Trusts Act 2019: Indemnities

The Trusts Act 2019 provides a long-awaited update to the current trust law in New Zealand and will replace the Trustee Act 1956 on 30 January 2021.  Earlier this year we provided a brief outline of the key changes in the new Act.  This article provides some more information on one of those changes – the new restriction on the indemnity that can be provided to trustees.

Trustee Indemnity

Under the current Trustee Act, there are no specific provisions regarding trustee indemnity.  However, case law does provide that trustees must act in good faith, honestly and for the benefit of all beneficiaries and they cannot be indemnified for failing to do so.

The Trusts Act 2019 (the New Act) does have specific provisions that deal with trustee indemnity.  The provisions state that a trustee will be held personally liable for any breach of trust that arises as a result of a trustee’s dishonesty, wilful misconduct, or gross negligence.  No indemnity for such actions can be included within a trust deed and if it is, it will be deemed invalid.  This closes a previous gap in the law where broad indemnity clauses may have protected individual trustees even when acting in a way which is considered to be grossly negligent – a relatively high standard.  Gross negligence is not specifically defined in the New Act, however section 44 of the New Act does give the Court factors to consider when determining if a trustee has acted in a way that is grossly negligent.  The Court must consider whether a trustee’s conduct was so unreasonable that no reasonable trustee in that trustee’s position and in the same circumstances would have considered the conduct to be in accordance with the role and duties of a trustee.  We anticipate that the interpretation of this section will likely be a litigious area in the future as more and more trustees are faced with these circumstances.

The intention of the Law Commission for limiting the indemnity of trustees is to provide further protection to beneficiaries as they are usually the ones that ultimately lose when a trustee is protected by an indemnity clause.

Trustees will no longer be able to rely on broad indemnity clauses in trust deeds to protect themselves from beneficiary claims.  Trustees will need to take a higher level of care in all of their dealings with the trust and the general operation/administration of the trust. 

It is timely for settlors and trustees alike to review the administration of the trusts in which they are associated and seek legal advice as to the implications/changes of the New Act.

Advisor Liability

There are also additional restrictions on limitations of liability for those paid to advise on the creation of trusts, and it is important to note that these are not limited to lawyers.  Under the New Act, proper advice must be given regarding liabilities, indemnities, and trustee duties and if not, then an advisor can be held liable.  There will be no ability to contract out of this new requirement.

Final Comments

If you are a trustee, or regularly give advice on trust creation/establishment, please feel free to get in touch to ensure you are protected/aligning yourself with the provisions of the New Act. 

If you would like further information please contact Amanda Hockley on 07 958 7451.