A Māori land trust which had a large asset base, including cash from rental received, had not taken any professional advice regarding investments at any time. 

One of their trustees brought to their attention that there were new rules in the Trusts Act 2019 which put stronger obligations on trustees in respect to investments.  The trustee was concerned that the trust was falling short of meeting these new obligations and that the trustees could be held liable for this.

The Trusts Act 2019 came into effect on 30 January 2021. The Act updated and improved the law governing trusts for the first time in more than 60 years. It applies to all trusts in New Zealand, including Māori land trusts.

Trustees are appointed to manage the trust to the best of their ability, using all their skills, knowledge and experience. It is important that every trustee knows the terms of the trust and acts within those terms, in addition to new mandatory duties detailed in the Act.

Duty to Invest Prudently

The duty under the Act to invest prudently is a ‘default duty’, meaning that it applies unless you have included a contrary intention in your trust deed.  The new obligations under the Act expand on the previous requirements under the old legislation. 

Trustees are now required, when investing trust property, to exercise the care and skill that a prudent person of business would exercise in managing the affairs of others, having regard to any special knowledge or experience that the trustee has, or that the trustee holds out as having. If the person acts as a trustee in the course of a business or profession, regard must be had 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. 

As above, it is possible to lower this standard in your trust deed, for example to the care and skill that an ordinary person would exercise.

Trustees need to check their trust deeds to see what standard they are currently held to, as well as consider how this fits with the new default duty.

Breaching this duty means that trustees are open to beneficiaries suing the trust. 

Conduct of the trustees

The duty of prudent investment is assessed by examining the trustees’ conduct in making investments, not by whether the investments were successful.  Prudence is a test of conduct not outcome. 

An investment strategy including diversification is an important element in assessing the trustees’ conduct when making investment decisions.  If the trustees do not have the relevant knowledge or experience it may be appropriate that they seek expert advice.

It is worth noting that the Act does not impose a duty to diversify.  In some cases, the circumstances of the trust may make diversification inappropriate.  For example where the trust property comprises only the family home or a fund that is too small to justify diversification. 

Examples of what might be considered imprudent investment

We have included some examples below of what may constitute imprudent investment, however each case will be depend on the assets of the trust:

•          Where the trust holds substantial funds, failure to diversify is likely to constitute imprudent conduct. 
•          Where there are different classes of beneficiaries and the trust’s assets consist of, or include, cash, the            absence of an investment strategy, including diversification, may indicate a lack of care and skill of a                prudent person of business and thus a breach of the duty of prudence.
•          Making investments that carry unjustifiable risks.

Professional trustees held to a higher standard

As above, a higher standard of prudence when investing is required for professional trustees and those trustees who have special knowledge or experience (such as experience in investment advice).

Professional trustees are trustees who are hired to act as a trustee in their professional capacity (eg: lawyer, accountant, investment advisor), but have no interest in the trust assets.  These trustees are usually held to a higher standard of prudence as they have been appointed because of their expertise. 

In addition, a trustee who has, or holds themselves to have, experience in finance and investments (for example) will be held to a higher standard of prudence than a trustee who does not have the same level of expertise – regardless of whether they are professional trustees or appointed because of these skills.

Other factors

There are other factors that trustees should take into account when making investment decisions.

If a trustee is unsure if they are meeting their obligations under the Act, the best course of action is to seek professional advice.