Understanding the Legal Structure of Trusts in New Zealand

Since the introduction of the Trusts Act 2019, the legal framework governing trusts in New Zealand has been significantly streamlined. Some argue that trusts have lost their appeal; however, this depends entirely on the purpose and management of the trust. Trusts remain a powerful legal and financial tool—if structured and administered correctly.

What is a Trust?

A trust is a legal arrangement, not a legal entity. It involves the transfer of property from a settlor to a trustee, who then holds and manages the property for the benefit of one or more beneficiaries.

Historical Background 

The concept of trust originates from English law. Historically, when men (often soldiers) left for war, they entrusted their assets (like a home) to a third party to care for their wives and children. At the time, women were legally prohibited from owning property. When the entrusted party failed to uphold their duty, beneficiaries sought justice through the courts. The courts initially rejected these claims due to lack of legal ownership but eventually recognised the underlying obligations, giving rise to the modern concept of trust.

Purpose and Benefits of a Trust

A trust can serve several purposes, including:

• Asset Protection: Assets held in a trust are no longer in the settlor’s name, offering protection from creditors, debt collectors, and in some cases, the IRD.

• Wealth Preservation: Trusts can protect and pass on wealth to future generations (e.g., children or grandchildren).

• Assisting with Incapacity: If a settlor becomes incapacitated, the trustee can continue to manage the trust assets on their behalf.

• Tax Planning: Although the trust tax rate is 33%, some limited tax planning opportunities remain.

• Residential Care Subsidy Planning: Trusts were historically used to qualify for subsidies, but strict gifting rules now limit their effectiveness.

• Relationship Property Protection: Trusts can provide protection under the Property (Relationships) Act 1976, though this is limited, especially for the family home (see Clayton v Clayton [2013] NZHC 309).

Caution: If the trust is deemed a "sham" (i.e., lacking genuine intention), it can be disregarded by the courts (Rosebud Corporate Trustee Ltd v Bublitz [2014] NZHC 2018).

Key Trust Roles Explained

Types of Trusts

• Discretionary Trust: Most common in NZ. Trustees have discretion to decide which beneficiaries receive distributions and how much.

• Charitable Trust: Must be established for charitable purposes under section 5(1) of the Charities Act 2005 (e.g., education, religion, poverty relief).

Trustees’ Duties (Trusts Act 2019 & Trustee Act 1956)

Trustees have legal ownership of the trust property and must:

• Act prudently and in the best interest of beneficiaries

• Keep accurate records and provide them when requested

• Know and follow the terms of the trust deed

• Protect and manage trust property

• Act personally unless permitted to delegate

• Take legal and financial advice when necessary

The Trust Deed

A trust deed is the foundational legal document that outlines:

• Details of the settlor, trustees, and beneficiaries

• The powers and duties of the trustees

• Rules for administration and distribution

• Dispute resolution procedures

The deed must be professionally drafted, signed, witnessed, and dated.

How to Set Up a Valid Trust

To be legally valid, a trust must meet the three certainties (Knight v Knight):

• Certainty of Intention – Clear intention to create a trust

• Certainty of Subject Matter – Clearly identified trust property

• Certainty of Objects – Clearly defined beneficiaries or purpose

Operating a Trust

• Trustees must manage the trust according to the trust deed.

• Annual meetings, recordkeeping, tax returns, and compliance costs must be maintained.

• Trustees must exercise independent judgment, not simply follow the settlor’s wishes.

Protecting Your Assets Through a Trust

• Once assets are gifted to a trust, the settlor no longer owns them.

• If established early and properly administered, trusts can protect assets from creditors and statutory claims (subject to the Insolvency Act and Companies Act).

• Residential Care Subsidy gifting limits apply. Excess gifting may disqualify eligibility.

Trusts and Relationship Property

Trusts can help separate personal assets from relationship property. However, the courts may still include trust assets in settlements under the Property (Relationships) Act 1976 if:

• There is evidence of shared contributions or expectations of ownership

• The trust was set up to defeat the partner’s interest

See: Clayton v Clayton, Murrell v Hamilton, Prime v Hardie

Risks of a “Sham Trust”

A sham trust is one where:

• The settlor retains control over the trust property

• The arrangement is intended to mislead third parties or the court

As defined in Rosebud Corporate Trustee Ltd v Bublitz [2014] NZHC 2018, a sham trust has no real intention to create a valid legal arrangement. This can render the trust void.

Common Reasons a Trust May Be Invalid

• Lack of genuine intent to transfer control

• Settlor acting as sole trustee without actual independence

• Improper or weak trust administration

• Trustees acting in settlor’s interest, not independently

• Lack of regular trustee meetings or documentation

Gift Rules and Gifting to a Trust

Gifting is the process of transferring assets to the trust. Gift duty was abolished in 2011, so you can now gift assets in full. However, for Residential Care Subsidy, gifting more than $6,000 per year (within the five years before applying) may be clawed back in the assessment.

Conclusion

A trust, when structured and managed correctly, is a powerful tool for:

• Asset protection

• Estate planning

• Intergenerational wealth transfer

• Supporting vulnerable family members

However, poor administration, lack of independence, or unclear intentions can undermine its legal validity. Professional advice is essential when creating or maintaining a trust.