How family trusts work and why you would set one up

What are the benefits of a family trust?

Family trusts are designed to protect your assets, and allow you to manage and distribute them to benefit members of your family beyond your lifetime. When your assets are in a family trust, you no longer have legal ownership of them – the assets are owned by the trustees, for the benefit of your family members.

People usually set up a family trust to get some benefit from no longer personally owning an asset. A family trust may be useful to:

• Protect selected assets against claims and creditors – for example, to protect a family home from the potential failure of a business venture
• Set aside money for special reasons, such as a child or grandchild’s education
• Ensure our children, not their partners, keep their inheritances
• Manage the risk of unwanted claims on our estate when we die – such as from a former partner.

Since 1 April 2024, family trusts are taxed at a flat rate of 39% on income exceeding $10,000 (after deductible expenses) that’s retained within the trust. This rate aligns with the top personal income tax bracket, so it removes the previous tax advantages where trusts were used to shelter income.

Who’s involved with a family trust?

• A settlor: The person or company who creates the trust.
• Trustees: The people who manage the trust. The settlor can also be a trustee. It’s also a good idea to appoint an independent trustee who’s not a relative. Professionals such as lawyers and accountants (or companies they have set up) often act as independent trustees.
• Beneficiaries: The people who benefit from the trust – members of your family, for example.

There’s often more than one trustee. There may also be more than one settlor.

The trust deed (read more about these below) states who has the power to appoint and remove trustees. The settlor – or anyone else who’s named in the trust deed – can have this power. This is an important power that the person can also transfer to someone else in their will or during their lifetime.

Note that a trust doesn’t usually end with the settlor’s death – it can last for a maximum of 80 years from inception, but this is likely to be extended in the future.  

How do family trusts work?

A legal document called a trust deed will formally set up the family trust. It will name the trustees, list the beneficiaries, and state various rules for the administration and management of the trust. The trust deed needs to be very carefully written, preferably by a lawyer.

Asset transfer

Then you’ll need to decide what things you own should be put into the family trust, and what their value is. In many cases, this will be the family home, but other things of value like cash, bank deposits, shares, artwork, etc can also be included in the trust.

Once the family trust is formed, assets can be sold into the trust at market value; however, although the trust might want to buy, say, your house (and you might want to sell it to the trust) the trust has no money to buy it. How, then, does the family trust pay for the house?

The answer to this is that you lend the family trust the money. Initially this is a ‘paper’ transaction – you sell the house to the trust, and the trust now owes you a house-sized debt. However, the debt that the trust owes is still counted as a personal asset, so you’ll need to get rid of the debt so you can achieve your aim of owning less in your name.

The way to do this is through ‘gifting’.

Gifting

Most people who form trusts ‘gift’ away the debt that the trust owes them. Before October 2011, there was a limit of $27,000 that anyone could gift in one year without paying a tax called ‘gift duty’ to Inland Revenue. Gift duty has now been abolished and there’s no limit to how much we can gift in one year.

This means that when it would previously have taken 22 years to gift the value of a house worth $600,000 to a family trust without paying gift duty, we can now gift the whole amount of the debt straight away.

If you still owe the money you borrowed to buy the house in your own name, you would not want to gift away the whole debt the trust owes you – because you would have no assets and a large liability. This would leave you insolvent and at risk of being declared bankrupt.

It’s always best to seek legal advice before proceeding with gifting. 

Note that gifts are still included in the assessment for a Residential Care Subsidy.

For more information, visit the Work and Income website. 

What costs come with setting up a family trust?

Family trusts can be complex and time consuming to administer. It costs money to set them up and there are generally ongoing legal or accounting fees.

It’s worth shopping around, as different organisations charge different amounts both for the establishment and ongoing management of a trust.

Think carefully about who should have the power to appoint and remove the trustees and who the initial trustees will be, as they will be responsible for managing the trust properly. Whoever has the power to appoint and remove trustees should appoint a person in their will to take over the role after they die. 

What are the risks?

What steps do I take to establish a family trust in New Zealand?

Setting up a family trust requires professional help – this isn’t a DIY project.

Get professional advice. Start with a lawyer who specialises in trust work. If you’re putting relationship property into the trust, both partners should get independent legal advice.

Create the trust deed. Your lawyer prepares this legal document, which names trustees, lists beneficiaries and sets out administration rules.

Decide what goes into the trust. Work out what assets should be transferred and their value. This is often the family home, but could include cash, shares or other valuables.

Transfer assets to the trust. Assets are sold to the trust at market value. Since the trust has no money, you lend it the money – initially a ‘paper’ transaction.

Deal with the debt. You’ll need to ‘gift’ away the debt the trust owes you. Since 2011, there’s no limit on gifting, but be careful not to leave yourself insolvent if you still have a mortgage.

Shop around to reduce your costs, think carefully about trustees and keep clear records. Getting expert help from the start is worth it – it may seem expensive, but poor set-up costs more later.