Setting up a trust for the benefit of family members can be a valuable estate planning tool, offering various benefits such as asset protection and structured distribution of wealth. However, there are several key considerations to keep in mind to ensure the trust is effective and meets your goals. A trust can be created during a person's lifetime or in their will. 

Also a reminder than while we may use the term ‘family trust’ in this resource, the term in fact has no legal standing.  A family trust is just one form of express or discretionary trust, and nothing official in the law.

Things to think about

The main things you need to consider when setting up a trust for the benefit of family members include:

Beneficiaries

The trust deed should clearly state who the beneficiaries are. The trustees usually have discretion over which beneficiaries receive capital and income. 

Trust purpose

Understand the purpose of the trust and who you want involved. 

Trust documents

Clearly outline the trust's purpose and all parties involved in the trust deed and memorandum of guidance. Clear documents are essential for the trust to run smoothly. 

Trust name

Choose a distinctive name for the trust to help differentiate it from your own assets.

Trustees

Think carefully about who, and how many, should be the trustees of your trust. Specifically consider the benefits of having an independent trustee. Legal firms often set up independent trustee companies to be able to provide this service. Lawyers and accountants also often fulfil this role. However, also carefully consider whether lawyers and accountants (or their independent trustee companies) are the best people to take on a trustee role, especially if one of the purposes of the trust is to support the needs of a disabled family member.  In these circumstances family members or family friends are more likely to understand the needs and best interests of the disabled family member.

Tax

Consider the tax advantages and disadvantages of having a trust. The main thing to be aware of is that accountants are likely to attribute income to the disabled person if they are on the lowest tax rate in the family. But this is not advisable if the person is dependent on a WINZ benefit as it creates a debt to the disabled person which WINZ sees as an asset, and this will get asset tested.  Seek advice from an expert in this area when establishing your trust.

Trustees' duties

Trustees have several compliance responsibilities and should have the skills to fulfil these as efficiently and effectively as possible. 

Trust dissolution

Consider the when, what, and how rules that you want to apply when the trust is to be wound up. 

Tax and accounting advice

When winding up the trust, trustees should get tax and accounting advice to ensure they don't trigger a tax liability. 

Important considerations 

Setting up a trust for the benefit of family members in Aotearoa New Zealand involves careful planning and consideration of various factors. By addressing these key considerations—type of trust, purpose, trustee selection, beneficiary designation, asset management, tax implications, legal compliance, review processes, and costs—you can create a trust that effectively meets your family's needs and protects your assets for future generations.

Type of Trust

• Discretionary Trust: This allows the trustee to decide how to distribute income and capital among beneficiaries. It's flexible but may lead to complexities in management.
• Fixed Trust: Beneficiaries have defined shares in the trust. This provides certainty but lacks flexibility.
• Express Trust: A common type of discretionary trust specifically designed to benefit family members.

Consideration: Choose the type of trust that aligns with your goals for asset distribution and management.

Purpose of the Trust

• Asset Protection: Determine if the primary purpose is to protect assets from creditors, relationship property claims, or to preserve wealth for future generations.
• Support Vulnerable Family Members: If you have dependents with special needs or minors, consider how the trust can provide ongoing support for their care.

Consideration: Clearly define the trust's purpose to guide its structure and administration.

Trustee Selection

• Choosing Trustees: Select trustworthy and capable individuals or institutions to serve as trustees. Consider their ability to manage investments and make decisions in the best interests of beneficiaries.
• Number of Trustees: It can be beneficial to have multiple trustees for checks and balances, but too many may complicate decision-making.

Consideration: Evaluate the skills, experience, and reliability of potential trustees.

Beneficiary Designation

• Identifying Beneficiaries: Clearly define who the beneficiaries are. This can include immediate family members, extended family, or even charities
• Distributions: Outline how and when beneficiaries will receive distributions. Consider whether they will receive income, capital, or both, and under what conditions.

Consideration: Specify the rights and entitlements of beneficiaries to avoid disputes.

Asset Transfer and Management

• Transferring Assets: Decide which assets will be placed into the trust. Consider real estate, investments, and personal property.
• Ongoing Management: Consider how the assets will be managed within the trust. This includes investment strategies and how income will be generated.

Consideration: Ensure a clear plan for asset management to preserve and grow trust assets.

Tax Implications

• Tax Treatment: Understand how income generated by trust assets will be taxed. Trusts in Aotearoa New Zealand can be taxed at a higher rate, and distributions to beneficiaries may have tax implications.
• GST and Other Taxes: If the trust holds business assets, consider the GST and other tax obligations that may arise.

Consideration: Consult with a tax advisor to understand the tax implications of your trust structure.

Legal Compliance and Documentation

• Trust Deed: Draft a comprehensive trust deed that outlines the terms and conditions of the trust, including powers of the trustee and rights of beneficiaries.
• Compliance with Laws: Ensure that the trust complies with New Zealand trust law and any relevant regulations, including the Trustee Act 1956.

Consideration: Engage legal professionals to ensure that the trust is established correctly and legally sound.

Review and Amendments

• Regular Reviews: Trusts should be reviewed regularly, especially when there are changes in family circumstances, financial situations, or legal regulations.
• Amendments: Consider how and when the trust can be amended. Discretionary trusts may offer more flexibility in this regard.

Consideration: Establish a process for reviewing the trust to ensure it remains aligned with your goals.

Costs and Fees

• Initial Setup Costs: Understand the costs associated with establishing the trust, including legal fees, accounting fees, and any registration fees.
• Ongoing Management Costs: Consider the ongoing costs of managing the trust, including trustee fees and accounting services.

Consideration: Budget for both initial and ongoing costs to ensure that the trust remains financially viable.

Conclusion

Setting up a trust for the benefit of family members involves careful planning and consideration of various factors. By addressing these key considerations—type of trust, purpose, trustee selection, beneficiary designation, asset management, tax implications, legal compliance, review processes, and costs—you can create a trust that effectively meets your family's needs and protects your assets for future generations. Consulting with legal and financial professionals is essential to navigate the complexities of trust law and ensure that the trust is structured appropriately.