Family Trusts


Family trusts have become a popular way of conducting small business operations in New Zealand.  There are a number of persons who form and operate the trust.


This is the person who establishes the trust and signs the trust document.  They may transfer property other than the initial settlement to the trustee to be held on trust.

The initial settlement amount is usually relatively small (usually less than $100) with more substantial assets being transferred or loaned after the trust has been settled.

It is important that the initial settlement is actually paid to the trustee.


The trustees are responsible for all aspects of the day-to-day management, investment of monies etc., relating to the trust.  Subject to the terms of the deed of trust the trustee can be a natural person or a company.  The number of trustees will usually be determined by the deed of trust.  The trustees have extremely wide legal and trust responsibilities for the administration of the trust.

The trustee holds assets for the benefit of the beneficiaries of the trust.  The trustee of a discretionary trust generally has the power to make distributions of profits and capital to any beneficiary or beneficiaries.

Trustees are governed by the Trustees Act 1956 and owe significant obligations to the beneficiaries of the trust.  A trustee should be fully aware of its, his or her obligations before accepting any appointment as a trustee.

Trustees (including corporate trustees) are liable for debts of the trust.  Directors of corporate trustees need to ensure they fulfill their duties under the Companies Act, otherwise they may become personally liable for debts of the trust.

Trust deed

The trust deed is prepared by a solicitor or administered by an accountant or other person using a suitable precedent.  It sets out:

  • The purposes of the trust (i.e. who can benefit)
  • What the trustee can do
  • Investment powers
  • Borrowing powers
  • Period of the trust (cannot exceed 80 years)
  • Names of settlor, beneficiaries, trustee and appointor(s)


Beneficiaries are those people for whom the trust was created.  The beneficiaries of a trust can be divided into a number of groups:

  • Primary beneficiaries – normally (but not necessarily) the settlors and present and future children
  • Secondary beneficiaries – normally future grandchildren and great grandchildren
  • Tertiary beneficiaries – other trusts, religious organisations, charities and so on
  • Final beneficiaries are the beneficiaries who benefit at the end of the Trust

Business activities

The trust, through the trustees, can conduct virtually any type of business activity that is approved by the trust deed in basically the same way as any other business activity operates.


The persons who have the powers of appointment are stated in the trust deed.  Subject to the terms of the deed of trust the appointor(s) have the right to add and remove trustees and beneficiaries, and to approve permitted changes provided for in the trust deed.  The extent of these powers can be customised to suit individual circumstances.

Distribution of profits and capital gains

The trustees of a discretionary trust decide how to distribute profits and capital.  The trustee is not bound by any fixed or predetermined percentage of distribution.


The trustee of a family trust pays income tax on taxable income that is not distributed to any beneficiaries.  The trustee rate of tax is currently 33%.

Income distributed to beneficiaries (other than minor children) is taxed at the beneficiary’s marginal rate.

Family trusts are a very effective structure for those people entering into a business who do not have existing creditor exposure, but wish to protect assets against future risks.

The reasons for settling a trust include protecting assets from future creditors; protecting assets from future relationship breakups; preserving assets for a single limb of a blended family; and inter-generational asset protection.

In the majority of cases any distribution from a trust to a child under the age of 16 will be taxed at the trustee’s tax rate.

Any net loss derived by a trustee cannot be distributed to beneficiaries of a trust in order to be offset against other income derived by them.  The losses are carried forward to be offset against future earnings of the trustee.


The advantages of a trust include:

  • Assets may be able to be protected from a variety of people and organisations, such as:
  • Creditors
  • Family
  • In limited situations, asset and income tested benefits and assistance
  • Income can be distributed or paid out for the benefit of family members
  • Care must be taken to administer balances owing to beneficiaries carefully. Any distributions that are unpaid can be demanded as well as being included in the property of the beneficiary for relationship property and other purposes
  • The trust is ongoing.  It has a life of up to 80 years, unless it is wound up and distributed earlier


Disadvantages include:

  • Naturally, there are additional legal and accounting costs to set up a family trust
  • There are further ongoing compliance costs to administer a family trust properly. Tax returns and full financial statements must be prepared on an annual basis if the trustees own income producing assets.  In addition, the trustee must maintain resolutions approving financial statements, beneficiaries’ distributions, and all major transactions.  These may also be minuted.  The skills of a good accountant must usually be employed
  • A good knowledge of trustees’ responsibilities is required. It is not wise for anyone to agree to act as a trustee until they are fully aware of their duties and responsibilities
  • Disgruntled beneficiaries have the power to sue trustees where trustees have acted in breach of trust. Whilst this is rare, it is happening more frequently and it reinforces the need to be fully aware of duties and responsibilities
  • The IRD are able to pursue all trustees for debts of the Trustee regardless, even if a trustee is only acting in the capacity as corporate trustee

Trust Losses

Net losses incurred by the trustee in one year are generally available to carry forward against net income in subsequent income years.  Losses cannot be passed on to beneficiaries.

Where the trust is a shareholder in a look through company (LTC), any losses from that LTC can be used against the trustee’s net income.

Asset Protection

Property and investment assets can be segregated from any business venture of significant risk into separate trusts.  Assets can be protected:

  • From potential creditors
  • In the event of a relationship property dispute
  • For children’s education
  • So that in limited situations, government income/asset tested benefits are still available

The basic idea is for you to gift your assets to the trust.  This can be done in a lump sum or progressively.  Say for example you sell an asset (your family home) to the trust.  Prior to the abolition of gift duty the usual arrangement was for an interest free loan to be made by you to the trust.  The loan to the trust was then ‘forgiven’ by way of gift at the rate of $27,000 per annum per person without incurring any gift duty.  A husband and wife or de facto or civil union partners can jointly reduce the loan at a rate of $54,000 per year.

A benefit here is that when John and Mary’s house is sold to the trust for $500,000 any increase in value belongs to the trust, not to John and Mary.

Provided the trust is a fully compliant discretionary trust, the house should be protected.  The debt owing to John and Mary of course will not be protected until forgiven (gifted).  The couple could suffer a business disaster but the trust assets can be legally separate, if the basic legal principles have been followed correctly.

Now that gift duty has been abolished, it is possible for assets to be gifted directly to a Trust without a gifting program.  Whether assets should be gifted immediately or progressively will depend on the donors’ circumstances.  However, advice should be taken before any significant gifts are made to ensure there are no adverse consequences from the gift.

Matters to take into consideration before a significant gift include:

  • Whether the gift will mean that any entitlement to a residential care subsidy (or other means tested benefit or allowance) might be compromised, either now or in the future
  • Loss of control over the asset
  • Whether the gift might have the effect of defeating a creditor’s issues
  • The donor’s solvency
  • Whether the gift could comprise relationship property

Distribution of profits

Once the trustee has made a distribution to a beneficiary (the distribution does not have to be by cheque – it can be a journal entry), then that money legally belongs to the beneficiary.  The trustee may be empowered by the trust deed to utilise beneficiaries’ current accounts for the benefit of the trust – with or without interest.  However, any balance attributed to a beneficiary, together with any gains, remains that beneficiary’s property.

Capital profit distribution

The trustee may have the discretion to distribute capital to various beneficiaries.

Claim on balance in current account

A beneficiary who is ‘sui juris’ (20 years old), can claim the balance in his/her name in the beneficiary’s account.  He or she is also entitled to request a copy of the financial report each year together with other trust documents.

Trustees’ responsibilities

A trustee’s role is not necessarily onerous but does carry particular legal significance and specific responsibilities.

A beneficiary can sue a trustee for a wrong-doing whilst acting as trustee that constitutes a breach of trust.

Trustees may wish to notify beneficiaries of their status when each beneficiary attains the age of 20 years.  However, in the absence of any provision in the deed of trust, there is no obligation at present to do so.

Trustee’s decisions, whether made formally or not are called Trustee Resolutions.  Good practice requires that each trustee resolution is recorded.  Where a contemporaneous record of a decision is not made, the trustees should ensure that the minutes of the next trustee meeting record the resolution that was made.

Trustees’ meetings should be minuted and the trust documentation should be carefully maintained.  Some examples can be found in the section on trust minutes.

It is also imperative Trustees are aware of the extent of their liability for debts of the trust (including directors of corporate trustees)

If you would like to discuss what a trust would entail or what your responsibilities might be as a trustee, please contact us.  And, of course, your solicitor can also advise you in this matter.