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A discretionary trust, otherwise known as a family trust, is a legal structure set up by a person wanting to protect certain assets or minimise their tax. This article will discuss the benefits of setting up a discretionary trust and how you can set one up.

Asset Protection

A trust is a legal relationship where one person (the trustee) holds assets “on trust” for another person or group of people (the beneficiaries). The trustee will own the trust assets. The trustee must keep the trust assets separate from their other assets, such as personal assets that are not part of the trust deed. The trust assets will not be available to anyone trying to come after the trustee personally, for example, the trustee’s personal creditors.

One of the most significant benefits of establishing a trust is that you can use it to protect your assets. If you are looking to purchase some valuable assets or shares in a company, consider whether protecting these assets through a trust is beneficial for you.

Tax Planning

Discretionary trusts are extremely useful for tax planning. In New Zealand, your rate of tax depends on how much income you earn. The more income you earn, the greater percentage of your income will be subject to a higher tax rate. You can use a discretionary trust to distribute income earned from family assets in a tax-efficient way. 

If the trust assets earn income, the trustee must distribute that income to the beneficiaries. The trust deed should specify how to distribute the trust assets and the amount each beneficiary should receive. Usually, under a discretionary trust, the trustee is given discretion as to how to distribute the trust income. The trustee must distribute all of the trust income in any financial year, or reinvest it if permitted. Importantly,  the trustee cannot keep the money sitting in the trust.

For Example:

Sibella has set up a discretionary trust. She is a beneficiary of the trust, along with her partner Milo. The trustee holds some shares. 

The company pays $2,000 worth of dividends on the shares. The dividends are paid to the trustee. The trustee has to choose how to distribute them.

Sibella is a big earner! Her salary is $200k. Milo is working part-time and has a salary of $30k. This is their only income (apart from the dividends).

Sibella will be taxed at the highest marginal tax rate (which in 2020 is 33%). Milo will only be taxed at 17.5%.

How could the trustee distribute the income?

The most tax-effective choice is to distribute all the dividend income to Milo. 

How Do I Set Up a Discretionary Trust?

There are six steps to setting up a discretionary trust.

1. Pick Your Trustee 

Your trustee can be anyone. It can be an individual or a company. The only condition is that your trustee cannot be the only beneficiary of the trust. This will cause the trust to collapse. If this occurs, the beneficiaries will have no interest in the assets, and you will not receive any of the asset protection or tax planning benefits you intended.

You can also have more than one trustee. Generally, it is a good idea to appoint an independent person to act as an additional trustee. This lowers the risk of you losing the possible tax advantages of the trust. If you do not have an independent trustee, there is a chance that you will be deemed to own the assets personally, rather than through your discretionary trust. If you are deemed to own the assets personally, you may lose all the possible tax benefits. Your decision to appoint an additional trustee will depend on how much unchecked control you have over the trust assets.  

You can choose to set up a new company to act as the trustee (Trustee Company), or as the additional trustee. A Trustee Company is useful if you want to be the sole beneficiary of the trust, and if you are planning to retain the tax advantages of the trust.

2. Pick Your Beneficiaries

Your beneficiaries can also be anyone you want. It can be solely yourself (provided you are not the trustee – see step 1). If you are intent on being the trustee and a beneficiary, you can include some family members or other people as beneficiaries of your trust. Importantly, because it is a discretionary trust, you do not have to distribute income to other beneficiaries if you do not want to. However, if your trust is wound up, or other events occur, your beneficiaries may have a right to have some of the trust assets.

From 30 January 2021, there are also obligations on trustees to inform beneficiaries that they are beneficiaries under a trust and provide information to them about the trust in certain circumstances. You will need to consider this if you prefer that the beneficiaries do not know about the trust.

3. Draft Your Trust Deed

It is best practice to engage a lawyer to draft your trust deed. Depending on what type of assets your trust is holding, you might need to include specific clauses. Without specific clauses, the trust may be incorrectly created, or your trustee may not have the powers they need to look after the assets and distribute the income.

4. Sign and Give the Initial Trust Assets to the Trustee 

The trustee will need to sign the trust deed, along with the settlor. The settlor must direct the trustee to “settle” the trust. They can be anyone, including yourself (as long as you are not the only trustee). If the trustee is a company, they will need to hold a meeting at which the directors of the company agree to sign the trust deed.

The initial trust assets can be any type of property, but it is usually money. It can be a nominal sum, for example, $10. However, you should be aware that if the trustee is not given the initial trust assets, then the trust might never be created. Consequently, you will lose all of the potential benefits).

5. Apply for your NZBN and IRD Number

After establishing the trust, you can apply for a New Zealand Business Number (NZBN) and an Inland Revenue Department (IRD) number. You can make an application online for a NZBN through the New Zealand Business Number website. To receive an IRD number, you can apply through the IRD website. Alternatively, you can receive either of those numbers with the assistance of an accountant or lawyer. It can take up to two to six weeks to obtain these numbers.

6. Open a Bank Account

You should open a bank account for the trust in the name of the trustee. This should occur after you establish the discretionary trust. The bank may require the trust NZBN before it will open the account.

Once you have opened a bank account, the first deposit should be the initial trust assets (assuming it is money). You should deposit the initial trust monies before making any other deposits or entering any other transactions.

By following all six steps, your trust will be successfully up and running. 

Key Takeaways

The two main reasons you may wish to set up a discretionary trust is to protect certain assets or minimise your tax obligations. There are six steps to setting up a discretionary trust, which are:

  1. pick your trustee;
  2. pick your beneficiaries; 
  3. draft your trust deed;
  4. sign and give the initial trust assets to the trustee;
  5. apply for a NZBN and IRD number; and
  6. open a bank account in the name of the trustee. 

If you need assistance setting up a discretionary trust, contact LegalVision’s New Zealand business lawyers on 0800 005 570 or fill out the form on this page.


What is a discretionary trust?

A discretionary trust is a legal structure set up by a person wanting to protect certain assets or minimise their tax. 

How do trusts help with tax planning?

The more income you earn, the greater percentage of your income will be subject to a higher tax rate. You can use a discretionary trust to distribute income earned from family assets in a tax-efficient way. 

How can I set up a discretionary trust?

To set up a discretionary trust, you need to pick your trustee, select your beneficiaries, draft your trust deed, sign and give the initial trust deeds to your trustee, apply for your NZBN and IRD number, then finally, open a bank account.

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