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Trusts are a popular form of managing your property or assets in New Zealand, especially for families wanting to collect income for their benefit. But, they can be confusing at first glance. You can structure your trust as a family or discretionary trust. This article will explain:

  • what are family and discretionary trusts;
  • their key features and benefits of managing your assets through a trust; and
  • the differences between the two trust types.

What is a Discretionary Trust?

In simple terms, a trust is what happens when someone (a settlor) gives or sells property to another person (the trustee) to hold or manage for the benefit of someone else (a beneficiary). Some examples of such property are:

  • cash or life insurance policies;
  • real estate; and
  • securities.

When your trust is discretionary, this means that the people managing the trust (the trustees) can choose:

  • who can benefit from the trust; and
  • how much money or property they can receive.

This is different from a fixed trust, where you can choose who the beneficiaries are and what payments they can get when you create the trust. Under a fixed trust, these parameters do not change in the future.

What is a Family and Discretionary Trust?

A family trust is a trust that can be fixed or discretionary, but most tend to be discretionary as this provides trustees more flexibility and control. The key feature of a family trust is that it is usually created by someone to benefit their family. They put their property into a trust, and family members gain income or other forms of payment from that property in the trust. A member of the family usually manages the trust as well. Some reasons why you might want to put your family assets into a trust include:

  • as a parent, you may want to leave behind a form of income for your children after your death, and may not want your children to manage it themselves; or
  • if your family wants to start a business, putting your property into a trust can protect it from any risky ventures.

Key Aspects of a Trust

Trust Deed

This document sets out how the trust works. Usually, it would include clauses that cover:

  • the purposes of the trust, and how it runs;
  • who the trustees are, and the powers they have;
  • who the beneficiaries are;
  • what you need for making decisions about the trust;
  • how you split the assets (payments) between the beneficiaries; and
  • how beneficiaries receive these payments.

If you have any questions about your trust, the trust deed is the first place to go to for answers.

The Settlor

This is the person who creates the trust, and gives or sells the property to the trust. The settlor can also make themselves a trustee, or a beneficiary. The settlor transfers ownership of that property to the trust.

The Trustee

This can be multiple people and are the recorded owners of the trust. The trustee has a duty to manage the trust sensibly. This means:

  • making responsible business decisions;
  • keeping accurate and up to date records of the trust; and
  • making sure that the beneficiaries can receive the full benefits that they are entitled to.

The Beneficiary

This is the person or people that benefit from the income or capital generated by the trust. 

Advantages of a Trust

If you wish to put your family assets into a trust, there can be many advantages to doing so. If you do not own the property in the trust, but still benefit from it, this is useful in a variety of situations:

Protection Against Relationship Property Claims

If you split from your partner, and you put your property in a trust before you entered into the relationship, this property cannot be claimed in a divorce settlement. Because you do not legally own the trust assets, this excludes it from the claim.

Income Taxes

Income earned from property owned by a trust is taxed at 33%, which is lower than when an individual owns property. If this trust income is for beneficiaries who earn little or no income, then the income tax is based on the tax bracket the beneficiary falls into. They may be a lower tax rate as well.

Trust Difficulties

From managing your property to running your business, trusts can be useful for a variety of reasons. However, they are not simple to run or manage. Trust law in New Zealand is changing to make sure that trusts are functioning legally and efficiently. This means that trustees are more scrutinised, and have set duties to manage the trust in a proper manner. 

If Inland Revenue suspects that your family or discretionary trusts are not being maintained properly, then it can investigate and declare the trust a “sham”. This means that it is invalid.

Key Takeaways

If you want to manage your assets through a family or discretionary trusts, it is essential to understand their differences. A discretionary trust means that trustees control who can benefit from the trust, and how much payment they get. A family trust can be a kind of discretionary trust, that usually benefits your family and is managed by a family member. Trusts can be useful for various reasons, but are not to be entered into lightly. If a trust is not well-maintained, this leaves you open to legal action. If you want more information or help with your family or discretionary trusts, contact LegalVision’s business lawyers on 0800 005 570, or fill out the form on this page.

FAQs

What is a discretionary trust?

A trust is someone (a settlor) gives or sells property to another person (the trustee) to hold or manage for the benefit of someone else (a beneficiary). A discretionary trust is a form of this, where the trustees can decide who the beneficiaries are and what payments they can receive from any income or capital created by the trust. They can also change this.

Is a discretionary trust the same as a family trust?

A family trust is a kind of discretionary trust that you can create to hold your family’s assets. This means that you can set up a trust to generate income for the benefit of your family.

What is the point of a family trust?

You can cater your family trust to suit your situation. But, some families use it to generate income for your children or other family members. Or, you can put your assets in a trust to protect them if you decide to start a family business.

What are the disadvantages of a family trust?

If you do not manage or maintain your family trust properly, then this can leave you open to legal ramifications. This means you must keep up to date records of the trust, and actively take part in business decisions regarding the trust. 

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