Trusts – Community Toolkit

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 chapter 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.

However, the trustees of a charitable trust can choose to register as a “charitable trust board” under the Charitable Trusts Act 1957, and they thereby become an incorporated body with a separate legal identity in the same way as groups that incorporate by registering under the Incorporated Societies Act. Charitable trust boards are explained in the next section (see “Charitable trust boards”).

Creating a trust

How is a trust created?

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 in order 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?

Trustee Act 1956, s 43(2)(c)

A trust can be created with just one trustee, although it’s usual for there to be at least two. The law does not specify a minimum number of trustees, and leaves this instead to the particular trust deed.

Trusts with a charitable purpose: Ownership of the trust property

Charitable Trusts Act 1957, ss 3-5

The Charitable Trusts Act specifies that, if a trust has a charitable purpose, it’s not strictly necessary each time that replacement trustees are appointed for there to be new documentation recording that the new trustees are the legal owners of the trust property. Instead the Act states that at any given time the owners of the trust’s property will be whoever are the trustees at that time.

However, despite those provisions in the Act, most trust deeds will require some form of documentation of the new trustees’ legal ownership of the trust property.

Trustees: Their powers, duties and liabilities

Powers of trustees

Trustee Act 1956, ss 13A, 14, 15, 24, 29, 31

Trustees have the following powers under the Trustee Act 1956:

to invest the trust’s funds
to sell, exchange, lease, rent out or mortgage any of the trust’s property
to insure any of the trust’s property
to obtain valuations for any of the trust’s property
to spend trust funds on repairs, maintenance, renovations or improvements of trust property
to employ or hire other people (such as lawyers and accountants) to act as agent for the trustee in doing things necessary for administering the trust (this can also include employing a trustee corporation such as Public Trust to invest trust funds)
to reimburse themselves for the charges and expenses they incur in hiring those other people to act for them
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)

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 and what’s stated in the trust deed, the Act overrides the deed.

Duties of trustees

Trustee Act 1956, ss 13B-13D, 13F, 13G

The Trustee Act and the common law (law made by the courts) require trustees to:

act only for the benefit of the trust, and consistently with the trust rules and the powers given to the trustees
exercise due diligence and prudence (reasonable skill and care) in managing the trust
comply strictly with the trust deed, unless the deed itself allows the trustees to do otherwise, or the courts or the beneficiaries allow it
invest money that’s held on trust
keep accurate accounts for the trust property
be impartial towards beneficiaries (unless the trust deed says otherwise)
not be in a position of conflict of interest (this means where their own personal interests would conflict with their duties as trustees).

Trustees must also:

be familiar with the terms of the trust deed, with the trust property, and with the actions of previous trustees
act unanimously in making decisions about trust property, unless the trust deed allows majority decisions (with public or charitable trusts, however, the majority of trustees may usually bind the minority)
act personally and not delegate responsibilities, unless the trust deed explicitly allows this (recognising that trustees may need expert advice) or the delegation is in one of situations permitted by the Trustee Act (see “Powers of trustees” above).