No limit supported on use of trusts legal purposes

As long as no criminal activity is involved, there should be no limit on the way in which trusts can be used, the New Zealand Law Society says.

In a submission to the Law Commission on the Commission’s Review of the Law of Trusts: Second Issues Paper, the Law Society notes that trusts are used for a wide variety of purposes.

It says it would support legislation being implemented to prevent trusts being used to further any illegal or criminal activity. Trustees’ duties are becoming increasingly onerous, and the Law Society says the legislation would provide some practical assistance in limiting more questionable activities that trusts may be involved in, due to trustees’ personal liability.

The Law Society says it agrees with the proposition that a trust may be created for any purpose which is not illegal, which is not against public policy, and which it is possible to achieve.

“There is a perception, and at times a reality, that trusts are set up which allow some people to avoid legal obligations, such as debts, relationship property entitlements, and family protection/testamentary promises entitlements,” it says.

“There may well be appropriate policy reasons, within each of the statutes or legal provisions regulating these areas, that would justify the courts in considering and perhaps addressing patent unfairness which may result from the use of a trust to defeat the objectives of the particular legal provision. However, it would be appropriate to consider amending the particular statutes involved, rather than attempting to deal with perceived problems by reforming the law of trusts.”

The Law Society submission says it does not believe there should be a statutory provision which enables the courts to set aside a trust.

“The issue of validity of trusts should be left to the courts to determine according to trust law as it currently stands,” it says.

A number of serious disadvantages in trying to legislate about when a trust is invalid are identified. These include conceptual disputes that would need to be determined first, the likelihood that issues in each case would be very fact-specific, and possible technical drafting problems in defining just when a trust should be found invalid.

However, the Law Society says remedial legislation could be necessary from time to time in limited areas. This includes the law relating to sham trusts. The submission states that the leading case on these in New Zealand appears to be incorrectly decided, and this should be addressed by legislation.