How Do I Dissolve a Trust in New Zealand?

A trust is when someone (the settlor) gives or sells their property to another person (the trustee) to maintain for the benefit of someone else (the beneficiary). There are numerous benefits to holding your property in a trust, such as: 

• lower tax rates; and
• asset protection.

Trust law is changing in New Zealand, and this may have an impact on whether you want to maintain your trust. This article aims to help with that decision and will explain:

• some possible reasons to dissolve a trust;
• when a trust will end;
• what happens at that time; and
• how that end can come about.

Why Dissolve a Trust?

The main reason why you would want to dissolve a trust is simply that it does not fulfil its original purpose. This could be because that purpose does not exist anymore, or you have achieved it.

For example, your family trust set up to protect the family business may not be needed anymore if the business is doing well. If not set up correctly, a trust can be costly to maintain, and the administrative costs of doing so may outweigh the benefits that the trust brings. The existence of the trust may affect your eligibility for legal subsidies, or the tax benefits of the trust may not be as lucrative as they had been in the past. Or, the simplest reason, the trust has reached its final distribution date, when you must distribute all assets in the trust to the beneficiaries.

When Does the Trust End?

All trusts have a limited life. In New Zealand, that is 125 years from the date of the trust’s creation or the final distribution date as specified in the trust deed – whichever of the two dates is the earliest. The settlor of the trust can set a fixed date when the trust ends when they create the trust. Alternatively, they can have the trust end when certain circumstances come to pass. 

But, as time goes on, it may end up that the trust needs to be wound up earlier than what you originally intended. So, you can bring this date forward in a number of ways, outlined below.

Ways to Dissolve a Trust

Trustees or Settlors Winding Up the Trust

If the trust deed (the legal document outlining the trust) allows for it, the settlor or trustee may choose to wind up the trust. The trust deed will outline this process and how you should divide the remaining assets between the beneficiaries. If the trust is a discretionary trust, the trustees may have the discretion to decide that themselves. They must notify the beneficiaries if they do decide to bring forward the trust’s expiry date.

By Beneficiary Consent

Another way you can dissolve a trust is through beneficiary consent. This requires the combined consent of all beneficiaries of the trust who are entitled to the remaining property. This means that every beneficiary has to submit a written request to the trustees to dissolve the trust. It must be signed either by the beneficiary themselves or an agent if they are unable to do so.

For example, an agent may sign it if the beneficiary is a child under the age of 18. In some cases, the Court may be able to do this on a beneficiary’s behalf if they do not have the capacity to do themselves, or are not born yet. Once the trustees receive this request, they must follow through and dissolve the trust.

By Court Order

If there has been any kind of legal wrongdoing involved with the trust, the Court may order a termination of the trust. This can occur if Inland Revenue investigates the trust and finds that its sole purpose is tax evasion, or any other reasons that operate in bad faith.

What Do I Need to Do When the Trust Ends?

Regardless of how the trust ends (if not forced to do so by the courts), its expiry date also becomes its final distribution date. This means you must distribute any remaining trust assets to any living beneficiaries. Usually, the trust deed or trustees will determine how to do this, and how much of the trust property or remaining income each beneficiary receives. 

If the trust deed does not give any specific direction or the trustees do not have this power, the law says that you must distribute assets according to the purposes of the trust. If that is not available, then any remaining assets must be divided between the beneficiaries in equal shares.

Key Takeaways

If your trust does not continue to fulfil the objectives you began it with, then it may be worthwhile to consider your options. If you do decide to dissolve your trust, check your trust deed to see if the settlors or trustees can do so – otherwise, it can be closed with the consent of all of the beneficiaries. In the end, you must distribute all assets to the trust’s beneficiaries on its expiry date. For more information, help regarding the winding up of your trust, or other legal advice, contact LegalVision’s business lawyers on 0800 005 570 or fill out the form on this page.