not contrary to public policy, and possible to achieve. A trust and its terms must be for the benefit of its beneficiaries;
(c)including a list of purposes for which trusts should not be used.

Discussion

2.46Most submitters considered that the purposes of private trusts should not be restricted in legislation. A few submitters who thought that some purposes should be restricted drew attention to the current problematic areas, such as people using trusts to avoid paying creditors, to avoid the equal sharing regime under relationship property legislation, and to meet income and asset testing requirements for eligibility for government assistance. However, most submitters considered that these issues were best addressed in specific legislation relating to each policy area rather than limiting trust law as a whole.

2.47We agree with the majority of submitters. Restricting the purpose of a trust in legislation risks inhibiting the concept of the trust when this is not the real issue. Trusts are legally used to achieve a variety of purposes. In looking at the different rationales for establishing a trust (as set out in chapter 1) it is apparent to us that it is extremely difficult to draw a line between acceptable and unacceptable trust purposes. Whether a purpose for establishing a trust is seen as acceptable or less acceptable can depend on the perspective and interest of the person making the judgement. The same trust that can be described as having the purpose of protecting personal assets from business risks by a settlor may be seen as being for the purpose of defeating creditors by creditors who are unable to recover a debt from the business because it does not have sufficient assets. A trust established for the purpose of estate planning and providing for future generations of a family may be viewed as being for the purpose of defeating the equal sharing regime of the Property (Relationships) Act 1976 as it applies to the relationship of one of the family members. Consequently, it is not realistic to consider introducing significant limitations to the purposes for which trusts may be used along the lines of what some people consider objectionable. These limitations would be open to subjective interpretation and could have the effect of drastically limiting the use of trusts, something for which there is little public or government appetite.

2.48We have given careful consideration to whether it would be helpful to codify the general judge-made rule, as in option (b). More than half of the submitters did not favour this approach as it was seen as not being useful and too open to unintended interpretations that would unduly limit trusts. A problem with wording like that in the United States’ Uniform Trust Code is that the phrase “contrary to public policy” is open to different interpretations. A strict legal interpretation would limit its meaning to unlawfulness and the case law public policy rules, in which case there is little advantage in including it in legislation. Submitters and commentators recognised the risk of a court interpreting “public policy” more broadly and subjectively to invalidate trusts that are viewed by some as unfair. Some were even uneasy about using the concept of “lawfulness” in statute for the same reason.

2.49The phrase “public policy” does have the advantage of being a flexible term that allows the law to keep pace with changing social norms. It is used in existing Acts, such as the Arbitration Act 1996, the Charitable Trusts Act 1957 and the Health Sector (Transfers) Act 1993.

2.50On balance introducing a “contrary to public policy” or “unlawfulness” restriction would have the potential to create uncertainty and is not worthwhile. Further, our view was that there is little to be gained by having a minimalist purpose restriction, such as a prohibition against trusts for illegal purposes. The courts have already made it clear that trusts cannot be used for illegal purposes and having only this in legislation would risk misrepresenting the current legal position.

82Noel C Kelly, Chris Kelly and Greg Kelly Garrow and Kelly Law of Trusts and Trustees (6th ed, LexisNexis, Wellington, 2005) at [7.6]−[7.9].
83National Conference of Commissioners on Uniform State Laws Uniform Trust Code (National Conference of Commissioners on Uniform State Laws, Chicago, 2005).