How the Law Commission would like to change the law of Trusts.

The Trustee Act is 56 years old. Much has changed since it was enacted and the law needs to be updated.

The Law Commission has published what it calls its “Preferred Approach” to the reform of Trust law. The changes it proposes aren’t confined to fashionable topics but extend to all aspects of Trust law.

The Commission has asked for submissions and comments on its Preferred Approach by 22 February 2013. After that, it will give its final recommendations for changes to what it would call the “Trusts Act” – rather than the “Trustee Act” – the present name of the statute.

The Commission and the people who have assisted with its enquiries, have in general developed a comprehensive and sensible set of changes to the law.

This article is confined to a few of the proposals that the Commission is thinking of recommending.

Extending the perpetuity period

The perpetuity period of Trusts would be extended to 150 years.

A duty to inform

The Commission proposes that trustees should have an “obligation to make such information available to beneficiaries upon request as is reasonable to enable the Trust to be enforced.”

Many parents will wish to create Trusts to benefit their children. But expectations of entitlement to Trust wealth can demotivate potential beneficiaries and be socially destructive. (The “Trustafarian syndrome”) The law should encourage individual endeavour and a requirement to notify potential beneficiaries of wealth that they may receive has the potential to promote laziness and a lack of individual motivation.

The proposed amendment – which essentially enacts the Schmidt v Rosewood Trust decision of the Privy Council – will probably survive the consultative process.

I am aware of families who have been badly harmed by the disclosure of Trust information to potential beneficiaries. Settlors who have such concerns, will need to adopt defensive strategies to avoid having to disclose information about Trusts to their potential beneficiaries.

Delegation of responsibilities

It is proposed that trustees will be able to delegate many responsibilities to agents including powers to appoint and remove trustees, powers to amend Trusts, powers to revoke Trusts, and powers to re-settle Trusts.

Such powers are associated with some of the most contentious aspects of family Trust disputes. They are of critical importance to Trusts and it seems unusual that powers of such importance might be delegated to a stranger.

A duty of “good faith and honesty”

It is proposed that “a power to appoint trustees must be subject to a duty of good faith and honesty.” The intention of such a provision is obvious but the wording is vague and may not be easy to apply.

Giving the District Court jurisdiction over Trusts

It is proposed that the District Court should have concurrent jurisdiction with the High Court “to determine any proceeding under trusts legislation.” If this recommendation reaches the Commission’s final report, it would be preferable that the implementation of it should be conducted in conjunction with some form of specialisation within the judiciary – both in the High Court and the District Court - to ensure that decisions on Trust matters in both Courts are sound and consistent with each other.

By “some form of specialisation” I have in mind the allocation of Trust disputes to designated Judges in the High Court and District Court who would be given appropriate resources; be required to commit to keep abreast of the law; and be given the task of devising simplified procedures for common types of application.

Liability of directors of corporate trustees

It is proposed that directors of corporate trustees will be personally liable to discharge the obligations of the corporations and they will not be able to be “fully indemnified” against liabilities for breaches of Trust.

Lawyers and accountants who act as professional trustees commonly do so via “shell” Companies to distance themselves from the possibility of being sued. If the Commission’s recommendations are enacted, many professional trustees will resign rather than face the risk of being sued for a breach of Trust; an unsuccessful investment decision; or any other complaint that a beneficiary may decide to make against them.

Saunders v Vautier

It is proposed that the rule in Saunders v Vautier (if all beneficiaries agree to revoke a Trust, they can do so) should be the subject of an express provision in a new Trusts Act. The beneficiaries would be able to “confer new powers upon trustees or deviate from, or vary, the terms of [a] Trust” and revoke it or resettle its assets.

Settlors who don’t want their intentions to be frustrated by beneficiaries will need to adopt strategies in the structuring of their Trusts that will prevent the beneficiaries from being able to do this.

A requirement to give reasons for decisions

The Commission wants to provide “a clear and workable mechanism for holding trustees to account.” The general acceptance that trustees don’t have to give reasons for their decisions, would be displaced by a regime of disclosure and accountability and the Courts would be able to “review the exercise of the trustee’s power, with the onus on the trustee to substantiate and uphold the grounds of the act, omission or decision that is being reviewed.”

This change, when combined with the reduced ability of professional trustees to shield themselves from claims by beneficiaries, would cause many professional trustees to resign their trusteeships. But they may end up with a new role: that of advisers to the reduced pool of people who are willing to act as trustees in a more exposed environment.

Relationship Property

My next article will comment on the Commission’s proposals for changes to claims that involve Trusts in relationship property disputes.