Thousands of New Zealanders are Trustees of charitable trusts, providing governance for thousands of diverse charities. In our series of articles on “demystifying the role of Trustees of charitable trusts” we answer some of the questions we often hear from Trustees. In this article we focus on the legal duties of Trustees. In our other articles we explore Trustee Delegations, Trustee Powers and Trustee Liabilities.
Impact of the Trusts Act 2019
The Trusts Act 2019 (“Act”) helps to clarify Trustee duties by placing them in legislation. Previously the duties existed in case law (law determined by the courts) so were not as readily accessible.
Trustees are fiduciaries of a Trust and it makes sense that they are held to high standards. The role of a fiduciary is characterised by the obligation of loyalty and good faith, avoiding conflicts of interest, acting honestly, and not profiting from a position. These responsibilities are reflected in the mandatory duties of Trustees in the Trusts Act, which cannot be modified.
Mandatory duties
These duties are compulsory for all Trustees. They are as set out below, with a brief explanation of what each duty refers to:
- Duty to know the terms of the trust – this basically means that Trustees need to know what the Trust Deed says and what it means.
- Duty to act in accordance with the terms of the trust – this requires Trustees to ensure that they make decisions that are permitted by the Trust Deed. Trustee powers are typically quite wide, but sometimes these are restricted in the Trust Deed, for example, there may be a limit placed on whether the Trust can enter into a loan. Trustees need to know what is permitted and restricted by the Trust Deed before they act or they risk making a decision that is not legally valid.
- Duty to act honestly and in good faith – this requires that when making decisions, Trustees genuinely consider their decisions, consider all important information and act without an ulterior motive, including avoiding self-interest.
- Duty to further the permitted purpose of the trust in accordance with the terms of the trust – the ‘purposes’ of a charitable trust is the beating heart of the trust, setting out why the trust exists. The purposes should guide all decisions.
- Duty to exercise the trustee’s powers for a proper purpose – this requires that Trustee decisions align with the Trust purposes and not exceed these, and are not exercised for personal or collateral reasons.
Default duties
The default duties in the Act, which can be modified, are:
- The general duty of care;
- Duty to invest prudently;
- Duty not to exercise power for own benefit;
- Duty to consider exercise of power;
- Duty not to bind or commit trustees to future exercise of discretion;
- Duty to avoid conflict of interest;
- Duty of impartiality;
- Duty not to profit;
- Duty to act for no reward; and
- Duty to act unanimously.
The default duties may be modified, provided the modifications are set out in the Trust Deed, which usually happens when the Trust Deed is drafted. For Trust Deeds that have existed since before the Act, the Act still applies, including all of the default duties. However, it is usually possible to amend a Trust Deed and the default duties can be modified then by adding a schedule to the Trust Deed.
Examples of modifications
As an example, without modification, the duty to invest prudently requires Trustees to invest with the care and skill that a prudent person of business would exercise having regard to any special knowledge or experience that the Trustee has and if the person acts as a Trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession. This is a relatively high threshold to meet. Our charitable trust deed typically modifies this duty and replaces it with a duty to “invest in the manner Trustees believe in good faith to be in the best interest of the purposes of the Trust”, which is a slightly lower threshold for Trustees to meet, while still requiring Trustees to exercise due diligence.
Another default duty that is sometimes modified is the duty to act for no reward. Without modification this duty means that Trustees should not be paid for their role as Trustees. However, Trustees may decide that payment is appropriate to the circumstances of the Trust and permit the Trustees to be paid, provided the payment is commensurate with market rates.
One default duty that we regard as very important and would not recommend modifying is the duty to avoid conflicts of interest. At times, a Trustee’s personal or financial interests may conflict with those of the Trust. A simple example is if a Trustee owns a catering company and the Trust needs to provide catering for a function. The Trustee should disclose their interest and may provide a quote for this service to the Trust, and best practice requires that the Trustee then recuse themselves from the decision around the catering. We also encourage Trustees to create and maintain a conflict of interest policy including an interests register to keep this duty front of mind.
Finally, the duty to act unanimously can be a high threshold to meet so we expressly modify that requirement.
In summary
The duties of Trustees illustrate the weight of the role of Trustees. It is an important role and consequently involves considerable responsibility. Trustees can be found personally liable if they breach one of their duties.
It is possible to modify the default duties in the Act so that Trustees are held to a slightly lower threshold. Please get in touch and we can assist you to amend your Trust Deed or answer any questions you may have about what duties apply to your circumstances and what this means in practice.
_____________________________________________________________________________________________________________________
The information contained in this outline is of a general nature, should only be used as a guide and does not amount to legal advice. It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating decisions. Special considerations apply to individual fact situations. Before acting, clients should consult their Parry Field Lawyer.
