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Trusts are a useful way that many businesses and families in New Zealand organise assets and property. Unfortunately, discussions of trusts often involve thick legalese (legal jargon). Confusing trust property with trust deeds is a common misconception. To understand your options and the possible advantages a trust might bring, having a good grasp on the key legal terms is a useful starting point. This article will simplify key legal terms about trusts in New Zealand, including common misconceptions about trust creation and operation. 

Key Legal Terms

There is a range of fundamental terms that are important to know when thinking about trusts and how they operate. Firstly, it is vital to understand the parties involved in a trust, i.e. the beneficiary, trustee and settlor. 

Parties Involved in a Trust

  • beneficiary: the individual, group of individuals or organisation for whom a settlor creates a trust for. The trust creator (or settlor) designates beneficiaries and a trustee, who has a fiduciary duty to manage trust assets in the best interests of beneficiaries. The trust agreement will outline these details;
  • trustee: a trustee carries out business or manages the trust in the interests of the beneficiaries. Trustees can be both companies and individuals, which can sometimes be confusing;
    • Corporate trustee: a company typically set up with the purpose of being a trustee to manage the trust. The directors of the company will handle the day to day management of the trust;
    • Individual trustee: a person who manages the trust themselves. The trust assets will be in this person’s name, but they still have to distribute the income from that trust to the beneficiaries. A trust can have multiple individual trustees; and
  • settlor: the person or organisation that sets up the trust. The ‘settlor’ is another term for the ‘trust creator’ or ‘grantor.’

Types of Trusts

A discretionary trust is a type of trust arrangement where the trustees have the discretion to choose the beneficiaries of a trust. Likewise, the trustees can choose how they wish to distribute the trust’s assets or property to those beneficiaries. This is different from a fixed trust. Trustees have a significant amount of power and flexibility in a discretionary trust, but not in a fixed trust.

In a fixed trust arrangement, the beneficiaries are fixed, along with how the trust property is distributed among them. This is fixed at the establishment of the trust, and the trustees do not have the discretion to change this arrangement.

A trading trust is a business operated by a company in its capacity as a corporate trustee. The trustee company is operating the business for the benefit of the discretionary beneficiaries of the trust. A trading trust will often work in conjunction with a family trust, which is a beneficiary of the trading trust. The trust will typically only retain the assets required to run the business, with other assets distributed to a family trust or other beneficiary. 

Trust Deed vs Trust Property

A trust deed is a legal document that forms a trust. This document sets out the rules for how the trust will operate and the date it will dissolve. It should specify who the settlor, trustees and beneficiaries are. Additionally, the trust deed may provide the trustees with a range of administrative powers. These documents will differ depending on the aims of the settlor and the context of the trustees and beneficiaries. 

Trust property refers to assets that have been placed into a trust for the benefit of the designated beneficiaries. This is another term for ‘trust assets.’ Trust property may include any type of asset, including cash, real estate, shares and financial investments.

Key Takeaways

There is a range of key legal terms that are key to understanding New Zealand trusts and the advantages they might offer your business or family. The basic mechanics of how trusts operate can be confusing. However, having a general understanding of the key legal terms about trusts will help you when creating your own trust.

For more information about trusts, or creating your own, contact LegalVision’s New Zealand business lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What is a beneficiary?

A beneficiary is an individual, group of individuals or organisation for whom a trust is created. The trusts’ trustees have a duty to manage trust assets in the best interests of those beneficiaries.

What is a settlor?

A settlor is a person or organisation that sets up a given trust. This person or organisation can also be known as the grantor or trust creator. 

What is the difference between a corporate and an individual trustee?

Both companies and individuals can be trustees. Typically, corporate trustees are established to manage the trust and its assets. Individuals or a group of individual trustees can manage the trust on behalf of the beneficiaries. No matter whether the trustee is a company or an individual, the same duty to act in the best interests of the beneficiaries applies. 

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