A trust is an entity that holds money or property for the benefit of its beneficiaries or for law purposes. Estates are a person’s assets after they have died. Both trusts and estates are taxed on the income they generate. – Inland Revenue Te Tari Taake
In 2021, there were between 300,000 to 500,000 trusts in Aotearoa New Zealand. The legal structure is often used by organisations in the non-profit sector, set up as a charitable trust when assets are intended for charitable purposes like education. The key people involved in the day-to-day work of managing of trust, the trustees, are selected by the settlor, the person who makes the initial transfer of property or funds when the organisation is formed.
When the trust is formed, the asset owner transfers property or money to the trustees who take on a role similar to that of Board members. The trustees must meet the duties imposed on them by the trust deed, a set of rules and purposes created to help manage the assets. Trusts are typically established as a way of providing legal protection for the assets of an individual, family, or business, and to make sure they are distributed according to the wishes of the owner. A trust is not a company. It is a legal structure that forms a formal relationship between trustees and beneficiaries. The trustees make decisions in the interest of the beneficiaries, make payments to them, and can use any property for the purposes the settlor has intended.
Types of Trusts
The Trust Act (Trusts Act 2019) regulates all types of trusts in Aotearoa New Zealand, and while every trust has a similar structure and function, there are several different types of trusts currently being used in the country. They include charitable trusts, family trusts, nextgen trusts, parallel trusts, and business trusts.
Establishing a family trust allows you to move ownership of an asset and still retain benefit from its value or revenue. The beneficiary is a person for whose benefit the trust is established, such as the settlor, their children, or grandchildren. This type of trust is typically established to:
Protect assets for family members in case of financial loss.
Transfer ownership of some assets and protect the settlor from creditors.
Conduct high risk activities without putting certain assets at risk.
Protect a family business or property for future transfer to the next generation.
Retain assets for other family members to be used after the settlor retires, is hospitalised, or begins living in a long term care facility.
Protect family members or a family business from relationship property claims such as contesting a will.
Manage assets when a person is unable to manage their own affairs.
Assist with estate administration by transferring assets to a trust before death.
Make a change in tax planning such as reducing tax liability to save money.
Family trusts are formed by the settlor who appoints trustees to run the organisation. The trustees are responsible for making decisions about how to distribute the trust benefits, which can include distributing funds or property to an individual, his or her children, or grandchildren.
Parallel trusts are structured like two organisations, one for each partner. Two people in a relationship may not have assets of equal value or may later form new relationships and wish to protect their assets and distribute inheritance between each partner in a specific way. Each partner forms their trust with its own trustees and beneficiaries. A parallel trust is often used in blended families where a new relationship and family have formed. They can either allow a surviving partner to use the shared assets after the death of the other, protect a partner’s assets from unwanted beneficiaries, let one partner protect larger assets from the other, or allow both partners to divide assets according to their wishes.
Next Gen Trusts
A nextgen trust (inheritance trust) is formed by parents for the benefit of their child. Its purpose is to provide protection from future relationships if the first one dissolves, or from business partners, creditors, and others who may challenge ownership of the assets after one parent’s dies. They also allow people who inherit assets to keep them separate from those related to their relationship. The main purpose of a nextgen trust is to make sure children are provided for after the parents have died and inheritance is distributed to the beneficiary it is intended for.
The purpose of establishing a charitable trust is to use the organisation for charitable purposes such as the advancement of religion or education, the relief of poverty, or any activities beneficial to the community. As a legal structure, a charitable trust allows you to hold and protect assets such as properties and money to use for charitable activities. Like other trusts, this type of organisation is managed by trustees who must make decisions based on the purpose set out in the deed or a set of rules established when the trust is formed. A trust can become incorporated under the trust Act and register as a charitable trust with Charities Services.
Business trusts are normally formed to assist in tax planning, protect personal assets in the case of business loss or failure, and enable business succession. If a business fails and its owner is unable to meet financial obligations, creditors can make claims on personal assets. Having a business trust can help protect a person’s personal assets such as a family home and manage business assets separately. For example, if a business partner dies, a trust can enable succession planning and offer protection against anyone who challenges ownership of company shares. Business trusts can also reduce tax liability and make it easier to repay debts or transfer assets.
Benefits and Limitations
There are both advantages and disadvantages to choosing a trust structure for your organisation. All trusts in Aotearoa New Zealand provide one of the best governance frameworks for larger or more complex groups. They offer limited liability to members of the trust board and allow organisational leaders to keep control in fewer hands. In the long term, this means more stability due to fewer changes in leadership, making it easier to make decisions and run the organisation. Charitable trusts make it easy to manage estate assets planned for charitable activities or gifts such as a scholarship fund. Family trusts have flexibility in making changes to deeds and since they are not publicly registered, family members can maintain more confidentiality.
However, the stability of a trust can lead to staleness or stagnation when it comes to running or growing the organisation. Control is in the hands of a few trustees and there is less accountability to a wider membership. If you choose to form a charitable trust, your profits may not be distributed directly to members and as a settlor the financial benefits will be limited.
Succession planning for trusts can be a complicated process. This is typically done by trustee appointment, which means communication with beneficiaries may not always be timely or transparent. Family members or appointees who act as trustees must be well informed about their responsibilities and the timelines for taking action to avoid making mistakes that will negatively affect the trust or its beneficiaries. Since the new Trusts Act 2019 has been adopted, family trusts have also seen an increase in the cost of running the organisation, including more disclosure obligations.
Trust Act 2019 Reforms and Charitable Trusts
In January 2021, a new Trust Act (Trusts Act 2019) was voted into law to improve trust governance and regulation in Aotearoa New Zealand. The new rules apply to all types of trusts, including charitable trusts. While many rules stay the same, the role and powers of trustees are now clearer. The Act states that the duties trustees carry out must be included in the trust deed and comply with new requirements for managing information to beneficiaries such as helping them understanding their rights and obligations. There are also new rules around trustee liability. These changes are meant to make it easier to administer trusts.
The Charitable Trust Act 1957 is still relevant to how charitable trusts are managed in New Zealand, although some sections in the new Trusts Act may not apply. For example, provisions in sections 51 and 55 related to the powers and duties of trustees are not applicable to charities. The rules in the Charitable Trusts Act 1957 are still relevant to charitable trusts and help define the rules and purposes set out in the trust deed 1.
Do trustees have restrictions with what they can and can’t do?
Yes. Both the rules trustees must follow and the structure of the trust will depend on the wishes of the settlor. Trustees must refer to the trust deed for guidance on how to manage the organisation. They must also meet the legal obligations of the New Zealand Trusts Act 2019. The duties of a trustee are to understand the terms of the trust deed, act in accordance with them, act in good faith, manage trust property for the benefit of the beneficiaries, and make decisions based on the purpose of the organisation.
How long can a trust exist in New Zealand?
Most trusts in NZ can only exist for 80 years. The trust deed sets the date when the trust will finish (date of distribution), however, trustees have the power to end it sooner. Some trust deeds give trustees the power to extend the organisation beyond the date of distribution, as long as this doesn’t go beyond the 80 years. The assets managed by the trust are often used as an investment to earn long term revenue. Therefore, estates can continue to make money even after a person has died.
What steps do I need to take to cease a trust?
When your trustees have made the decision to wind up or terminate a trust, the property must be distributed, and no further income can be generated from the assets. After these steps are complete, you can ask Inland Revenue – Te Tari Taake to officially ‘cease’ your trust or estate. You cannot cease the trust if it still holds assets and is still conducting activities that generate revenue. You can however request that it be made non-active if no further income is generated. Once the trust is non-active, trustees no longer need to submit income tax returns.
What is the difference between a charitable trust vs private trust?
A trust can be established either for private purposes or charitable purposes. This depends on what type of trust you choose for your legal structure and what your reasons are for establishing the organisation. A family trust can be formed for private purposes and for the benefit of a specific group of individuals such as family members. In this case, members will have more confidentiality and the trust will be run without a public function. Alternatively, a charitable trust must have a public function since its purpose is to provide benefit to the community such as the relief of poverty, advancement of education or religion, or another beneficial purpose. Charitable trusts are more transparent since they often apply for grants and are publicly listed.
What is the difference between a trust vs company?
Each legal structure has its advantages and disadvantages. A trust offers more flexibility in how assets are managed, has several tax benefits, and is a good option for family and community run businesses or charities. A company can provide the structure for business growth if your main objective is to make a profit. You can also operate your business through a trust, still have some freedom to operate and distribute profit and in some cases, lower tax costs.
This fact sheet is intended as a simple overview. Non-profit law is incredibly complex and there are many components, allowances, restrictions, exceptions and important qualifications that are not described above. Dedicated legal advice should be sought from a legal practitioner before taking action.
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