An express trust is a type of trust that is intentionally created by the settlor (the person establishing the trust) through explicit and clear terms. These terms are typically documented in a formal trust deed, which outlines how the trust will operate, the assets it will hold, and the rights and responsibilities of the trustees and beneficiaries. Here’s a detailed overview of express trusts under New Zealand law, including their characteristics, types, and legal framework.
Intentional Creation
An express trust is deliberately established by the settlor, who must clearly indicate their intention to create a trust. This intention is usually documented in writing.
Defined Beneficiaries
The beneficiaries of the trust must be clearly identified. These can include individuals, groups, or charitable organisations that will benefit from the trust’s assets.
Specific Purpose
The trust is created for a specific purpose, such as providing for the education of beneficiaries, managing assets for minors, or supporting charitable causes.
Trust Property
An express trust must hold identifiable property or assets, which can include real estate, financial investments, cash, or personal belongings.
Appointment of Trustees
The settlor designates one or more trustees who will manage the trust assets according to the terms of the trust deed and act in the best interests of the beneficiaries.
Discretionary Trust
In a discretionary trust, the trustee has the discretion to decide how to distribute income and capital among beneficiaries. Beneficiaries do not have fixed entitlements, allowing for flexibility in distribution based on their needs.
Example: A parent establishes a discretionary trust for their children, allowing the trustee to determine how much each child receives based on their individual circumstances.
Fixed Trust
A fixed trust specifies the exact shares or entitlements of each beneficiary. Beneficiaries are entitled to a predetermined portion of the trust assets.
Example: A grandparent creates a fixed trust stating that their three grandchildren will each receive equal shares of the trust's assets upon reaching a certain age.
Testamentary Trust
A testamentary trust is created through a will and comes into effect upon the death of the testator (the person who made the will). It is often used to manage the distribution of assets to beneficiaries over time.
Example: A person includes a clause in their will establishing a testamentary trust to fund their children’s education until they reach adulthood.
Inter Vivos Trust (Living Trust)
An inter vivos trust is created during the lifetime of the settlor and is often used for estate planning purposes. It allows for the management and distribution of assets while the settlor is still alive.
Example: A couple sets up an inter vivos trust to hold their family home, managing the property and providing support to their children.
Trusts Act 2019: Governs the administration of trusts in New Zealand, outlining the powers and duties of trustees, the rights of beneficiaries, and the obligations of trustees to act in the best interests of the beneficiaries.
Property Law Act 2007: Provides relevant provisions regarding the management of property in relation to trusts and the rights of trust beneficiaries.
Safeguarding vulnerable beneficiaries
Express trusts allow the settlor to specify how and when assets will be distributed to beneficiaries. This means that vulnerable beneficiaries can receive support in a structured manner, rather than receiving a lump sum that they may not manage well.
Example: A parent sets up a trust for a child with special needs, allowing distributions to be made for education, healthcare, and living expenses rather than a direct cash inheritance.
Discretionary Powers
In a discretionary trust, the trustee has the authority to decide how to allocate funds to beneficiaries. This discretion allows the trustee to tailor distributions based on the specific needs of vulnerable beneficiaries, ensuring they receive appropriate support.
Example: If a beneficiary is struggling with financial management, the trustee can provide funds directly for necessary expenses such as housing or medical care, rather than giving the beneficiary cash.
Preventing Exploitation
By holding assets in trust, vulnerable beneficiaries are better protected from potential exploitation by third parties. The trust structure can shield assets from creditors or individuals who might seek to manipulate or take advantage of the beneficiary.
Example: If a beneficiary is at risk of being taken advantage of due to their vulnerability, the assets held in the trust remain protected, as they are legally owned by the trust and managed by the trustee.
Ongoing Benefits
Trusts can be designed to provide financial support over the long term, ensuring that vulnerable beneficiaries have a steady source of funds for their needs throughout their lives.
Example: A trust can be established to provide ongoing monthly payments to a beneficiary with a disability, ensuring they have a reliable income for basic living expenses.
Conditions for Distribution
The trust deed can include specific conditions for distributions that prioritise the needs of vulnerable beneficiaries. For instance, provisions can be made to ensure funds are used for healthcare, education, or living expenses.
Example: The trust may stipulate that funds can only be used for the beneficiary's medical treatment, ensuring that the money is spent on necessary care.
Control Over Asset Distribution: The settlor can dictate how and when assets are distributed, ensuring that specific needs of beneficiaries are met.
Asset Protection: Trust assets are generally protected from creditors and legal claims, which can be crucial for individuals in high-risk occupations.
Tax Efficiency: Trusts can provide tax advantages, such as income splitting among beneficiaries who may be in lower tax brackets.
Privacy: Unlike wills, which become public documents upon death, express trusts usually do not go through probate, maintaining the confidentiality of the trust’s terms and assets.
Conclusion
In summary, an express trust in New Zealand law is a trust that is intentionally created with clear terms and defined beneficiaries. By establishing an express trust, individuals can manage and protect their assets according to their specific wishes. It is advisable to seek legal advice when setting up an express trust to ensure it is compliant with New Zealand laws and effectively meets the settlor's objectives.
