Chapter 1
The trusts context in New Zealand

Do we need trusts?

1.36A few people have raised the question of whether New Zealand law should continue to allow trusts at all. A small minority have been concerned about certain uses of trusts, particularly for purposes that are considered less acceptable, and they see the existence of the trust itself as the problem.

1.37It has never been the Commission’s intention to propose the abolition of trusts given their long history of development and entrenchment within New Zealand’s society and economy. However, it is worthwhile to examine the value of trusts.

1.38The trust is a valuable mechanism for structuring property in a different way from outright ownership, such that those responsible for the management and control of the property are not the same as the people or purposes that receive the benefits of that property. Trusts allow settlors to direct with some precision how dispositions of property are to be managed into the future, even well beyond the settlor’s death. Trusts ensure that the management of property is treated with a considerable degree of care and responsibility by clearly assigning the task to trustees who are under fiduciary and non-fiduciary duties. Trusts are flexible arrangements that can be adapted to changing needs. The mechanism of separating the legal and beneficial rights and interests in property appears to be one that will continue to be considered useful and is not inherently problematic. Trusts are a sophisticated way of splitting and managing rights in property, but they are not the only way of achieving these purposes. If trusts did not exist, it is likely that existing mechanisms would be used or new mechanisms devised to achieve similar effects.

1.39We are mindful of the concern from some people about the problematic use of trusts and about “trusts” that stretch the bounds of what trusts actually are. In this project we have considered whether there were problems sufficiently associated with our focus on core trust law that could be addressed by this review. We have looked at the options of a statutory restriction on the purposes for which trusts can be used, a general look-through provisions setting out factors that indicate when dispositions to a trust may be set aside for a particular purpose, and a statutory provision defining or indicating when a trust is a sham.52  After careful consideration we have decided not to pursue these options. It would be impossible to limit trust purposes in a way that maintains the flexibility of the trust and only targets the purposes that should not be lawful. Similarly, it is not feasible to define a look-through provision that is appropriate for all of the policy contexts where dispositions to trusts could be disregarded. The circumstances in which trust dispositions can be disregarded need to reflect the particular balancing of values and interests in each policy context. We found that the sham doctrine could not sensibly be codified in trusts legislation as it developed in the common law and applies much more widely than just to trusts.
1.40To the extent that there is a problem, we have reached the conclusion that the trust device is not itself the cause. Improvements can be made by clarifying the real nature of trusts and the roles and responsibilities that arise in trusts. Our reform proposals regarding definitions, when a trust is not a trust and trustees’ duties,53  along with having a statute that is generally clearer and more accessible will have a beneficial impact.
52Discussed in chs 2 and 16.
53Discussed in chs 2 and 3.