The following comments pertain generally to discretionary family trusts and are intended as general advice. If you are considering setting up a trust, you should seek specific, tailored legal advice.
What is a Trust?
A Trust is a legal arrangement where property owners (the Trustees) hold property for the benefit of others (the beneficiaries) or a specific purpose (e.g., a charity). The terms of the Trust are outlined in a document known as a “Trust Deed.” Typically, in the Trust Deed, the Settlor appoints trustees—usually at least two, often three—to hold the Trust Fund, which usually starts with a nominal sum (e.g., $10) on behalf of the Trust’s beneficiaries.
Settlor
The Settlor is the person or persons transferring assets to the Trust. In the case of a couple transferring jointly owned assets, both are considered Settlors. The Settlor usually retains the right to appoint and remove Trustees.
Trustees
Trustees control the Trust’s assets and unanimously determine which beneficiaries will benefit. Trustees often have the power to add or remove discretionary beneficiaries, sometimes with the Settlor’s consent. Trustees might include the Settlor(s) and possibly other family members. Appointing an independent trustee, such as a lawyer or accountant, is recommended to reduce the risk of the Trust being challenged by creditors, the IRD, or WINZ.
Beneficiaries
Beneficiaries can be anyone you choose, including yourself, your spouse, your children, grandchildren, charities, or other organizations. Due to changes in tax law, beneficiaries should ideally be individuals for whom the Settlor has “natural love and affection” to avoid tax liabilities. Trustees determine who receives income and capital from the Trust. In a discretionary trust, individuals only benefit if trustees exercise their discretion in favor of those beneficiaries.
Pros of Having a Trust
To Benefit Others: Trusts can protect the long-term interests of your spouse, children, and future generations. They offer flexibility in dealing with changing circumstances and can benefit charities.
To Protect Assets: Trusts protect assets from future claims by creditors, claims against estates, relationship property claims, government claims, health and safety prosecutions, leaky home claims, and employment grievances.
Privacy: Trusts are not recorded on public registers, maintaining privacy. Passive trusts with no income do not need to file tax returns.
Trusts for Special Purposes: Trusts can serve specific purposes, such as providing for a child with disabilities.
Income Planning: Trusts offer potential income-splitting benefits and tax savings. Trust income is categorized into Trustee Income (taxed at 33%) and Beneficiary Income (taxed at the beneficiary’s marginal tax rate).
Cons of Having a Trust
Ongoing Administration and Maintenance: Poorly managed trusts can be costly and inconvenient. If declared a ‘sham,’ the assets remain personally owned, and the trustees may face penalties. Annual meetings and clear records are essential, incurring additional costs.
Relinquishing Ownership: While you own property as a trustee, you do so on behalf of the beneficiaries. You benefit from the Trust’s property only if you are also a beneficiary. Modern trust deeds offer flexibility, but having property in a Trust means less direct control.
Memorandum of Wishes/Guidance
A Memorandum of Wishes indicates to the trustees how the Settlor wishes the Trust to be administered. It is not binding to maintain the discretionary nature of the Trust.
Term of the Trust
A Trust is usually settled for 125 years, the maximum term under the Trusts Act 2019. Trustees can choose to shorten the term if desired.
Wills and Trusts
Establishing a family trust has significant implications for your Will. It is recommended to create a new Will when setting up a family trust.
For specific legal advice tailored to your situation, contact our experienced team today. Leading law firms offer fixed-price initial consultations to help you understand your options cost-effectively.