The Breach of Trust Spectrum & How Trustees Can Protect Themselves
The commencement of the Trusts Act 2019 (the Act) marked a watershed moment for trust law in New Zealand, replacing the Trustee Act 1956 and modernising the principles governing the complex relationship between trustees and beneficiaries.
At its most fundamental level, a breach of trust is an act or omission by a trustee that is not authorised by the trust instrument or by the general law. This can range from a positive act, such as an unauthorised distribution, to a passive failure, such as neglecting the duty to invest the trust fund with reasonable care.
The Spectrum of Culpability
A breach of trust occurs when a trustee fails to perform a duty or exceeds a power, regardless of whether that failure is dishonest, negligent, or innocent. However, the categorisation of a breach is critical because it determines the availability of any trustee indemnity and the likelihood of the Court granting relief.
The spectrum of culpability includes:
● Criminality: The dishonest use of a position of trust for personal gain or the intentional dissipation of trust assets.
● Civil dishonesty: Evaluated objectively against what the trustee subjectively knew. If an ordinary, honest person would consider the conduct dishonest, the trustee cannot escape liability by claiming they genuinely believed their behaviour was acceptable.
● Wilful Misconduct: A conscious decision to commit a breach or a reckless disregard for the trustee’s obligations 11.
● Gross Negligence: Conduct that is "so unreasonable" that no reasonable trustee in the same position would have considered it consistent with their duties 12.
● Ordinary Negligence & Technical Breaches: Failures to exercise reasonable skill and care, or minor administrative deviations 13.
Crucially, section 40 of the Act prevents a trustee from limiting or excluding liability for any breach of trust arising from the trustee’s dishonesty, wilful misconduct, or gross negligence. The inclusion of “gross negligence” as a non-excludable breach significantly raises the standard expected of trustees and narrows the scope of protection previously relied upon in older trust deeds.
Inadequate Deliberation as a Breach
Trustees may also commit a breach of trust by failing to give proper consideration to relevant matters when making a decision.
As recently emphasised by the Supreme Court in Cooper v Pinney, courts will intervene where a discretion has been exercised in bad faith, for an improper motive, ultra vires, or after “inadequate or misconceived deliberation”. If a trustee fails to adequately inform themselves, takes into account irrelevant considerations, or reaches a decision that was not reasonably open to a properly informed trustee, the Court may set the decision aside. A failure in deliberation will amount to a breach of trust if the inadequacy was material in the sense that it affected, or could have affected, the decision.
Common Traps for Trustees
In practice, breaches of trust frequently arise from:
● Failure to understand the trust deed: Misunderstanding distribution powers or variation provisions.
● Informal decisions or poor documentation: Deficiencies in trustee records complicate the ability to justify decisions. Notes should properly record what information was considered and weighed.
● Conflicts of interest: Exercising powers in a way that benefits the trustee directly or indirectly when prohibited by the trust terms.
● Failure to obtain professional advice: Mischaracterising income and capital, for example, can have significant adverse tax consequences. Taking advice from accountants or lawyers before exercising powers mitigates this risk.
How Trustees Can Protect Themselves
The law recognises that even the most diligent trustee may inadvertently fall into breach. Trustees can manage risk and seek protection through:
● Statutory Relief (Section 131): The Court may relieve a trustee from personal liability, either wholly or partly, if the trustee acted “honestly and reasonably” and ought fairly to be excused 23.
● Indemnities: Trustees are generally entitled to be indemnified out of trust assets for expenses reasonably incurred. However, as noted above, this cannot cover dishonesty, wilful misconduct, or gross negligence.
● Seeking Court Directions (Section 133): If trustees act in accordance with a direction given by the Court under s 133 of the Act, their action is immunised from any allegation of breach of trust.
● Good Process: Ultimately, the most effective protection is good process. Trustees who can demonstrate proper, considered decision-making, adherence to the trust deed, comprehensive record-keeping, and early engagement with professional advisers are generally far less likely to be found in breach.
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This article is a condensed version of a longer paper co-written and presented with Israel Vaealiki, Partner, Jackson Russell at the Law Association Cradle to Grave (C2G) Conference, May 2026.