Family trusts are a common legal arrangement in New Zealand. They allow families to efficiently protect their assets and manage taxation on income and gains received from those assets. However, family trusts cannot last forever. Either they reach their distribution date, and as a result, the trustee must close the family trust. Alternatively, the trustee could decide to wind up the trust early. This article explains:

  • who’s involved in a family trust;
  • closing your trust at the distribution date; 
  • reasons to wind up your trust early; and
  • the steps involved in closing a family trust.

Who’s Involved?

Setting up a family trust involves three parties, the:

  • settlor: the person (or company) who sets up the trust and decides what goes into the trust deed. Commonly, the settlor will be an independent third party, for example, a lawyer;
  • trustee: the person who manages the trust and looks after its assets, as instructed by the trust deed; and
  • beneficiaries: the people who receive benefits from the trust, for example, family members.

The Distribution Date

All family trusts must be closed eventually. This is because there are rules against trusts lasting forever. In most cases, New Zealand trusts have a ‘distribution date’ which is 80 years after the trust is established. 

To close your family trust at the distribution date, the appointed trustee must distribute all the assets of the trust to the beneficiaries. The trustee must ensure that all of the liabilities of the trust have been discharged (for example, any outstanding tax liabilities).

You should check your trust deed to ensure that you are taking the steps required to close your trust and to distribute all of the trust’s assets correctly.

Closing a Family Trust Early

If you want to close your family trust earlier than the distribution date, your trust deed may give the trustee(s) the power to wind up the trust early.

Some reasons why you may want to wind up your family trust early include:

  • the reason you established the trust no longer applies (for example, you set up a family trust for asset protection and tax benefits, but your family is now moving overseas, so those benefits no longer apply in the same way);
  • you can no longer manage the cost or administration of managing a trust; or
  • restructuring (for example, you set up a family trust for your business but now want to restructure so that you run your business through a company).

You should check your trust deed to understand whether and in what circumstances your trust can be closed earlier than the distribution date. 

Steps to Closing a Family Trust 

There are significant financial and legal steps which you’ll need to take when closing a family trust. These steps form part of the process of winding up the family trust, once you have decided you want to do so. They include:

  • reviewing the trust deed to ensure you can close the trust in the circumstances in which you’re intending;
  • preparing the necessary approvals by the trustees (and any other parties required to consent under the trust deed) for the winding up of the trust;
  • ensuring that the trust accounts are up-to-date and correct;
  • discharging all of the trust’s liabilities, including discharging any tax liabilities or forgiving any debts;
  • ensuring that any registrations made on behalf of the trust (for example, GST registrations) are de-registered;
  • ensuring any contracts to which the trustee is a party to are transferred to another party;
  • closing any bank accounts in the name of the family trust; 
  • distributing the trust assets to the beneficiaries, including any distribution deeds as necessary; and
  • ensuring that all decisions regarding the closing of the family trust and the distribution of the trust assets are properly recorded.

It is also important to obtain tax advice to ensure you understand any potential tax implications that could arise from the winding up of the family trust and the distribution of the assets.

Key Takeaways

It is common to wind up family trusts in circumstances where the trust: 

  • has reached its distribution date; or
  • is being closed early.

Before closing your family trust, you should consider why you want to do so, what avenues are available for you under the trust deed, and the legal, tax and accounting considerations which you will need to manage as part of the winding up process. You should also consider all the changes that will need to take place as a result of the trust being wound up, for example, changes to the registrations, contracts and bank accounts that were previously in the name of the trust. If you need assistance closing a family trust, contact LegalVision’s business structure lawyers on 0800 005 570 or fill out the form on this page.

FAQs

What is a family trust?

Family trusts are a common legal arrangement in New Zealand. They allow families to efficiently protect their assets and manage taxation on income and gains received from those assets. 

Who are the main parties to a family trust?

Setting up a family trust involves three parties. These are the settlor, the trustee, and the beneficiaries.

Why might I close a family trust?

It is common to wind up family trusts in circumstances where the trust has reached its distribution date or is being closed early.

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