A trust is an arrangement where one person (a settlor) gives or sells assets to another person (the trustee) to hold or manage for the benefit of someone else (a beneficiary). These assets can include property, income, or shares. In New Zealand, trusts can last up to 125 years. A lot of changes can happen during this time, and you may want to remove beneficiaries to reflect those changes. We explain how to remove a beneficiary from your discretionary trust in New Zealand.
What is a Trust?
To form a trust, you will have to prepare and sign a trust deed, which is the legal document that:
- establishes the key individuals involved in your trust, including the settlor(s), trustee(s) and beneficiary(s);
- delegates certain rights and obligations to these individuals; and
- outlines the trust property and what should be done with the assets.
There can be more than one settlor of a trust. Likewise, the settlor can act as a trustee and a beneficiary of the trust, as long as they are not the sole trustee or beneficiary.
To understand how you can remove beneficiaries, it is important first to understand who and what beneficiaries are, and who has the power to choose the beneficiaries of a trust.
Who and What are Beneficiaries?
While the trustee is the legal owner of the property or assets of the trust, the trustee owes significant obligations to the beneficiaries.
Beneficiaries receive the benefits of the assets in your trust by receiving income, capital, assets or property. The trustee holds these trust assets for the sole benefit of the beneficiaries, and the trustee can only act for the benefit of the beneficiaries. The trustee is also accountable for any losses to the beneficiary.
A trustee must inform any beneficiaries that they are a beneficiary of the trust unless there is a good reason not to.
Continue reading this article below the formWho Chooses the Beneficiaries?
When the settlor creates a trust, the settlor must choose someone or multiple people who will benefit from the trust.
In a discretionary trust, you can identify the beneficiaries in two ways:
- an individual is directly named as a beneficiary; or
- an individual is identified within a class of beneficiaries, such as ‘children of X’.
However, it is up to the trustee’s discretion to select which beneficiaries will receive assets from the trust and how much they will receive. The beneficiary does not have an automatic entitlement to the trust property just by being a beneficiary.
Who Can Remove Beneficiaries?
The trust deed is your first port of call for any decisions regarding the trust. This is because the trust deed sets out who has the power to:
- remove beneficiaries; and
- make other decisions, such as who can appoint and remove trustees.
Usually, the settlor holds power to appoint and remove beneficiaries. If this is clear from the trust deed, the settlor and trustees can sign a deed of removal to remove beneficiaries.
How to Remove Beneficiaries
There are typically two ways that a trustee of a discretionary trust may remove beneficiaries.
1. The Trust Deed
The trust deed is a document that is agreed to and signed on creating the trust. It sets out the processes for managing the trust, including how to make changes, such as removing beneficiaries.
In most cases, a trust deed may offer two processes for the removal of a beneficiary:
- the beneficiary can sign a document to renunciate all interests as a beneficiary; or
- the trustee may have discretionary power to revoke the beneficiary by declaring that a person will no longer be a beneficiary from a specified date.
2. Executing a Deed of Variation
By executing a deed of variation to the trust, you amend the trust deed to remove a beneficiary or change the class of beneficiaries. This deed will update the relevant section of the original trust deed.
You must create and execute the deed of variation per the instructions provided in the trust deed. It will then form part of the discretionary trust documentation.
Can Removing Beneficiaries Create Issues?
Removing a beneficiary may contravene the settlor’s intentions for setting up the trust in the first place. For example, some trusts specify a class of trust beneficiaries as ‘final beneficiaries’. These are usually the settlor’s children in family trusts. Removing one of these ‘final beneficiaries’ is likely to breach the trust’s purpose. This may create issues where the removed beneficiaries claim against the trustees for breach of trust or the trust is declared a ‘sham’.
Additionally, trustees have duties to act in the beneficiary’s best interests and exercise their powers for a proper purpose. Hence, you should proceed with caution when removing beneficiaries if it is not in their best interest to do so.
As trustees are personally liable for their decisions regarding the trust, it is essential to get legal advice before removing beneficiaries.
What if There is No One Authorised to Remove Beneficiaries?
Usually, both settlors must act unanimously to remove beneficiaries. However, there may be no one authorised to remove beneficiaries when one or both of the settlors have died or have lost mental capacity. In such a situation, the beneficiaries are locked in and cannot be changed.
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Key Takeaways
When a trust is created for the first time, the settlor(s) will choose beneficiaries. In New Zealand, trusts can last up to 125 years, which may require changes, including removing a person as a beneficiary. Your trust deed may offer processes for the removal of a beneficiary. Alternatively, you may execute a deed of variation to the trust to remove beneficiaries.
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Frequently Asked Questions
A trust is a legal relationship that arises when the settlor gives property to a trustee to hold and maintain for the benefit of the trust’s beneficiaries. A discretionary trust is where the trustees retain the discretion and flexibility to choose how and when the beneficiaries benefit from the trust.
Yes, you can. If you do, you may consider having your children named as final and discretionary beneficiaries depending on your intentions and how you draft the trust deed.
Usually, with most trust deeds, no. The power to remove and appoint beneficiaries is usually only held by the settlor as they initially set up the trust. If trustees have the power to remove and appoint beneficiaries, then it is possible that this power is misused and beneficiaries are removed contrary to the settlor’s intentions.
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