A discretionary trust, otherwise known as a family trust, is a legal structure set up by a person wanting to protect certain assets, manage tax efficiently, or have flexibility in how income is distributed within a family or group of beneficiaries. This article will discuss the benefits of setting up a discretionary trust and how you can set one up.<\/p>\n\n\n\n
A trust is a legal relationship where one person (\u2018the trustee\u2019) holds assets \u201con trust\u201d for another person or group of people (\u2018the beneficiaries\u2019). Although the trustee is the legal owner of the trust assets, they must manage those assets in accordance with the trust deed and for the benefit of the beneficiaries.<\/p>\n\n\n\n
A key requirement is that trust assets are kept separate from the trustee\u2019s personal assets. This separation is fundamental to the trust structure and is what gives rise to its asset protection benefits. In practice, this means that assets held in a properly established trust are generally not available to satisfy the personal debts or liabilities of the trustee.<\/p>\n\n\n\n
One of the most significant advantages of a discretionary trust is therefore the protection of wealth from personal risk. For example, if a trustee becomes personally insolvent or faces legal claims, assets properly held within the trust are typically insulated from those claims.<\/p>\n\n\n\n
This is subject to certain legal exceptions such as sham trusts or clawback provisions in insolvency situations.<\/p>\n<\/div>\n\n\n\n
For individuals acquiring property, shares, or operating a business<\/a>, a trust can therefore act as a protective structure to separate personal exposure from valuable assets.<\/p>\n\n\n\n In New Zealand, individuals pay income tax at progressively higher rates as their earnings increase. This means higher earners pay a greater percentage of their income in tax.<\/p>\n\n\n\n A discretionary trust can be used to distribute income earned from assets in a tax-efficient way to beneficiaries. When trust assets generate income, such as dividends, rent, or business profits, the trustee has discretion to decide which beneficiaries receive that income and in what proportions (subject to the trust deed<\/a>). <\/p>\n\n\n\n For example, if one beneficiary is on a higher income tax bracket and another is on a lower bracket, the trustee may allocate a greater share of income to the lower-taxed beneficiary, potentially reducing the overall tax burden for the family group. This flexibility is what distinguishes a discretionary trust from other trust structures.<\/p>\n<\/div>\n\n\n\n However, this only works in practice where there are beneficiaries on lower marginal tax rates – for example, a partner who is not working. If no such beneficiaries exist, a trust is unlikely to offer meaningful tax advantages. <\/p>\n\n\n\n You must properly document trust distributions and make them in accordance with the trust deed. Trustees cannot simply retain income indefinitely without proper structuring, and Inland Revenue closely scrutinises arrangements that appear designed solely for tax avoidance rather than legitimate wealth management.<\/p>\n\n\n\n It is also worth noting that in New Zealand, the trustee tax rate may apply to undistributed income, meaning careful planning is required to ensure distributions are both compliant and efficient.<\/p>\n<\/div>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nTax Planning<\/h2>\n\n\n\n