There are numerous benefits to holding your property in a trust, such as lower tax rates and asset protection. Trust law has undergone recent changes in New Zealand, including increased disclosure requirements to named beneficiaries. Accordingly, this may impact whether you want to maintain your trust or dissolve it. 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 to dissolve a trust.
Parties to a Trust
Settlor
The settlor is the party that makes the initial property transfer to the trust. Therefore, anyone who transfers the initial asset(s) to the trust is known as a settlor.
Trustee
The trustees manage the trust’s assets, with the settlor identifying the initial trustees. The settlor can also be a trustee. The trustees have certain fiduciary responsibilities that they must abide by, and they must act for the benefit of the trustees. If you are also the settlor, it is often a good idea to appoint an independent trustee to ensure objective decision-making regarding trust matters.
Beneficiary
Beneficiaries are the persons who will benefit from the trust. All actions taken by the trustees are for the benefit of the beneficiaries. There are generally two types of beneficiaries: discretionary beneficiaries and final beneficiaries. Discretionary beneficiaries do not have an automatic right to payments from the trust. In contrast, final beneficiaries generally have a legal right to trust property when the trust ends.
Why Dissolve a Trust?
For example, a family trust set up to protect the family business may not be needed if the business is doing well. Additionally, if the trust is not set up correctly, it 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 be less lucrative than they were 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.
Continue reading this article below the formWhen Does the Trust End?
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. Nevertheless, as time goes on, it may end up that the trust needs to be wound up earlier than what you originally intended. Accordingly, 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. However, they must notify the beneficiaries if they decide to bring forward the trust’s expiry date.
By Beneficiary Consent
Another way to dissolve a trust is through beneficiary consent. This requires the combined consent of all trust beneficiaries 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 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 so themselves or are not born yet. Once the trustees receive this request, they must follow through and dissolve the trust.
By Court Order
If any kind of legal wrongdoing is involved with the trust, the Court may order a termination of the trust. For example, 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.
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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, 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, 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, you can close it 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
If you need help dissolving family trusts, our experienced commercial lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
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). A trust lasts for 125 years, or when the trust deed says it finishes.
When the trust reaches its end, all assets held by the trust must be split between any remaining beneficiaries. Any real estate, outstanding income, or other assets are split between the beneficiaries.
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