Trusts 101 - Your questions answered
Trusts are common in New Zealand, but they can be confusing. That is especially true when you are trying to work out whether you need one, who does what, and what your responsibilities are once it is set up. In this article, we answer the questions we are most often asked about trusts.
What is a Trust?
A trust is a legal arrangement where one or more people, known as trustees, hold and manage property for the benefit of others, known as beneficiaries. The trustees are responsible for managing the trust’s assets and making decisions about how they are used, invested or distributed, in accordance with the terms of the trust deed.
Although a trust itself is not a separate legal entity, it creates a legal relationship (known as a fiduciary relationship) where the trustees must act in the best interests of the beneficiaries when dealing with the trust’s assets.
How do I set up a Trust?
A trust is usually established by signing a trust deed. The trust deed is an extensive document which sets the rules for the trust, including who the beneficiaries are, the beneficiaries rights, what powers the trustees have, and how decisions are made.
In practical terms, setting up a trust often involves:
deciding what the trust is for and who will benefit from it;
choosing trustees (and an appointor, if the deed includes one);
preparing and signing the trust deed;
“settling” the trust with an initial gift (sometimes a small amount of money);
transferring assets into the trust (and updating ownership records);
putting good admin in place (for example, trustee resolutions/minutes and separate trust finances);
Trust deeds can be flexible to suit your unique circumstances so it is essential to get advice before setting up a trust.
Who are the key players in a trust?
Settlor – The settlor is the person who creates the trust by gifting an initial asset to the trustees. This initial asset can be as small as $10.00 or as big as the family home. The settlor relinquishes control and ownership of assets when they are transferred to the trustees.
Trustees – Trustees are the people who legally own the trust assets and make decisions for the trust. They must act for the benefit of the beneficiaries and follow the trust deed. Trustees have fiduciary obligations to act in the best interests of the beneficiaries, which includes holding and investing the trust assets responsibly. There are two types of duties trustees must consider:
mandatory duties - obligations that trustees must always follow;
default duties - standard rules that can be modified or excluded by the terms of the trust deed.
Trustees can be held liable for a breach of these duties, for example, if a trustee used trust assets for their own benefit rather than for the beneficiaries.
Beneficiaries – These are the beneficial owners of the trust assets. In New Zealand the most common type of trust is a discretionary trust, where beneficiaries are discretionary beneficiaries only. That means beneficiaries don’t automatically have a right to trust assets, but trustees must consider them when making decisions (for example, investing trust assets or making distributions).
Appointor – The Appointor is the individual or group who effectively holds the ultimate control of the trust. While trustees are responsible for managing the trust assets and making decisions in accordance with the trust deed, the Appointor has the authority to appoint and remove trustees.
Do I need a Trust?
Trusts are widely used in New Zealand. In 2024, New Zealand was estimated to have between 300,000 to 500,000 trusts. Some of the main reasons Kiwis set up trusts include:
Relationship Property – Trusts can provide an additional layer of protection for personal assets in blended families because, once assets are transferred into a trust, they are no longer legally owned by an individual. This separation can mean those assets are not treated as ‘relationship property’ under the Property (Relationships) Act 1976 (PRA), reducing the risk that they could be divided between spouses or partners if a relationship ends, or on death.
In that way, a trust can help ensure that particular assets are preserved for particular family members, such as children from a previous relationship. However, the intersection between trust law and relationship property law is a complex one, and trusts don’t automatically protect assets in every case. If this is a key reason you’re considering a trust, we recommend getting advice on your specific situation.
Succession Planning – Trusts are commonly used as part of wider estate planning because they allow families to protect and manage assets over time, rather than transferring ownership outright upon death. When assets are placed into a trust, the trustees take on legal ownership and are responsible for managing those assets until they are eventually distributed to beneficiaries. This structure can be especially helpful for families who want to provide for children or other beneficiaries without immediately handing over control of significant wealth.
Asset Protection – Trusts are frequently used for asset protection because they allow individuals - particularly company directors exposed to business risk - to separate their personal wealth from their commercial activities. Directors can be held personally liable for breaches of their duties, trading while insolvent, certain tax obligations, and for personal guarantees they give on behalf of their companies.
By transferring personal assets into a properly established and administered trust, those assets are no longer owned beneficially by the director and are generally protected from claims by personal creditors. This structure helps safeguard key family assets, such as the home or investments, from business related liabilities while still allowing them to be managed for the benefit of the director’s family.
Is there anything else I need to consider?
We recommend that everyone consults a qualified tax advisor or certified accountant prior to establishing a trust to ensure there are no unintended tax consequences associated with establishing a trust and transferring assets to a trust in your particular situation.
Next steps
If you’re considering a trust (or you already have one and want to check it’s still fit for purpose), get in touch with our Trust Experts and we’d be happy to help. We can advise on setting up a trust, reviewing an existing trust deed, trustee changes, transferring assets, and winding up a trust where appropriate. Contact the team at enquiries@toddwalker.com or +64 (03) 441 2743.
