Trusts - The Definitive New Zealand Guide

In this guide, we explain everything you need to know about setting up a trust. With hundreds of thousands in operation in New Zealand, our guide is focused on explaining what's important and what you need to consider. 

We cover:

• ​Why are Trusts Important?
• Legal Terms and General Things to Know
• Setting up a Trust: Your Options Explained
• Frequently Asked Questions
• Trusts - Our Conclusion

Trusts can be effective in protecting assets. Since legal and beneficial ownership are separated, trustees have a fiduciary duty to hold and protect property for the benefit of the beneficiaries. There are several advantages to putting assets into the protection of a trust:

There can also be a number of disadvantages: 

• Loss of control over your own assets - this can end up in family disputes and disagreements
• Ongoing administration and cost
• If you don’t run it properly, it can be attacked by creditors/relationship property claims
• If you want to qualify for residential care subsidies, need to take great care you haven’t deprived yourself of assets, or you could be permanently disqualified from subsidy

Below are some essential legal terms to better understand trusts and common trust types:

1. Settlor: a person who creates a trust and transfers ownership of assets. A settlor must be 20 years or older and have a sound mind when creating the trust. There can be more than one settlor of a trust.
2. Trustee: a person or group of persons who hold and manage assets for the benefit of the beneficiaries on the terms of the trust. Trustees have certain legally enforceable obligations set out in trust law and by the terms of the particular trust. For example, trustees must always act honestly and in good faith. A trustee has fiduciary duty to act in the best interest of the beneficiaries.
3. Beneficiary: a person (named individuals or a class of people) who benefits from the assets being held and managed. A beneficiary may receive capital or income in accordance with the terms of the trust.
4. Asset: property owned by the settlor to be transferred to a trust for protection for the beneficiaries. This can be the family home, other real estate, securities, cash or life insurance policies.
5. Trust deed: an administrative document that sets out the terms of the trust. It will usually be drawn up by the settlor’s lawyer or may be prepared by a trustee organisation. It acts as instructions for how the trustees should manage the assets as per the settlors’ wishes. It should contain the purpose of the trust, the parties to the trust and the scope, duties and powers of the trustees.
6. Family trusts: an express trust usually formed by families to  benefit family members ie children. Are commonly discretionary but can be fixed.  
7. Parallel trusts: two separate trusts for each partner in a relationship. This is common within blended families, or when there is disproportionate asset value between partners.
8. Business trusts: the management and protection of private shares for tax planning and succession structures. The growth of a business owned by a trust remains property of the trust and not the shareholder.
9. Charitable trusts: assets designed to be managed for the philanthropic benefit of charities.
10. Purpose trust: usually created for a purpose rather than the benefit of a person; trusts must have ‘objects’ or beneficiaries or they are void.

It is important to note that setting up a trust is not a one-size-fits-all solution. What works for your parents, siblings, neighbours, friends or colleagues may not work for you. However, a trust is an excellent way to transfer and manage assets when set up and maintained effectively.  If a trust is not maintained properly, it may not be effective.
 
The Trust Deed

• Trusts have important and technical requirements. A trust needs to be set up professionally. It is appropriate to discuss the purpose of the trust with a licensed professional, such as a lawyer or trustee organisation specialised in trusts.
  
• A trust deed needs to be professionally drafted but written in clear and concise language. This will aid the trustees in their understanding of the purpose and intention of the trust. It is very important that a trust deed is written well, as it can influence how assets are managed, disposed of, or if a personal creditor can challenge the authenticity of the trust itself.

 
Trustees

• What traits are important when selecting who will be a trustee? The most important trait is simple trustworthiness and financial capability. Would you trust them with your life savings? If so, they may be a good trustee.
  
• Setting up a trust and its subsequent management is subject to restrictions and law. The recent Trusts Act 2019 has modernised and codified mandatory and default trustee duties.

 
Mandatory trustee duties are:

• Every trustee must know the terms of the trust.
• Every trustee must act in accordance with the trust terms.
• Every trustee must act honestly and in good faith.
• Every trustee must act for the benefit of the beneficiaries.
• Every trustee must exercise their power only in the proper purpose.

 
Default trustee duties are:

• A general duty of care.
• A duty to invest prudently.
• A duty not to use trust power for trustee benefit.
• A duty to consider exercise of trustee power.
• A duty not to bind future exercise of trustee discretion.
• A duty to avoid conflicts of interest.
• A duty to impartial decision making.
• Duty not to profit
• A duty to receive no reward.
• A duty to act unanimously.

 
Other characteristics that point towards a good trustee is financial rationality and good decision-making skills. Are they themselves good with money? Do they think through big decisions or rush into them? Do they consider all options or are they often biased?
 
Most people select friends and family as trustees. This is because we have built one-on-one relationships with them. We often trust our friends and family to truly know what we would want. However, friends or family members may get caught up in personal drama or struggle to remain neutral against their own intentions. In any case, neutrality is key.
 
You can ask professionals to be trustees. This can include a lawyer, accountant or a professional trustee organisation. ‘Professional trustees’ usually have greater knowledge and skill and can ensure the formalities of a trust are observed and assets are efficiently managed.
 
Beneficiaries

• Beneficiaries are the people who benefit from the assets the settlor transfers into the trust. It may be appropriate to intend certain assets go to certain beneficiaries.
  
• The trust deed can specify which beneficiaries, how and at what age should benefit from the assets in the trust.

The settlor usually appoints the initial trustees. The terms of the trust should set out who then has the power to appoint and remove trustees. If unspecified in the trust instrument (e.g. a deed), the default under the Trustee Act 1956 is that the continuing trustees or their personal representative can appoint other trustees. If there are disagreements between trustees, the Court can intervene to uphold the functionality of the trust.

The maximum duration of a family trust is 125 years under the Trusts Act. The expiry is known as the date of distribution. However, a trust can exist for any period of time under the maximum allowed and should be stipulated in any trust deed.

If a beneficiary feels a trustee is breaching their duty towards them, a beneficiary can engage the trustee in a law suit. If the beneficiary claims there has been fraudulent action, there is no time limit to engage a law suit. In any other case the time limit is 6 years after the alleged wrongdoing.

It depends on the terms of the trusts. As trusts can be complicated and time-consuming, it may be appropriate for the settlor to allocate capital to be distributed in order to compensate for the time taken to maintain a trust. Trustees are entitled to be indemnified from trust assets for costs and liabilities they incur as trustees.

The cost of setting up a trust varies depending on the complexity of the trust. In a rough estimate, transferring assets into a trust costs around $2,500 to $3,000 plus GST, but this can vary widely. For example, if the asset is a family home, extra costs surrounding updating valuation and legal transfer of the property can increase the cost, particularly if mortgagees are also involved.

A beneficiary is entitled to ask the trustees to benefit from the trust. They are entitled to information regarding trust deed specifics, trust accounts, and the trust’s assets and liabilities. A beneficiary may also entitled to details surrounding other beneficiary income or capital distributed from the trust.
 
A beneficiary is not entitled to information regarding trustee decisions to vary or resettle a trust, nor policy or advice the settlor has given trustees to aid their decision making.

At settlor discretion, a trustee can be excluded from liability for certain mistakes while acting as a trustee. However, the Trusts Act 2019 does not allow indemnity from acts of dishonesty, willful misconduct or gross negligence.

A trustee must always have the trust deed, any variation to the trust deed, records of trust property and its assets, liability, income and expenses, records of trustee decisions, any written contracts, accounting records, the memorandum of wishes and administration documents.

1. A trust can be an efficient way to manage and protect assets when done so diligently. Trustees should always act in the best interests of the beneficiaries.
2. When forming and operating a trust, begin by getting good ongoing advice from professionals. This ensures the trust is valid and properly set up.
3. Trusts may have initial expenses, but the costs can be worth protecting your assets. If it matters to the settlor in any material way, you should consider if it is right to  put it in the trust. A trust will protect assets for well over a lifetime if necessary.  

 
But, know this – trusts may not be appropriate for your needs. 

1. A lot of people have trusts, that cost them a lot of money to set up, for no real purpose.  Trusts cost money to wind up too.
2. They either require a lot of time and cost to keep operating properly, or they can be challenged if you ever try to rely on it (e.g. against creditors, or relationship property).
3. You can also stuff things up for yourself when trying to get a residential care subsidy for a retirement home if you’re seen to have disposed of assets. A trust should not be used to try to make yourself eligible for residential care subsidies.

This is the first edition of our trusts guide. If you have experiences you would like to share and/or tips you think we should include, please contact our team.