Many years ago, I was at a McDonald's late at night. A girl who had plenty to drink was in line in front of me. She commented that the McDonald's staff members were "like penguins - they all look the same".
It's tempting to say the same of trust deeds. They're like penguins - they all look the same.
It's easy to think that if you have a family trust, the terms of the trust must be fairly generic. Surely, one trust must be similar to the next, right?
Between you and me, most penguins look the same. If I'm at the Antarctic centre, I have trouble distinguishing one penguin from the next.
But if I was a penguin specialist, I'd know Mike from Mary. If I was a penguin, I'd know the difference between my sister and my cousin. It depends on the context.
And so it goes with trust deeds. You could have two different families, and each family could have a trust. But the terms of each trust could be profoundly different and lead to different outcomes in different situations.
I'm struck by this every time I'm instructed to do work that relates to a trust. If you want to do something, you need to look at the terms of the trust, and you can never assume you can do what you want to do the way you normally do it.
Even trust deeds prepared by the same law firm can differ. This can be for a number of reasons. The deeds could reflect the circumstances or instructions from the client. Or, as new cases come out and the law evolves, and best practice develops, this informs the wording of precedents, resulting in the wording of trust deeds prepared at different times to change in subtle but important ways.
Below I list some examples of how trust deeds can vary.
Who are the beneficiaries of the trust? Are there different types of beneficiaries?
Family trusts are usually discretionary trusts. This means that the trust has certain beneficiaries, who the trustees have discretion to benefit from the assets of the trust.
This sounds simple enough. But some trust deeds have subsets of discretionary beneficiaries. For example, income beneficiaries - people who can receive the benefit of income derived from trust assets (or in some cases use of trust assets), but who cannot receive capital from the trust.
Different trust deeds can nominate very different classes of people as beneficiaries. Some might include mum and dad, their children, their grandchildren, and so on. Some might include everyone in the family tree from mum and dad's grandparents, adding mum and dad's siblings, nephews, nieces, and their issue into the mix. Some include people related by marriage (and even when the marriage is over, whether by death or divorce). As you can imagine, the differences can be significant.
This just relates to discretionary beneficiaries. There are often other types of beneficiaries as well, including:
- Final beneficiaries - who receive trust assets (often in prescribed proportions) on the final day of the trust (often called the "vesting date" or the "date of distribution"). Whether the final beneficiaries are mum and dad's children or grandchildren can have a impact in certain situations.
- Reserve beneficiaries - people who become beneficiaries if, and only if, no discretionary or final beneficiaries survive.
Are some people prohibited from being beneficiaries?
Some trust deeds prohibit certain classes of beneficiaries. For example, children or grandchildren of mum and dad who are not biologically related to both of them.
It's easy to see why this clause might be added. But it can cause problems if they later decide to adopt, or their children enter into blended family arrangements and everyone wants to treat the otherwise-prohibited person as part of the family in every way.
Who can appoint and retire trustees, and what process do they need to go through?
The person(s) with the power to appoint and retire trustees is often called the "Appointor". It's arguably the most important power a trust deed grants.
Who is this? And is there a process setting out how they need to do this, and anything they need to consider?
Can the trust's beneficiaries be changed? Who can do this? How can it be done?
Another important power is the power to appoint and remove beneficiaries. Again, who can do this? And what is the process and/or what are the considerations that need to be attended to when exercising this power?
What do trustees need to consider before appointing income or capital?
Do the trustees need to consider the needs and circumstances of all beneficiaries? Or is there a term in the deed that allows certain beneficiaries to be paramount?
Although it is not so common in New Zealand, in some jurisdictions, certain parties also have the power to "veto" the decisions of trustees, when it comes to appointment of income or capital, or even investment decisions.
What types of investments can trustees make?
As a starting point, the Trustee Act 1956 regulates trustee investment decisions. Most trust deeds give additional discretion to trustees with respect to investments.
For example, it is common for trustees to be given leeway with respect to investing in property to be used for accommodating beneficiaries of the trust.
Related to this, is whether the trust deed allows the trustees to provide guarantees or security for lending that benefits beneficiaries.
Can trustees who are also beneficiaries appoint income or capital on themselves?
There is a general rule against trustees acting in a way that benefits themselves. Broadly speaking, the terms of the trust deed need to explicitly allow a trustee to do this.
Often there are certain requirements for when this can be done. For example, does an independent trustee need to be involved?
Is there a power to vary the terms of the trust?
Sometimes, it is in the best interests of all parties to a trust deed for the terms of the deed to be varied. Not all trust deeds allow for this. While they may allow for certain parties to change trustees or beneficiaries or make other specific changes, they may not allow for changes to the trust deed. Other times, trust deeds only allow for specific clauses to be changed.
What do we make of this?
For one thing, if you are establishing a trust, it is worth reading through the terms of the trust deed, or at least having the terms of the deed explained to you in detail. It's tempting to think that the terms are boilerplate, not negotiable, and allow for no variation. That's not necessarily true.
If you're a trustee, it's important to be aware of the terms of the trust, especially when considering or entering into a transaction, or looking to make a change to the trust in some way. It's worth reviewing the terms of the trust periodically, in light of changed circumstances, new law, and current best practice.
It can also be very valuable to engage professionals who work with trusts regularly and have the terms of your trust (not to mention the transactions you have subsequently entered into) reviewed periodically. They may be able to identify changes that would benefit all parties involved, or identify issues that might prove problematic before they become problematic.