Contents

Chapter 7
Custodian and advisory trustees

Advisory trustees

Proposal
P30
(1) The new legislation should continue to provide for the appointment of an advisory trustee and for a trustee to act with an advisory trustee, although the position should be renamed to remove the term “trustee”. The role of an advisory trustee should continue to be to provide advice to the trustee on any matter relating to the trust.
(2) The new provision should clarify that the trustee is not liable for anything done or omitted by him or her by reason of following the advisory trustee’s advice or direction unless the trustee knew or ought to have known that the advice was unlawful, contrary to the terms of the trust or trustees’ duties, or was advice that no reasonable advisory trustee would have given.
Please give us your views on this proposal.

Current law

7.22Section 49 of the Trustee Act provides for the appointment of advisory trustees by the settlor, the court, a trustee or a person with a power to appoint a trustee. An advisory trustee is not a real trustee, as he or she does not have legal ownership of the property or the powers or duties of a trustee. The advisory trustee is an adviser to the real trustee(s).180  The trust property remains vested in the trustee who retains sole management and administration of the trust. The trustee may consult the advisory trustee on any matter relating to the trust or trust property. The trustee is not required to follow advisory trustees’ advice, but his or her liability is limited when they do follow it. The section provides, in proviso (c) to subsection (3), that:

where any advice or direction is tendered or given by the advisory trustee, the responsible trustee may follow the same and act thereon, and shall not be liable for anything done or omitted by him by reason of his following that advice or direction.

7.23The trustee may apply to the court for directions if he or she thinks the advice conflicts with the trust, is contrary to law, exposes the trustee to liability, or is objectionable. The trustee may also apply to the court if the advisory trustees are not unanimous and give conflicting advice.

7.24Trustee corporations, including the Māori Trustee, commonly use advisory trustees as they enable family members or trust advisors to be involved and oversee the administration of the trust while allowing the trustee corporation to do the day to day administration work.

Issues

7.25There appears to be a lack of clarity about the extent of the protection from liability that the section provides to a trustee relying on the advice of an advisory trustee. Section 49 was introduced to enable trustee corporations to rely on advice from a family advisor where the trustee did not have enough knowledge of the family relationships and dynamics to be able to make decisions. Proviso (c) of section 49(3) was needed as the trustee would potentially be liable for a decision where he or she had relied on the advisory trustee’s advice and assumed the advisory trustee would know best.

7.26It is likely that section 49(3) proviso (c) was never intended to release the trustee from liability for something he or she knew to be wrong. Proviso (d) supports this view as it provides that if a trustee is of the opinion that such advice or direction conflicts with the trusts or law, or exposes him or her to any liability, or is otherwise objectionable, the trustee may apply to the court for directions. This implies that the trustee is not entitled to rely on the advisory trustee’s advice if it breaches the trust or the law. However, the wording of section 49(3) proviso (c) makes it seem as if the trustee will always be released from liability if relying on an advisory trustee’s advice because it is expressed broadly. It is consequently not clear when a trustee is released from liability when relying on the advice of an advisory trustee.

7.27In its 2002 report, Some Problems in the Law of Trusts, the Law Commission recommended amending section 49 so that a trustee must apply to the court for directions when he or she knows or ought to know that the advisory trustee’s advice conflicts with the trust or any rule of law, or exposes him or her to liability. The report also recommended that in all other cases, a trustee relying on the advisory trustee’s advice would not be liable for following the advice.181

7.28The Trustee Amendment Bill 2007 included an amendment to section 49 to effect the Law Commission’s recommendations, but modified the recommendation by not making it mandatory for a trustee to apply for directions if the advisory trustees are not unanimous and give conflicting advice, or are unanimous but the trustee considers the advice objectionable. The Select Committee decided to omit the mandatory requirement for obtaining court directions. It added provisions preventing the trustee from escaping liability when following the advice of an advisory trustee if the trustee would have been liable if he or she had taken that action in absence of the advice, and clarifying that a trustee is not protected from a breach of trust or failure to comply with general duties in law by following the advisory trustee’s advice or direction.

Options for reform

7.29We have considered whether new legislation should require trustees to make a mandatory application to the court for directions when the advice of advisory trustees conflicts with the trust, conflicts with the law, exposes the trustee to liability, or is objectionable, or whether the trustee should have the discretion to apply to court for directions in these circumstances.

7.30In relation to a trustee’s liability, the options we considered were:
(a)providing that the trustees are liable even if following the advisory trustee’s advice (as recommended by the Select Committee); and
(b)providing that the trustees are not liable unless they knew or ought to have known that the advice was unlawful, contrary to the terms of the trust, exposes the trustee to liability, or was advice that no reasonable advisory trustee would have given.

Discussion

7.31There do not appear to be any problems with the concept or role of advisory trustees, although it would be helpful to remove the word “trustee” from the name of the position to avoid confusion. They are considered useful, particularly where a trustee corporation is a trustee and needs another party to provide the personal knowledge of beneficiaries to guide decision-making. Similarly, we are not aware of any problems with who can appoint advisory trustees. The Māori Land Court commented that advisory trustees are particularly useful in Māori land trusts where there is a desire amongst owners to recognise the need for input from kaumatua and kuia who are not able to take on the full duties of responsible trustees.

7.32We have proposed not making it mandatory for trustees to apply to the court for direction when the advisory trustee’s advice is unlawful, objectionable or exposes the trustee to liability. Submitters were unanimously opposed to a mandatory obligation to apply to the court, stating that this would be onerous and time consuming, inefficient and not in the best interests of the beneficiaries, and could mean that advisory trustees are used less. Trustees are not required to follow the advisory trustee’s advice.

7.33We do consider that there is a need to clarify when a trustee can be liable when advised by an advisory trustee. Submitters appeared unclear about the extent to which the current law protected a trustee relying on an advisory trustee’s advice. Most submitters were comfortable with an approach that protected the trustee from liability only where he or she has not been at fault. It would ensure that trustees can be confident in having recourse to advisory trustees for advice and direction about personal and family matters without fear of liability.

7.34We suggest that the list of instances where a trustee may seek court directions (which is also the list stating when the trustee will be liable when relying on the advisory trustee’s advice) should not include “exposes [the trustee] to any liability” as it currently does in proviso (d) to section 49(3). This is too broad a criterion and may not of itself be sufficiently culpable behaviour that a trustee should be liable for relying on the advisory trustee’s advice.

180Trustee Act 1956, s 49 refers to the real trustee as the “responsible trustee”. In this chapter we will refer to this trustee as the “trustee”.
181Law Commission Some Problems in the Law of Trusts (NZLC R79, Wellington, 2002) at [23]−[24].