This article provides some thought provocation and alternatives for lawyers who look after trusts for their clients. We will be expanding on the challenges ahead, including:
- The Trusts Bill
- AML/CFT obligations
- Conflict management
- Professional indemnity limitations
- Succession planning
Lawyers are in the midst of a wave of trust-related change that may be unprecedented in the New Zealand sectors. In trust law, evolution happens slowly but inexorably, and the 2013 recommendations made by the Law Society on updating the Trustee Act 1956 resulted in the introduction of the Trusts Bill to Parliament in August last year.
The Trusts Bill will make explicit the responsibilities of trustees, something which has not previously been enshrined to any great extent in legislation. Some trust experts predict that a number of trusts will be wound up as trustees, correctly identifying the mounting risks, shy away from the stated responsibilities. The Bill is at select committee stage and submissions closed in April. Trustees and their advisers have time to act, with enactment not expected for a few months yet.
The facts around trusts themselves are less than explicit, because no formal public record is kept of New Zealand trusts. We do know that this country has among the highest number of trusts per capita in the world, with an estimated 400,000 to 500,000.
Many of these are administered by lawyers who work partly or wholly in family and estate services, and take on the role of trustee as a matter of course.
Also on the minds of professional services providers is the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT), which places obligations on New Zealand’s financial institutions and casinos to detect and deter money laundering and terrorism financing.
Phase 1 of the AML/CFT Act has been in force since 2013, applying responsibilities to banks, casinos and a range of financial services providers. Phase 2 extends the regime to lawyers, conveyancers, accountants, real estate agents, sports and race betting, and businesses that deal in certain high-value goods. Lawyers must comply with AML/CFT Act regulations from 1 July 2018.
There is no reliable way to gauge how many trustees, of the up to 500,000 trusts in New Zealand, are fully compliant with the Trustee Act as it currently stands.
Trust management inconsistencies and non-compliance are widespread, typically due to trustees’ unfamiliarity with trust law (based on evidence from within the trustee services industry, notably trust reviews conducted by Perpetual Guardian and New Zealand Trustee Services).
The double whammy of the Trusts Bill and the AML/CFT Act makes trustee services potentially high-risk and low-value to the legal or accountancy specialist who provides these services as an adjunct to their core work. For those professionals, the changes pose several challenges:
Meeting new obligations demands additional resources. To ensure compliance with both AML/CFT, and the new responsibilities expected to arise from the enactment of the Trusts Bill, law firms will have to adjust their structures. This will be achieved by either outsourcing trustee compliance services or adding to the internal head count with an additional compliance officer.
New potential for conflicts of interest. A lawyer who is providing core services and also providing trustee services and/or counsel on estate planning and management may be seen by some to be conflicted. This may have implications for the trust’s validity and the provider’s ongoing practice.
Risk to professional indemnity insurance. Trustees, whether they are a lawyer or anyone else who has professional indemnity (PI) insurance in place, are likely to find that the PI insurance doesn’t extend to cover their personal liability as a trustee, as opposed to their normal professional activities that are covered.
Succession planning issues. There are hundreds, if not thousands, of lawyers who are looking to retire and / or sell their firm or shareholding within the next decade. Many have not resolved the question of what to do with their existing trust book.
So what is to be done? Already, the evolution of the trustee services environment means partnerships have become more common between trustee services companies and law firms which have conducted trustee work as a non-core service. In these partnerships, there are four typical scenarios:
- Retirement and appointment of a replacement trustee(s)
- Resettlement of a trust with new trustee or co-trustee appointed to the trust
- Appointment of professional trustee as custodial trustee
- Purchase of an existing nominee company or JV with professional trustee firm
In each scenario, a trustee services company such as Perpetual Guardian can advise on best practice, whether the process is a straightforward retirement and new appointment or a more gradual transition. In some cases, the review of a book of trusteeships reveals trusts have outlived their purpose and are best wound up altogether. In every case, the benefits of trusts can be fully realised. Risk can be mitigated by expertise in compliance (including keeping thorough and up to date records) and a distinct separation between settlors, trustees and beneficiaries.
Most importantly, lawyers can, where appropriate, help clients understand what is motivating any changes. This includes how an update or transition will ensure the trust remains robust and legally sound, with no undue risk or financial cost to any parties.
With the right information, lawyers can reduce risk while retaining opportunity. For more information, visit https://www.perpetualguardian.co.nz/about/free-white-paper to download our white paper.
John McFetridge is Perpetual Guardian’s Personal Client Services Director. He has more than 25 years’ experience in the trustee and financial services industry and is a former MD of Perpetual Trust and former Chair of the Personal Trust and Advisory Services Committee with TCA.