A trustee company wanted to step down as trustee of a Family Trust, which they managed along with another trustee, who was also the settlor and a beneficiary of the Trust. 

The trustee company prepared a letter confirming the date of their resignation as trustee, which was signed by the Directors of the trustee company.  From then on the trust was managed by the one remaining trustee.

A few years later the Trust sought legal advice about a separate matter, and discovered that the trustee company had never validly retired, because its retirement without appointing a replacement meant the Trust was in breach of its “minimum number of trustees” provision. 

This was a very serious situation as the Trust had carried on generating income and making distributions to beneficiaries without the required number of trustees.  The Trust sought urgent legal advice to work out how to resolve the situation.

Minimum number of trustees

Many Trust deeds will require a minimum number of trustees, usually at least two, acting at all times.  A Trust deed may also include a requirement for at least one trustee to be independent (someone who does not have an interest in, and will not benefit from, the Trust).

In this case, the Trust deed stipulated that there must be at least two trustees at all times, at least one of whom was independent. 

Trustees retiring must do so by Deed…

Under the current law a trustee’s retirement must be recorded in a Deed (a formal signed and witnessed document).  When the new Trusts Act  comes into force on 30 January 2021, that requirement will no longer apply – a trustee’s retirement will need to be in writing, but will not have to be done by Deed. 

In this case, the trustee company tried to retire by way of a letter, which is insufficient under the current law.

Retiring trustee must be replaced

A retiring trustee will not be discharged from their role until they are replaced.  Except in Trusts with only one trustee appointed from the outset, there must at all times be at least one corporate trustee or two individual trustees appointed to manage the Trust (or otherwise in accordance with the Trust deed if it sets a higher minimum).  A retiring trustee must be validly replaced by a new trustee before their retirement is valid.

In this case, the trustee company was attempting to resign without ensuring they had a valid replacement.  Their retirement would have left the trust with only one trustee, breaching the minimum trustee requirement set out in the Trust deed.  That one trustee was also not independent being a beneficiary under the Trust.

Importance of an independent trustee

An independent trustee adds a degree of impartiality to the management of a Trust, which is especially necessary where the other trustees are also the main beneficiaries (for example in a standard Family Trust where the settlors, trustees, and beneficiaries are often the same people or close family members).  Not having an independent trustee where one is required by the Trust deed can cast doubt on the legitimacy of a trust, suggesting that it may be a sham. 

In this case, the Trust needed to act quickly to correctly retire the trustee company and appoint an independent replacement.  The trustee company also needed to take legal advice about the fact that it had continued to be a trustee of the Trust for several years without any involvement in the Trust’s management (because it thought it had retired), and to make sure that it had not incurred any serious liabilities in the meantime. 

As an independent trustee, the trustee company ought to have known that it needed to be retired and replaced by way of a Deed, and should have made sure that this happened.

Unfortunately these are the sorts of important legal details that can be overlooked in the running of trusts.  This is a timely reminder for trustees to check their records and ensure that trustee changes have been carried out and recorded correctly. 

The new Trusts Act will bring with it a number of significant changes for trusts in New Zealand, so it will be important that trustees know what is expected of them under the new law.  It is also important that trustees ensure that their records and documentation are in order so they can show that the Trust has been operated properly. If in doubt, it is important to get advice from a professional experienced in this area.


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Louisa Gommans
Associate


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