In most jurisdictions, trusts must vest at some point. Until recently, most trusts subject to New Zealand law had to have a maximum duration (or perpetuity period) of 80 years from settlement. The Trusts Act 2019 made a number of changes to the maximum duration of trusts. It repealed the Perpetuities Act 1964 and the common law rule against perpetuities and introduced an increased maximum duration for trusts of 125 years (subject to some exceptions).
These changes were intended to respond to complexities with the previous law that were identified by the Law Commission, as well as social changes such as increasing life expectancies. However, the way the changes are expressed in the Act has resulted in some unforeseen issues, particularly in the context of resettlements.
The rules relating to the duration of trusts are now largely contained in ss 16 and 17 of the Act. Section 16 prescribes the maximum duration of 125 years and provides for the way the duration of a trust is to be determined. In general, trusts will continue until the shorter of the expiry date specified or implied in the trust deed, and 125 years. As a result, the 125-year maximum duration will not apply to many trusts settled prior to the Act.
Section 17 relates to resettlements and provides:
17 Application of maximum duration rule to resettlements
- This section applies to property that is held on a trust (Trust A) to which section 16(1) applies and is transferred as a part of a resettlement to be held on 1 or more other trusts without first being finally distributed.
- The maximum amount of time that may elapse between the property being settled on Trust A and being finally distributed is 125 years.
Section 17 was added to the Trusts Bill that preceded the Act to prevent trusts being resettled indefinitely, with each trust continuing for up to 125 years.
On the face of ss 16 and 17, they set out a clear regime for determining the length of time a trust may continue. However, the practical application of s 17 in particular is not straightforward and its wording has resulted in two relatively significant issues. The first issue is that s 17(1) provides that s 17 applies to trusts to which s 16(1) applies. Section 16(1) simply provides “[t]he maximum duration of a trust is 125 years.” Further, s 17 does not seem to contemplate trusts to which s16(1) does not apply.
It is therefore not clear whether the reference to sub-section 16(1) in s 17(1) is intended to refer to:
- all trusts, on the basis that the maximum duration of all trusts is 125 years (of course, many trusts will not actually be able to continue for 125 years, depending on what the trust deed provides); or
- only trusts that can actually continue for up to 125 years. The latter interpretation would mean s 17 does not apply to trusts with a maximum duration of less than 125 years (ie, most, if not all, trusts settled prior to the Act). This seems unlikely to be Parliament’s intended outcome.
A sensible interpretation is that all trusts governed by the Act, including those formed prior to the Act with a duration of 80 years (or some other duration), are trusts with a duration not exceeding 125 years. Therefore, they technically fall within ss 16(1) and 17(2) and as a result s 17 applies to prevent assets being held on trust for more than 125 years. Some may feel this stretches the plain meaning of s 16(1), but it is the only logical conclusion. This does not necessarily answer the question of how long a particular trust receiving a resettlement may continue. Prior to the Act, it was necessary for a recipient trust to align its perpetuity period with that of the resettling trust to ensure the rule against perpetuities was not breached.
The second issue with s 17 is that following the enactment of the Act, it is not clear how long assets that are resettled may be held by the recipient trust. There appear to be (at least) two options in this regard, being:
- The maximum duration of the recipient trust must be aligned with that of the resettling trust on the basis that s 17 is restrictive. We comment as follows:
- If the duration of the resettling trust is 80 years and there is no power to extend it, then it may be fraud on a power (or, as Grand View v Wong described it, the “proper purpose” rule) to resettle the trust fund on to a trust with a longer duration. Such a resettlement would mean the assets would be held on trust for potentially much longer than the settlor intended. The practical impact would be that those beneficiaries the settlor intended to benefit when the trust vests would not so benefit. It is conceivable that those disappointed beneficiaries may challenge the resettlement.
- However, if the trustees of the resettling trust have a specific power to extend the duration, then they could extend it to 125 years and then resettle the trust on to the recipient trust. This is specifically contemplated by s 3(1)(b) of Part 1 of Schedule 3 to the Act. Section 3 also refers to a variation (including as to duration) or resettlement of a trust by unanimous consent of the beneficiaries under s 122 of the Act, which may also be an option if there is no relevant power in the trust deed. The proper purpose rule would, of course, still apply and the trustees would need to carefully consider whether extending the duration and resettling the trust would be in accordance with their duties.
- The maximum duration of the recipient trust may be up to 125 years from settlement of the resettling trust on the basis that s 17 is permissive. That is, Parliament has provided a concession that allows assets to be held on trust for up to 125 years, even if this was not contemplated by the trust deed for the resettling trust.
Clearly, these two positions conflict and could lead to trusts with vastly different durations. This has practical implications, including for whoever receives the trust fund on the vesting day.
In the absence of case law clarifying the position, we prefer the first option. If there is a power to extend the duration of the resettling trust (or if the beneficiaries unanimously consent to doing so under s 122 of the Act), then the trustees could extend it to 125 years and then resettle the trust. Regardless, the recipient trust must vest when the resettling trust was set to vest, or at least the resettled assets (and any income and capital gains from them) must vest by that date. The latter introduces complexity as it requires the trustees to segregate the resettled assets (and their income and capital gains) and ensure they vest at the appropriate time.
The above does not address whether trustees should resettle a trust or extend the duration of a trust or indeed exercise any other powers. Before making any decisions like these, the trustees will need to follow the usual fiduciary decision-making process and should take legal advice before proceeding.
We acknowledge that our suggestions reflect a conservative view and appreciate that some practitioners may prefer to take a more permissive approach. To the best of our knowledge, there has not yet been any case law on the topic but we await guidance from the courts with interest.
Daniel McLaughlin is a special counsel and Sarah Wells is a senior associate at Dentons Kensington Swan.
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