What is a trust?
A trust may be an appropriate form for your group if it has, or could potentially have, significant money or property and you want to keep decision-making in relatively few hands.
The key feature of any trust – whether a private “family” trust, or a trust with charitable status or some other community-based trust – is that the people appointed to be the legal owners of the trust’s property (the “trustees”) have a special duty to hold and manage that property for the benefit of others – either the people or classes of people (the “beneficiaries”) who are named in the trust deed, or the sections of the community who will benefit from a specific charitable purpose stated in the deed.
Although the trustees are the legal owners of the property, their duty to the beneficiaries means the beneficiaries still have a legally recognised interest in the property, which is called a “beneficial” or “equitable” interest.
Note: This section isn’t concerned with trusts for private purposes, such as “family trusts”, or with Māori land trusts. It deals only with trusts that have charitable status and other community-based trusts.
Trusts have no separate identity
A trust is not an incorporated body and therefore does not have a separate legal identity.
See: “Charitable trust boards” for an explanation of how a trust could choose to become incorporated by becoming a charitable trust board. This option is only available until October 2023 due to changes brought in by the Incorporated Societies Act 2022.
Creating a trust
How is a trust created?
Trusts Act 2019, s 15
The person who creates the trust – the “settlor” – does so by transferring property (a fund of money for example) on trust to one or more people – called “trustees” – or by declaring that the settlor now holds the property on trust (in which case the settlor is also a trustee).
A special document – the trust deed – is needed to create the trust. This records the key information about the trust: it identifies the trust property, appoints the trustees, and identifies the beneficiaries or the relevant charitable purpose.
Requirements for a valid trust
Under the common law (law made by the courts), a trust must meet the following requirements to be valid:
- The person creating the trust (the settlor) must show a clear intention to create the trust.
- The trust deed must clearly identify the money or property that is to be held in trust (known as the initial trust fund).
- The trust deed must identify specific people or classes of people as beneficiaries of the trust, or identify a charitable purpose.
- The trust deed must be signed or sealed by the settlor and by every trustee appointed under the deed. The trust deed must be executed in “proper form”, which means it must be in writing and must be witnessed by someone who records his or her address and occupation on the deed.
- Trusts for charitable purposes are not required to have an end date. Other trusts, however, including community-based trusts that don’t qualify as “charitable”, are required to specify an end date in the trust deed.
How many trustees do there have to be?
Trusts Act 2019, s 14
A trust can be created with just one trustee, except where they are also the sole beneficiary of the trust. It’s usual for there to be at least two. The law does not specify a minimum number of trustees, so this depends on the wording of the trust deed.
Ownership of the trust property
Charitable Trusts Act 1957, ss 3-5
Most trust deeds will require some form of documentation of the new trustees’ legal ownership of the trust property.
However, this documentation isn’t necessary if the trust is for a charitable purpose under the Charitable Trusts Act 1957. Instead, the Act specifies that, at any given time, the trustees at that time are the owners of the trust’s property.
Trustees: Their powers, duties and liabilities
Powers of trustees
Trustees have the following powers under the Trustee Act 1956:
- to invest the trust’s funds (ss 58, 59)
- to determine whether the return on investment is income or capital (ss 60, 61)
- to apply trust property for a beneficiary’s welfare in various ways (ss 62 – 65)
- to delegate their powers to another person (by a deed granting a power of attorney) if the trustee is, or is going to be, out of the country or physically incapable of being trustee for a period (if going into hospital for example) (ss 67, 70)
- to apply insurance money for loss or damage of trust property (s 77)
- for trust property engaged in an activity that the trustee is empowered or authorised to carry on as a portfolio investment entity, to adjust beneficiaries’ interests in the property for compliance with the Income Tax Act 2007 (s 78)
Other powers that are often granted by trust deeds include:
- to buy, lease or hire any land or personal property
- to borrow money on terms that the trustees think are appropriate
- to enter into contracts or other arrangements with any individual or body
- to pay expenses (to themselves or to others) that they’ve incurred in setting up and running the trust
- to change the powers and rules of the trust – however, if the trust has a charitable purpose, the changes must not detract from that purpose.
If there’s a conflict between the Trustee Act 2019 and what’s stated in the trust deed, the Act overrides the deed.
Duties of trustees
The Trusts Act 2019 imposes the following mandatory duties on trustees which can’t be modified or excluded by the trust deed:
- to know the terms of the trust (s 23)
- to act in accordance with the terms of the trust (s 24)
- to act honestly and in good faith (s 25)
- to hold or deal with trust property and otherwise act for the benefit of the beneficiaries in accordance with the terms of the trust (s 26)
- for trusts with a permitted purpose (like charitable purposes), to further the permitted purpose in accordance with the terms of the trust (s 26)
- to exercise the trustee’s powers for a proper purpose (s 27).
The Trusts Act 2019 also imposes some default duties that apply to trustees unless the trust deed modifies or excludes them:
- to exercise the care and skill that is reasonable in the circumstances when administering a trust (s 29)
- to invest prudently (s 30)
- to not exercise a power for the trustee’s own benefit (s 31)
- to consider actively and regularly whether the trustee should be exercising one or more of their powers (s 32)
- to not bind or commit trustees to future exercise or non-exercise of a discretion (s 33)
- to avoid a conflict between the interests of the trustee and the interests of the beneficiaries (s 34)
- to act impartially in relation to the beneficiaries (although this does not require a trustee to treat all beneficiaries equally) (s 35)
- to not make a profit from the trusteeship of a trust (s 36)
- to not take any reward for acting as a trustee (although trustees still have a right to be reimbursed for their legitimate expenses and disbursements in acting as a trustee) (s 37)
- to act unanimously (s 38).