Jeremy Sutton: The new trust laws explained - what you need to know

Legal changes to trust law will affect many New Zealanders. Photo / Getty Images

The new Trusts Act of 2019 came into effect on 31 January 2021. This new Act replaced the Trustee Act of 1956 that currently governs the law relating to New Zealand trusts. This update to the law will affect many Kiwis as New Zealand has one of the highest numbers of trusts per capita worldwide.

Despite the high number of trusts in New Zealand, they can often be a confusing concept for anyone who has not had a legal education or experience working with trusts. New Zealand's trust laws must be transparent and accessible to everyone, not just professionals familiar with the jargon.

Who does the new Act affect?

The new Act will apply to all trusts in New Zealand. This means it will affect anyone who currently has a trust, is a beneficiary of a trust, acts as a trustee or is considering setting up a trust.

The new Act clarifies the core principles of a trust and the duties of trustees. It imposes stricter obligations on trustees to report to beneficiaries about basic trust information.

Alternative dispute resolution (ADR) clauses

One of the most positive changes in the new Act is the increased emphasis on making alternative dispute resolution mechanisms available. This is particularly beneficial for couples who have separated but have property in a family trust.

The long-running problem

Under the previous law, couples who were separating usually had to divide their relationship property 50/50. If they could not reach an agreement about how their property should be divided, they could apply to the Family Court who could assist them in reaching an agreement. However, property owned by a trust was usually not considered relationship property. And this could complicate the division of property.

For example, the family home was considered relationship property under the Property (Relationships) Act 1976. This means that the value would be divided 50/50 at the end of a qualifying relationship, regardless of whose name is listed on the title. However, if the home was owned by a trust set up by one of the parties, the other party may not have had a claim to any of its value at the end of the relationship.

If a trust dispute arose in a relationship property matter, the parties would have had to take it to the High Court as the Family Court does not have the authority to decide on trust issues. This could draw out the dispute and add significant costs.

The new Act

The Trusts Act of 2019 provides mechanisms for dispute resolutions that minimise the need to apply to the Court. Under the new Act, a trustee can refer a dispute to ADR if all parties agree. If the parties apply to the Court, the Court can also direct them to attempt ADR first.

Alternative dispute resolution methods such as arbitration or mediation were available under the old Act but only if it was expressly stated in the trust deed. Now, these mechanisms are available to resolve disputes even when there is no mention of them in the trust deed.

Advantages of ADR

Applying to the Court to resolve a dispute usually requires a lot of patience. There may not be an available date to hear your dispute for months. ADR mechanisms such as arbitration or mediation are generally much more efficient options. They also tend to be less expensive than going to Court.

ADR mechanisms also offer greater flexibility in the outcome of the decision. In mediation, the parties collaborate to reach a solution that both parties are satisfied with.

This usually results in a high probability both parties will comply with the agreement as they were actively involved in the decision.

Disadvantages of ADR

For most ADR pathways (except for arbitration), there is no guarantee that a resolution will be reached. The parties may attempt mediation but not reach an agreement. If this happens, they may still have to apply to the Court.

Conclusion

The Trusts Act of 2019 is a promising new addition to the law governing trusts. An important feature is the increased emphasis and availability of alternative dispute resolution mechanisms. Such mechanisms can result in less strain on the Courts and less time and costs incurred by the parties. However, it is not a one-size-fits-all solution. For others, they may still require the Court's assistance.

- Jeremy Sutton is a senior family lawyer, specialising in divorce cases where there are significant assets, including family trusts and complex business structures.