Frequently asked questions - Trustee Decision Making 101

Common pitfalls include:

• Failure to know and understand the terms of the trust and the duties that apply, often on the erroneous basis that “someone” will tell the trustee what they need to know
• Not adopting a suitable process for decision making that is sufficiently robust to pivot as required
• Presumptions regarding modifications of default duties that are not borne out by the terms of the trust
• Where a trustee is a corporate trustee, failing to meet the obligations the company has pursuant to the Companies Act 1993.

When trustees are buying or selling property relevant considerations from a decision-making perspective include:

• Having all of the trustees make the decision to sell (or purchase) unless majority decision making is permitted
• Where majority decision-making is permitted by the terms of the trust, ensuring that the trustees act in accordance with the prescribed mechanism. For example, commonly where trust terms allow a majority decision, the terms of the trust will either specify a quorum of trustees to make a decision; or there will be a mechanism to record dissent. Modification of the default duty of unanimity in section 38 of the Trusts Act does not generally permit the majority of the trustees to act independently of the minority of trustees
• Where a trustee is also a beneficiary, and the trustees are purchasing a property that the trustee / beneficiary will live in, it is important to ensure an adequate modification of the duty not exercise a trust power for the trustee’s own benefit (section 31 of the Trusts Act).

If trustees give personal guarantees, each trustee’s liability between the trustee and the creditor is limited only to the extent that is agreed between the trustee and the creditor.

This limitation is separate to any rights of indemnity the trustee has pursuant to the terms of the trust and the Trusts Act.

Where a trustee also provides services to a trust it is important to confirm that the terms of the trust adequately modify the duty:

• to avoid conflict (section 34 of the Trusts Act)
• not to profit (section 36 of the Trusts Act)
• the duty to act for no reward (section 37 of the Trusts Act)

The letter of engagement between the accounting firm and the trustees should specify:

• the accounting services provided
• how trustee services will be charged for
• whether the accounting firm is also providing trust administration and how this will be charged for
• how the cost of the professional trustee’s retirement (should this occur) will be met
• what will happen in the event of a conflict that is not permitted pursuant to the terms of the trust or otherwise

The extent to which all of the trustees (including a professional trustee) must participate in decision making will turn on the terms of the trust and the extent to which the duty to act unanimously and other relevant default duties have been modified.

As a general observation “passive” trustee roles need careful consideration. The role of the “passive” trustee was considered in Selkirk v McIntyre [2013] NZHC 575 where the Court made the following observations:

• Passive trustees have been unsuccessfully seeking the court’s assistance since the development of contribution and indemnification as equitable remedies (bless them for trying but at what point will the message sheet home?) referring to the robust comments from the 1812 decision in Lingard v Bromley [1812] 1 V & B 114; 35 ER 45 where it was noted that “The Defence is of a Kind, which a Court of Justice is very unwilling to listen: that, having undertaken a Trust, they abdicated all Judgment of their own in the Performance of it; and did whatever the Plaintiff desired: “without examining” (as they say in so many Words) “into the Matter, or Ground, of the Proceeding”. Nothing could be more mischievous than to hold, that Trustees may thus act; and avoid Responsibility by throwing the Burthen upon the Person, in whom they have reposed this blind Confidence.”
• Courts should be vigilant against allowing any indemnity for passive trustees because if it existed “… it would act as an opiate upon the consciences of the trustees; so that instead of each [beneficiary] of the trust having the benefit of several acting trustees, each trustee would be looking to the other or others for a right of indemnity, and so neglect the performance of his duties. Such a doctrine would be against the policy of the Court in relation to trusts …”: Bahin v Hughes 31 ChD 390
• Equity does not recognise the concept of active and passive trustees. All trustees are equally accountable to the beneficiaries.

In Chambers v SR Hamilton [2017] NZCA 131 the Court of Appeal said that “it is necessary for trustees to read and understand the statement of wishes to discern the settlor’s views” and that when they have done so “… the trustees must then make an independent assessment of the appropriate course of action.  That is, whatever the settlor’s wishes, the trustees must consciously apply their independent discretion in exercising their powers and discharging their obligations as trustees. This Court confirmed that trustees could take the wishes into account (in other words, they were entitled to) but were not required to do so.”

If this is permissible by the terms of the trust, then there is no issue with this providing that the terms of the trust adequately modify the duty in section 31 of the Trusts Act (duty not to exercise powers for own benefit).

Regardless of whether this is permissible consideration must be given to how decisions to benefit trustee / beneficiaries must be made. As noted in Cain v Martin [2024] NZHC 715 at [27]:

[27] First, the Trust Deed for Tolemac Trust contains, in cl 14.1, a prohibition on self-dealing by trustees who are also beneficiaries. While cl 14.2 provides that a trustee who is not a beneficiary may exercise the power to make a distribution to a beneficiary-trustee, the resolution of 2 December 2020 under which Claire receives a distribution of $15,000 is signed not only by Tolemac Trustees Ltd but also by Claire. Claire should have had no part in the decision to make a distribution to herself. At the very least the evidence indicates a lack of understanding of the requirements not only of the Trust Deed but also the general requirements of the Trusts Act 2019, and in particular s 31, which provides that a trustee must not exercise a power for their own benefit.

The Trusts Act 2019 does not provide a mechanism to address lost trust deeds. However, nor does the Trusts Act specify in section 13 (Characteristics of express trust) and section 15 (Creation of express trust), that trust terms must be recorded in writing.

As a general observation where a trust deed has been lost, if there is adequate evidence of the trust terms, this may suffice together with appropriate declarations.

Where this will not be adequate see Sutton v NRS(J) Pty Ltd [2020] NSWSC 826 when the trust deed was a photocopy but the original could not be located, but was required for KYC (know your client) obligations. In that case tbe court ordered that the photocopy was a true copy pursuant to s 63 of the Trustee Act 1925 (NSW), which empowers the court to give advice. This was considered an appropriate alternative to the declaratory relief sought, which would have required service on all potentially interested parties.

Also, see In Porlock Pty Ltd [2015] NSWSC 1243 where the plaintiff trustee also applied to the Court for directions under s 63 of the Trustee Act 1925 seeking judicial advice because the trust deed could not be located. In that case the Supreme Court of New South Wales found that it has no power to actually recreate a trust deed, explaining:

“We are not in the same situation as one is when there is a lost will. What the court is doing is advising the trustee as to whether it would be justified in dealing with the trust property in the way in which it proposes. It is clear that the trustee recognises that it does not hold the trust property beneficially.”

In Re Porlock Pty Ltd the court was satisfied that the secondary evidence of the trust’s accountant “was the “best evidence” as to what the terms of the deed were, and found that the trustees would be justified in acting upon the letter with the observation that, if at some time in the future the deed did happen to turn up and was found to contain provisions inconsistent with the accountant’s letter, the trustees would nevertheless have the protection that the management and disposition of the trust fund was in accordance with the Court’s advice.”

“… a more than sufficient basis to conclude that the McKendry Family Trust executed in 1980 was in the form of [the pro forma draft] to Mr O’Connor’s affidavit of 14 August 2015.

Further, I consider that there is significant supporting evidence for the existence and due execution of the Trust Deed. That further evidence, in my view, establishes that since the Trust was settled, certain persons, including the Trustee, the beneficiaries and advisers to the Trust have acted in a way consistent with the due establishment of the Trust.”

Section 92 of the Trusts Act provides that:

92 Who may remove trustee and appoint replacement

• (a) the person nominated in the terms of the trust as having the power to remove trustees;
• (b) if there is no person authorised under paragraph (a) or the person is unable or unwilling to act, the remaining trustees;
• (c) if there is no person authorised under paragraph (a) or (b) or the person or persons are unable or unwilling to act, any of the following persons acting in relation to the trustee being removed that may be relevant:
  • (i) a property manager appointed under the Protection of Personal and Property Rights Act 1988 to act as manager of the trustee's property;
  • (ii) a person holding an enduring power of attorney over the property of a trustee who is mentally incapable;
  • (iii) the liquidator of a corporate trustee that is in liquidation.

Section 101 of the Trusts Act sets out how a trustee retires. This section providing that:

101 How trustee retires

A trustee who expresses in writing a wish to retire may be discharged in writing—

• (a) by a person with the power to remove trustees; or
• (b) if there is no person authorised under paragraph (a) or that person is unable or unwilling to act, by the remaining trustees; or
• (c) if there is no person authorised under paragraph (a) or (b) or that person is unable or unwilling to act, and the trustee's retirement will reduce the number of trustees below the minimum number of trustees required by the terms of the trust, by the retiring trustee and a replacement trustee (selected by the retiring trustee) together; or
• (d) if there is no person authorised under paragraph (a) or (b) or that person is unable or unwilling to act, and the minimum number of trustees required by the terms of the trust will remain, by the retiring trustee alone.

The lack of an independent trustee will not of itself indicate that a trust is a sham. However, if the absence of suitable skills there are risks to the trustees for failing to meet their obligations as trustees.

The English case of Turner v Turner [1984] Ch.100 provides useful guidance on the exercise of discretion where trustees do not understand their obligations. The trust in question was settled with a view to avoiding estate duty.  The deed used was that used by another farmer for an estate duty saving scheme.  The settlor did not follow advice to appoint a professional trustee, but instead appointed his father, a friend and later, the friend’s wife who was also the settlor’s sister in law (the Nutlands).  None of the trustees had any experience or understanding of trusts.  During the tenure of the trusteeships one of the trustees emigrated to Australia.

Various dealings took place involving trust property.  However, the trustees had little involvement with these.  It was stated in evidence that the trustees were “quite unaware of their responsibilities and duties”.  It was also noted that “It is plain that the Nutlands, unversed entirely in business affairs, became trustees to oblige the settlor as their friend with a family connection.  They had no thought that they would be expected to do anything at all.”

The question for the Court was whether the trustees effectively exercised their powers of appointment in respect of the trust fund.  The court framed this as “… whether or not the trustees so far failed to direct their minds to the matter of their discretionary powers of appointment that the deeds of appointment ought not be regarded as an exercise of the powers of appointment.”

The Nutland trustees were not aware of their duties or what the effect of the settlement was.  They did realise that it was to benefit the settlor’s children but thought that they only had a role to play if the settlor and his wife died. The Nutland trustees gave evidence that their understanding was that their signatures were required as a formality and they did not realise that the documents signed “required any consideration or decision by us.” They signed what was put in front of them because they believed that the settlor made all the decisions and that they had “no business” to look into the settlor’s affairs.

Also see Rosebud Corporate Trustee Limited v Bublitz [2014] NZHC 2018 where the subsequently appointed director of a corporate trustee was so oblivious of the role of the trustee that this was a factor in the finding that the trust was a sham.

In the first instance the trustees must consider the memorandum of wishes in light of any other relevant considerations. In Chambers v SR Hamilton [2017] NZCA 131 the Court of Appeal said that “it is necessary for trustees to read and understand the statement of wishes to discern the settlor’s views” and that when they have done so “… the trustees must then make an independent assessment of the appropriate course of action. That is, whatever the settlor’s wishes, the trustees must consciously apply their independent discretion in exercising their powers and discharging their obligations as trustees. This Court confirmed that trustees could take the wishes into account (in other words, they were entitled to) but were not required to do so.”

Also see Mackie Law independent Trustee Limited v Chaplow [2017] NZHC 1570, which provides a different perspective as to how closely trustees should follow a memorandum of wishes.

The trust in question in that case was settled by Mr Munro who wrote the memorandum of wishes referred to shortly before his death.

The primary beneficiary of the trust following Mr Munro’s death, was his daughter. Difficulties arose after Mr Munro’s death over the trustees adherence to the wishes, which included a direction that Mr Munro’s partner live in the trust property for 3 months after his death (notwithstanding that she was not a beneficiary). The memorandum also gave guidance regarding provision for Ms Chaplow. Relations between Ms Chaplow and the trustees deteriorated over the terms of a proposed resettlement and the trustees’ fees. The background issue was the trustees’ adherence to the memorandum of wishes. As noted at [35], the trustees were entitled to consider the memorandum as part of their decision making process and could elect to adhere to it provided that it did not conflict with the trust deed. However, they were wrong to consider themselves bound to follow the memorandum. The court noted the frequent references to the memorandum in correspondence but no minutes or resolutions other than one to follow the memorandum. It was also noted that there was no reference to the trust deed.

In adhering to the memorandum in the face of Ms Chaplow’s express disagreement the trustees were in breach of their obligations under the deed of trust.

This became relevant in the context of fees as trustees can only be reimbursed for expenses properly incurred. The onus lies on the trustees to demonstrate the extent to which fees are properly incurred. A trustee may be honest and yet incur wholly unjustifiable fees – for example out if an excess of caution: Re Chapman

The court considered all of the fees charged and found most not to be recoverable from the trust. As noted the matter should have resulted in a straightforward resettlement. While the trustees could seek to be indemnified for any liability in respect of unauthorised works carried out by Ms Chaplow they were not entitled to an indemnity for any failure to follow the memorandum of wishes. Nor were they entitled to the fees that resulted from what the court found to be the trustees protecting their own position.

An application for the trustees to be removed was considered and the required grounds made out. However, given the likely resettlement onto another trust, the court proposed a pragmatic solution and suggested the appointment of the trustees of the trust that was anticipated to receive the Trust’s asset’s by way of resettlement.

There is permissible in accordance with the terms of will. However, in the event that a testamentary trust arises, the implications of default duties in the Trusts Act must be taken into account.

Good practice moving forward is to ensure that wills appropriately modify default duties under the Trusts Act and also reflect any adviser duties that arise pursuant to sections 39 and 43 of the Trusts Act.

39 Adviser must alert settlor to modification or exclusion of default duty

(1) This section applies to a person who—

• (a) is paid to—
  • (i) advise on the creation of a trust; or
  • (ii) prepare the terms of a trust; and
• (b) recommends that the initial settlor should, or causes the initial settlor to, modify or exclude 1 or more default duties in the terms of the trust.

(2) Before the creation of the trust, a person to whom this section applies must take reasonable steps to ensure that the initial settlor is aware of the meaning and effect of the modification or exclusion.

(3) Failure to comply with subsection (2) does not of itself invalidate the modification or exclusion in the terms of the trust.

(4) In this section, initial settlor means the settlor who initially creates the trust or causes the trust to be created.

43 Adviser must alert settlor to liability exclusion or indemnity clause

• (a) a person (the adviser) is paid to—
  • (i)advise on the creation of a trust; or
  • (ii) prepare the terms of a trust; and
• (b) the adviser recommends that the settlor should, or causes the settlor to, include a liability exclusion or indemnity clause in the terms of the trust.

(2) Before the creation of the trust, the adviser must take reasonable steps to ensure that the settlor is aware of the meaning and effect of the clause.

(3) The liability exclusion or indemnity clause has no effect with respect to an adviser who is or becomes a trustee of the trust and who is in breach of subsection (2).

(4) Failure to comply with subsection (2) does not of itself invalidate the clause (except as provided in subsection (3)).

(5) In this section, liability exclusion or indemnity clause means a clause that has the effect of—

• (a) limiting or excluding the liability of a trustee for breach of trust; or
• (b) granting a trustee an indemnity against the trust property for the trustee's liability for breach of trust.

This will depend on the terms of the trust. See Cain v Martin [2024] NZHC 715 at [27]:

[27] First, the Trust Deed for Tolemac Trust contains, in cl 14.1, a prohibition on self-dealing by trustees who are also beneficiaries. While cl 14.2 provides that a trustee who is not a beneficiary may exercise the power to make a distribution to a beneficiary-trustee, the resolution of 2 December 2020 under which Claire receives a distribution of $15,000 is signed not only by Tolemac Trustees Ltd but also by Claire. Claire should have had no part in the decision to make a distribution to herself. At the very least the evidence indicates a lack of understanding of the requirements not only of the Trust Deed but also the general requirements of the Trusts Act 2019, and in particular s 31, which provides that a trustee must not exercise a power for their own benefit.

Trustee companies are subject to the Companies Act 1993. Accordingly, the shareholders will need to pass a resolution approving any major transactions.

What comprises a major transaction for an un-capitalised trustee company is open to debate. Good practice would indicate that a shareholder resolution is required whenever the base transaction involves the majority of the trust’s assets. This formulation reflects the value of the trustee company’s indemnity pursuant to the terms of the trust and the Trusts Act 2019.

If all of the beneficiaries are of age and consent this is permissible pursuant to section 121 of the Trusts Act, which provides that:

121 Termination of trust by unanimous consent of beneficiaries

(1) A trustee must terminate the trust and distribute the trust property on being required to do so by all of the beneficiaries who together hold all of the beneficial interest in the trust property if the conditions set out in subsection (2) are satisfied.

(2) The conditions for the termination of the trust are that—

• (a) every beneficiary consents to requiring the trustee to terminate the trust and distribute the trust property; and
• (b) the trustee receives a request to terminate the trust and distribute the trust property from or on behalf of each beneficiary; and
• (c) if any of the beneficiaries is a beneficiary described in section 124(2), the court has made an order under section 124 approving the termination of the trust on behalf of that beneficiary.

(3) The condition in subsection (2)(b) is satisfied if—

• (a) the beneficiaries provide a written request to the trustee to terminate the trust and distribute the trust property; and
• (b) the notice is signed by each beneficiary or by the duly authorised agent of that beneficiary.

This is considered in the High Court decision in Queenin v Queenin [2024] NZHC 1035 where Powell J stated at [53] and [74]:

[53] Such an approach ignores the undisputed context to these proceedings. The trust assets represent the capital accumulated by Bert and Diana over their lifetimes. As noted, the trust assets include the home in which they live as well as the family bach. It was Bert and Diana that chose to place these assets in a family trust, as many New Zealand couples in their position have done, in order to protect those assets and as a mechanism to ultimately pass their assets to their family once they themselves no longer require them. The fact that Bert and Diana are, in terms of the trust deed, simply discretionary beneficiaries like their sons cannot diminish their contributions to the trust properties. In fact, their contributions and the relevant context may well be sufficient to establish an institutional constructive trust over the trust properties.¹⁰

¹⁰Neither of the parties have discussed or pleaded whether there may be an institutional constructive trust over the trust assets in favour of Bert and Diana. Adopting the elements of a constructive trust set out in Lankow v Rose [1995] 1 NZLR (CA), several Court of Appeal decisions have found that institutional constructive trusts can arise over trust property: see Murrell v Hamilton [2014] NZCA 377 and Hawke's Bay Trustee Company Ltd as trustee of the Richard Hodgkinson Trust v Judd [2016] NZCA 397. In the present case, Bert and Diana directly contributed to the trust property as settlors and indirectly through their efforts in managing the rental properties. The remaining matters to be considered in determining the existence of an institutional constructive trust would be whether Bert and Diana had a reasonable expectation of an interest in the property such that the trustees should reasonably expect to yield them the alleged interest. The overall assessment, falling within the realm of equity, is whether it would be unconscionable for the trustees to deny Bert and Diana this expectation. However, given that the trust is now intended to continue and final distribution and/or dissolution has been postponed, this point may now be moot. Furthermore, as noted above, it was not discussed nor pleaded by either party.

[74] More generally, I do not accept Mr Johnson's submissions on behalf of Aaron that the Trusts Act has changed the landscape of small family trusts so fundamentally that those who have settled trusts for planning or asset protection purposes can no longer expect to control them for their own benefit. Although clearly the obligations for trustees are more explicit under the Trusts Act than hitherto, I do not think it is reasonable for a trustee appointed by the settlors in a small family trust to ignore the essential context and the very reason the trust was established in the first place in order to argue that the Trusts Act now means that settlors/trustees like Bert and Diana cannot expect to enjoy the fruits of their labours and must instead run the trust as though they are just two of a particular class of beneficiaries, with no greater claim to use of the trust assets than the other beneficiaries.

This will depend on the terms of the trust. For example:

The Trustees record that the trustee [ ] who is a beneficiary of the Trust did not participate in the decision referred to in clause [ ] and that the decision recorded in this resolution was made in accordance with the terms of clause 14 of the terms of the trust.

The Trustees further record that the trustee [ ] who is a beneficiary of the Trust did not participate in the decision referred to in clause [ ] and that the decision recorded in this resolution was made in accordance with the terms of clause 14 of the terms of the trust.

Such a minute will be a core document for the purposes of section 45 of the Trusts Act, which provides that:

45 Trustee must keep core documents

Each trustee of a trust must keep, so far as is reasonable, the following documents relating to the trust:

• (a) the trust deed and any other document that contains terms of the trust;
• (b) any variations made to the trust deed or trust;
• (c) records of the trust property that identify the assets, liabilities, income, and expenses of the trust and that are appropriate to the value and complexity of the trust property;
• (d) any records of trustee decisions made during the trustee's trusteeship;
• (e) any written contracts entered into during that trustee's trusteeship;
• (f) any accounting records and financial statements prepared during that trustee's trusteeship;
• (g) documents of appointment, removal, and discharge of trustees (including any court orders appointing or removing trustees);
• (h) any letter or memorandum of wishes from the settlor;
• (i) any other documents necessary for the administration of the trust;
• (j) any documents referred to in paragraphs (a) to (i) that were kept by a former trustee during that person's trusteeship and passed on to the current trustee.