Trusts are a popular method for managing assets and property among businesses and families in New Zealand. However, the topic of trusts can be controversial, with numerous misconceptions and varying viewpoints. To make informed decisions and understand the potential benefits of trusts, it is crucial to know the key legal terms. This article discusses essential legal concepts related to trusts in New Zealand, addressing common misunderstandings about how trusts are created and operated.
Key Legal Terms
When considering the operation of trusts, it is essential to understand some key terms. Firstly, you should understand the roles of the parties involved in a trust: the settlor, the trustee, and the beneficiary.
Parties Involved in a Trust
Settlor
This term refers to the individual who sets up the trust, also known as the trust creator. Typically, the settlor holds significant authority within the trust, including the power to appoint and remove trustees and beneficiaries.
Trustee
A trustee carries out business or manages the trust in the interests of the beneficiaries. Trustees can be an:
- individual: a person who manages the trust themselves. The trust assets will be in this person’s name. However, they must act in the best interests of the beneficiaries. A trust can have multiple individual trustees; or
- corporate trustee: a nominee shell company can also be set up as the trustee. Commonly, this corporate trustee is managed by the trust’s lawyer or accountant.
Beneficiary
A beneficiary is a person, group of people, or organisation for whom a trust is established by the settlor, who creates the trust. The settlor appoints both the beneficiaries and a trustee. The trustee is responsible for managing the trust’s assets with a fiduciary duty to act in the best interests of the beneficiaries. The specifics of these roles and responsibilities are detailed in the trust deed.
Types of Trusts
A discretionary trust is a trust arrangement where trustees have the flexibility to select the beneficiaries and decide how to distribute the trust’s assets or property among them. This contrasts with a fixed trust, where trustees do not have such powers and flexibility. Trustees in a discretionary trust have considerable authority to manage the trust as they see fit.
In a fixed trust, the beneficiaries and their shares of the trust property are predetermined, with no flexibility for trustees to alter these details. A trading trust, on the other hand, operates as a business managed by a trustee for the benefit of discretionary beneficiaries. Typically, such a trust maintains only the assets needed to run the business, while distributing other assets to a family trust or another beneficiary.
In the business context, trading trusts and fixed trusts are generally avoided. The use of a trading trust poses significant risks for trustees, who must personally sign for all business liabilities. Conversely, a fixed trust is unsuitable for businesses that require flexibility in profit distribution and the retention of earnings for growth.
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Continue reading this article below the formTrust 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 settlors with powers of appointment and removal of trustees and beneficiaries. 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.
Corporate structure
In many businesses, especially those structured as companies, owners often place their shares in a discretionary trust. This arrangement can protect the owners from personal liabilities such as breaches of directors’ duties or other legal responsibilities that directly impact directors. By holding shares in a trust, rather than in their personal names, business owners can safeguard their assets from creditors, since the shares are managed for the benefit of the trust’s beneficiaries.
Moreover, transferring company shares to a trust can offer tax and accounting advantages. For instance, when a company distributes dividends, if a trust owns the shares, these dividends can be distributed directly to the beneficiaries of the trust. This method can be an efficient way to transfer company profits to beneficiaries while potentially minimising tax liabilities. However, before establishing a trust for these purposes, it is crucial to consult with an accountant to ensure that the trust adheres to all tax requirements and obligations.
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Key Takeaways
There are a range of legal terms that are key to understanding New Zealand trusts and the advantages they might offer your business. The basic mechanics of how trusts operate can be confusing. However, having a general understanding of these terms will help you when creating your own trust.
For more information about trusts, our experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0800 005 570 or visit our membership page.
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