Fixing trust troubles on the cheap

Frustrated beneficiaries of family trusts could be offered new ways to hold trustees to account, and avoid having to foot the bill for a court action.

There has been rapid growth in the number of family trusts and there is rising concern many are badly managed, and that trustees are ignorant of their obligations.

There are now more than 337,000 trusts in New Zealand, ranging from single-home trusts to complex business-owning trusts.

The Law Commission has been investigating how to update trust law and is seeking views on whether the country should have a new ombudsman, a tribunal, or allow beneficiaries to require trustees to attend mediation when problems arise.

The proposals, designed to increase access to justice for beneficiaries without the means to pay for a High Court fight, have been greeted with concern by some trust professionals and lawyers, something the commission acknowledged in a discussion document released last month.

It recognises that, if enacted, such proposals would represent a break in legal tradition, and lead to non-judges deciding cases.

But New Zealand boasts a tradition of creating new schemes in areas where governments decide the courts are too slow or costly, such as the Weathertight Homes Tribunal.

In its latest paper, the commission says "the law makes it difficult for beneficiaries to hold trustees to account. Taking an action against a trustee in the High Court, which is currently the only practical option available to beneficiaries ... is likely to be costly, complex and slow. These factors are likely to dissuade beneficiaries from taking action when they may have a well-founded case".

Its suggestions include:

Empowering district courts: Many disputes can be heard only by the high court. Though there are "mixed views within the judiciary and legal profession", that could be altered by giving the lower court powers in cases involving claims of $200,000 or less to remove trustees and to order them to make good financial losses.

Creating an ombudsman: That person could make non-binding recommendations. It would allow disputes to be heard privately and have a similar financial limit to district courts.

Establish a tribunal: Just as the Disputes Tribunal sits below district courts for civil cases, a tribunal would exist for trust cases, and have the same power to make binding rulings, subject to appeal. "A tribunal is likely to be quicker, cheaper, more informal and less adversarial than the high court," the commission said.

Alternative Dispute Resolution: This could include passing laws making mediation or arbitration, which is private, low-cost and informal, available to trust beneficiaries.

Politicians would have to decide how such schemes were funded, and to make some cost-effective there might have to be a mix of taxpayer funding and pay-per-use.

Trusts expert John Brown said: "Conceptually it is a great idea to solve legal issues cheaply. The trouble is the trust area is not an easy legal area."

Even the least controversial of the changes, allowing district courts more power, could be criticised, said Brown, particularly since higher courts frequently overturned district court judgments.

Brown said some of the district court judgments involving trusts made for uncomfortable reading for trust experts, and some have not survived appeals to higher courts.

- © Fairfax NZ News