Trusts are a popular way of protecting property and managing assets. Their popularity has gone up and down over the years, often in response to changes in the law and, in particular, to changes in taxation laws.

In these pages the person who is intending to create a trust using the LawOnline system is called "you". You are the reader of these pages.

When you establish a trust you are creating a set of rights, duties and powers that can last for many decades. In simple terms, the life of a trust is 125 years, although it can be brought to an end before that. During the lifetime of a trust, society and the laws that society requires, will inevitably change. There are trusts in existence today which were created before the second World War and which are still operating. In that time, we have seen governments come and go, and attitudes to trusts have changed many times. Taxes, including estate or death duty, gift duty, beneficiary's and trustee's taxes and superannuation super tax have all changed, and in some cases, have come and gone. Things such as rest home subsidies and the law relating to matrimonial property, have all changed radically. Over the years, the courts have made decisions and rules that have changed the way that trusts are regulated.

In establishing a trust today, the person drafting the deed can only try to anticipate the changes in the law that may occur, and to draft the trust deed in a way that tries to give the persons whose rights, duties and powers are governed by the deed, as much flexibility as possible. However, the deed is unlikely to be perfect.

A trust is created when a person, who is called the settlor, transfers property to a person, or people or to a company, to hold and manage on behalf of someone else. It is said that the property is "settled on" the trustee or trustees. A person to whom property is transferred in this way is called a trustee. Trustees are obliged by law to use the property for all lawful purposes that the settlor has specified in the trust deed. Usually one of these purposes is to make payments from the trust property to people called beneficiaries. Beneficiaries can be anyone, including;

• family members
• people who are defined as a class or a specified group, e.g., students at a particular school or university, or refugees.

The LawOnline trust deed limits the discretionary beneficiaries to you and your family, but then gives power to you to make changes to the group of beneficiaries.

A trust is normally given a name and is often referred to as if it is a separate entity, in the same way that a company is. However, a trust is not a separate legal entity. A trust is a relationship between trustees and beneficiaries which is defined in a trust deed or in a will, which imposes duties on the trustees to deal with the trust property in the best interests of beneficiaries.

Trustees have extensive rights, powers and duties, partly specified in the trust deed, partly in the relevant statute laws (i.e., laws made by Parliament) and partly by the decisions of the courts. Some of the relevant decisions of the courts on trusts were made hundreds of years ago.

The terms and conditions of trusts can differ markedly, depending on the purpose for which the trust concerned has been established.

There are many different types of trusts. These include fixed trusts, unit trusts, constructive trusts, charitable trust, will trusts and discretionary trusts. The information set out in these pages deals only with discretionary family trusts and, while the information may be correct for, and relevant to, other types of trusts, we do not mean to provide any advice here on any type of trust other than discretionary family trusts.

This type of trust is called "discretionary" because the trustees have discretions, which are set out in the trust deed. Those discretions usually include the power to decide who among the possible beneficiaries to pay benefits to, or to apply benefits for. The discretions often include a power to decide whether to pay benefits at all during the life of the trust. When the trust comes to an end, the trustees must pay the remaining value to one or more of the residuary beneficiaries.

The LawOnline trust deed is prepared on a conservative basis. In the creation of trusts, there is a difference between what is possible and what is wise. The LawOnline deed has been prepared taking a cautious approach. That means that it is assumed that you want to have a trust that is more likely than not to protect the assets involved from any challenge. A conservative approach should mean that the trust will be likely to survive any future challenge from a taxing or other government authority, a creditor or a disgruntled beneficiary. However, LawOnline does not guarantee that the trust deed will survive any challenge. One consequence of the conservative approach is that you will have less control over the trust property than some trust founders may wish to have. If you prefer to take a more aggressive approach to the trust, then you should look elsewhere for assistance.

The usual reasons for establishing a family trust include:

• To try to achieve protection of some assets from creditors, where you are personally undertaking a risky business venture, in case it fails.
• To ensure that some assets, such as a family business or a farm, are transferred intact to the next generation.
• To make sure that some assets are retained for other family members, when one or more members needs rest home or hospital care.
• To protect family members or a family business from possible relationship breakdown, or a from a contested will claim.
• To manage the assets of someone who is unable to manage his or her own affairs, whether through a disability or illness.
• To simplify estate administration by transferring assets to a trust before death.
• To change tax liability.

The main parties to a trust are:

The Settlor

The Trustees

The Beneficiaries

The Appointor

Settlor

The person (people or company) who makes the initial transfer of property to the trustees is called "the settlor". By common practice, the initial property which is transferred to the trustees is only a nominal amount. The LawOnline standard trust deed provides for the settlor to pay $100.00 to the trustees, for the trustees to hold on the trusts set out in the trust deed. Normally, at a later date, other property is then transferred to the trustees for them to hold on the same trusts.

While it is quite normal for the person who is creating a discretionary family trust for his or her family (i.e., you) to be the settlor, it is good and cautious practice for the settlor to be someone who is completely unrelated to the family (a friend for example), and for the settlor to play no further part in the trust. That is what is provided for in the LawOnline trust deed.

A discretionary family trust normally has two or more trustees. They should be people who will manage the trust wisely.

A person who is forming a trust for his or her own family can choose to be a trustee of his or her own trust, however it is advisable to also have an unrelated trustee, who might be a family friend, or a lawyer or an accountant. It is also possible to have a company to be the trustee.

While it is theoretically possible for one person alone to be trustee of a discretionary trust, while also being one of the potential beneficiaries, a trust structured in those terms is likely to encounter difficulties. If the range of potential beneficiaries includes the trustee himself, or herself, it is difficult to see how a sole trustee could exercise the power to distribute income or capital without placing himself, or herself, in a position of conflict of interest. If a distribution is made where there is a conflict of interest, it is likely, if it is challenged, that a court would undo that distribution, and that there may be other adverse outcomes.

For that reason, the LawOnline trust provides that there will be two trustees, only one of whom can also be a beneficiary. It also permits the trustee to be a company. Please also make sure that the second trustee is not also a beneficiary. If you use a company as the trustee, please make sure, when you are preparing your trust deed, that you are not the sole director, if you are also a beneficiary. The same problem of conflict of interest is likely to arise if both trustees (or directors of the trustee company) are also beneficiaries.

These are the people for whose benefit the trust has been established. They can be either named individuals or a class of people, such as "children" or "grandchildren".

Discretionary family trusts involve both:

• discretionary beneficiaries, and
• final, ultimate or residuary beneficiaries, which expressions broadly all mean the same thing.

Discretionary beneficiaries have a right to be considered by the trustees for payments from the trust property, but they do not have an automatic right to receive payments or other benefits from the trust.

The following are often named as discretionary beneficiaries:

• The person who creates the trust and his or her spouse, and
• His or her children and grandchildren.

The LawOnline trust deed provides that you (i.e., the person who is preparing the trust deed) will be a discretionary beneficiary, as will your spouse or de facto partner, as will your children (including any adopted children), your grand children and anyone else who you decide to include from time to time.

Final, ultimate or residuary beneficiaries have a legal right to the trust property on the date the trust finishes. They are sometimes expressly named, but are more often the settlor's children with provision for grandchildren if a child dies before the trust finishes. The LawOnline trust deed provides that the discretionary beneficiaries who are still alive at the date of final distribution are the residuary beneficiaries. Often, this will be any living grandchildren.

Rather than allowing you to specifically name the beneficiaries, the LawOnline trust deed defines the beneficiaries as :

• the Appointor, while living;
• the spouse, civil partner or de facto partner of the Appointor; while living;
• the children of the Appointor from time to time living;
• any grandchild or more remote issue of the Appointor from time to time living;
• such other person or persons or charity or charities as the Appointor shall before the Date of Distribution either revocably or irrevocably appoint by deed.

The person who creates the trust deed is encouraged to be the Appointor for the reason that he or she and his or her relatives are then the beneficiaries. You should note that the beneficiaries are discretionary beneficiaries which, essentially, means that the trustees have the discretion at any time to choose who from among the class of beneficiaries to provide with benefits from the trust property. For example, the trustees may choose to pay a distribution to you as the Appointor, or to one of your children, without having to make the same payment to all of the beneficiaries.

As the Appointor, you are also given the power in the LawOnline trust deed to both add and remove beneficiaries. You are also given power to appoint and remove trustees. What you are not able to do is, on your own, to make the decision about who the trustees pay benefits to. You need to select trustees who you trust to act properly. If you don't like what they do, then you may replace them, but in doing so, you will have a duty to act in the best interests of all of the potential beneficiaries, and not just in your own interests. In giving you these powers, the deed refers to you as the "appointor".

In simple terms, a discretionary family trust cannot exist for longer than 125 years, and the trust deed must set a date by which the trust has to finish. This is known as the date of distribution, or date of final distribution.

Trustees are usually given the power to bring the trust to an end before the date provided for in the trust deed as the date of distribution. Some trust deeds give the trustees a power to extend the distribution date, so long as the total period of the life of the trust does not go beyond 125 years. Both of those provisions are contained in the LawOnline trust deed.

The trustees are the legal owners of the trust property and can do the same sorts of things with the trust property that any owner can do. They can hold property, raise mortgages, open and operate bank accounts and generally hold all types of assets and investments, as long as they operate according to the powers set out in the trust deed.

It is very important that proper records are kept for the trust, including minutes of decisions made by the trustees, financial records, tax returns and proper documentation for any transactions that the trustees enter into. It is important that if you are not qualified to do these things yourself, that you take proper professional advice from a lawyer and an accountant.

The new Trusts Act 2019 has effect from 30 January 2021. Much of the new Act updates or restates law that already exists , either in statute or in case law. There are a number of changes about which people who are involved with trusts should be aware.

On the whole, there is unlikely to be any need to change the content of trust deeds. The LawOnline trust deed is suitable to be used with the new Act in force.

Trustees will have new duties in respect of trust documentation. Each trustee will be obliged to keep copies of the trust deed and any variations. They will have to either keep their own copies of core trust documents or to ensure that at least one of the other trustees holds all of the core trust documents and will make them available on request. Any sensible trustee will keep a copy of all of these documents personally. The Act defines the expression “core trust documents” in section 45. It includes the trust deed, any amendments, trustee’s minutes, financial accounts and contracts. It would be wise for trustees to have a complete set of all records in respect of the trust.

The Act defines “mandatory” and “default” duties for trustees.

Mandatory duties cannot be modified or excluded by the trust deed so all trustees will be bound by these duties.

These duties are to:

• Know the terms of the trust
• Act in accordance with the terms of the trust
• Act honestly and in good faith
• Deal with the trust property and to act for the benefit of the beneficiaries in accordance with the terms of the trust deed, and
• Exercise the trustees’ powers for a proper purpose.

Default duties are obligations which bind the trustees — unless the trust deed specifies otherwise when the trust is established. These default duties include :

• a general duty of care,
• a requirement to invest prudently,
• a prohibition on trustees acting in their own interests,
• a duty to consider the exercise of trustees’ powers,
• a duty not to fetter a trustee’s discretion,
• a duty to act unanimously, which means that the trustees must all agree, and
• duties not to profit from the trusteeship or benefit from the exercise of trustee discretions.

Default duties can be modified or excluded if this is how the settlor wants to set up a trust. For example, a settlor might want the trustees to be able to purchase depreciating assets such as retirement village units. The settlor may want trustees to be able to act with a majority in favour of any particular decision, or it may be desirable to allow a trustee (who is also a beneficiary) to take part in decisions despite a conflict of interest.

The Trusts Act 2019 has imposed restrictions on the extent to which trust deeds can limit the liability of the trustees of the trust. These limitation clauses have usually taken the form of an exemption from liability and the right to be indemnified (compensated) for any loss that they suffer, out of the assets that are held in the trust.

Section 40 of the Act says:
“The terms of a trust must not limit or exclude a trustee’s liability for any breach of trust arising from the trustee’s dishonesty, wilful misconduct, or gross negligence.”

Section 41 of the Act says:
“The terms of a trust must not give a trustee any indemnity against the trust property for liability for any breach of trust arising from the trustee’s dishonesty, wilful misconduct, or gross negligence.

The relevant clause in the LawOnline trust deed provides a broad exemption and indemnity of the trustees, but makes clear that that exemption and indemnity does not apply where the liability arises from the trustee’s dishonesty, wilful misconduct, or gross negligence.

The Act also creates a presumption that “basic trust information” must be made available to beneficiaries. That includes information that a person is a beneficiary of the trust, the name and contact details of the trustees, details of trustee changes as they occur, and the beneficiary’s right to request further trust information.

There is also a presumption that if a beneficiary requests further trust information, including a copy of the trust deed, the trustee must provide that information within a reasonable period of time. The trustee may ask the beneficiary to pay the reasonable costs of providing that information.

Trustees do have the ability to decide that either, or both presumptions, do not apply. A list of factors is set out in the legislation and the trustees must consider these factors when deciding whether these apply in the circumstances.

Those factors include, amongst other things:

• The nature and interests of the beneficiary (including whether the beneficiary is likely to receive trust property in the future)
• The nature and interests of other beneficiaries
• The intentions of the settlor when the trust was established
• The age and circumstances of the beneficiary in question and the other beneficiaries of the trust
• The effect of giving the beneficiary the information
• The nature and context of any request for further information, and
• Any other factor a trustee reasonably considers is relevant. Trustees will have to carefully consider any decision not to disclose information.

Many people underestimate the cost and effort involved in administering a trust. It is not hard to find situations where a trust has been established, but where everyone involved simply can't be bothered to administer it properly, if at all. There is cost involved in taking proper advice, in keeping proper records and in dealing with all of the day to day issues that arise. Where the value of the property which is held in the trust is not large, many find that the cost and required effort are too much, when compared to the benefits that are gained.

Before a trust is established, it is worth while taking the time to investigate all of the possible costs and benefits, before making the decision whether or not to establish the trust. It is important to be clear about what you want to try to achieve, and whether the trust will, or be likely to, succeed in achieving your purpose.

Assets can be transferred into the trust at any time. They can be gifted to the trustees, or sold to them. The appointor, will usually transfer further assets into the trust, or the trustees may acquire the assets from someone else.

Gift duty was an issue until relatively recently, in the transfer of assets to a trustee, but that is no longer the case.

Any increase in the value of the asset sold to the trust belongs to the trustees, and not to the settlor (or the appointor). Similarly, any income from the trust assets, is usually trust income, and not the income of the appointor.

Generally, the trustees decide which payments are to be made from the trust, and which beneficiaries will receive them.

Often, assets will be transferred to the trustees, with only part payment of the price, or on the basis that the whole price remains owing. The trustees will acknowledge the outstanding price as a debt, usually in a deed of acknowledgement of debt. The debt is often made payable on demand, and it is normal to make payments in reduction of the outstanding debt, as and when the trustees have available cash to fund the payments. If the debt for the initial purchase of assets is repayable to the appointor on demand, the appointor can require payment of all or any part of this debt at any time. Payments of this kind, from the trustees to the appointor, will probably be payments of capital rather than income, and will therefore probably be free from income tax.

Generally, income earned on trust assets will either be taxed in the hands of the trustees as trustee income, or will be taxed in the hands of a beneficiary, if the trustees have paid the income to the beneficiary. If income is paid to a beneficiary over the age of 16, within six months of the end of the tax year, then it is taxed at the beneficiary's personal tax rate, and the tax is paid by the beneficiary. Income that is not distributed in this way is taxed as trustee income, at the trustees' rate. The rate at which tax is paid on undistributed trustee income is currently 33%, which is often higher than the rate paid by beneficiaries. The consequence is that there is an incentive for trustees not to accumulate income.

Where a trustee pays income tax on any part of the income of a trust, no tax will be payable on those moneys when they are later paid to a beneficiary. However, the usual effect of available income not being paid to a beneficiary, is that the total tax paid by the trustee on the income concerned will be higher than it would be, if the money was paid to a beneficiary in the tax year in which it was earned, who then paid tax on it at his or her (usually lower) tax rate.

If the allowable deductions available to the trust exceed its taxable income, a loss will result. Such losses may be carried forward and set off against future income of the trust, but cannot, except in limited circumstances, be "distributed" to the beneficiaries, to be set off by them against any other income that they might receive.

Where the settlor or other creator of a trust retains effective control over the trust property, as will be the case where the settlor retains a power to revoke a trust, the settlor will be assessed personally for tax on the trust income. For this reason, where a trust is established by the settlement of some moneys forming the initial trust fund, it is common to have a third party settlor, quite separate from the other parties to the trust, and to ensure that the trust contains no machinery whereby it might be revoked or dismantled by the settlor. This is one of the reasons why, the LawOnline trust deed makes you, as the founder of the trust, the appointor, and not the settlor.

Trusts can provide advantages to the taxpayer, particularly by allowing income to be split among the members of a family. This can be done by using a discretionary trust as a trading trust to carry on a business, thereby sharing the tax burden at lower marginal rates. The attractiveness of this device has waned since the introduction of changes to the law relating to the taxation of income of most potential beneficiaries who are below 16 years of age.

Also, the current law and approach of the Commissioner of Inland Revenue relating to income splitting, where the income arises from the provision of services, has reduced the desirablity of many previously used income splitting tactics.

In a recent publication, the Commissioner has said;

"Inland Revenue has always been concerned about arrangements involving taxpayers who arrange to effectively divert to an associated entity some or all of the income they earn (or could earn) from a business or activity of supplying personal services - where it has the effect of taking advantage of lower marginal income tax rates payable by that entity and/or by family members as beneficiaries or shareholders of that entity. Other tax-linked benefits (such as certain entitlements and obligations such as Child Support) may also arise under the arrangement.

There are legitimate reasons for using entities such as trusts or companies in many business situations. Therefore the mere use of alternative business structures will not, on its own, amount to a tax avoidance arrangement. Further, the profit generated by the business may not be wholly generated by the individual and there may also be good non-tax reasons as to why the controller of a business receives significantly less of the business profits than would otherwise be the case.

However, where the business involves the provision of services, we are likely to examine closely any arrangement where the individual service provider (usually the real owner or owners or controllers of the business) is not receiving a significant portion of the profits derived from the business. This is particularly so where there is an absence of other business profit drivers and other non-tax reasons do not justify the level of remuneration received by the individual."

One alternative to having a single trust is to have 2 parallel trusts. The trusts are identical in every respect except that one spouse will be the appointor of one trust and the other spouse will be the appointor of the second trust. Initially, one half of the assets might be transferred to each trust, although there is no compelling reason to have the property equally split between the trusts. This type of arrangement can allow spouses to keep more control over what were, for example, their own assets in a second marriage situation. Both spouses and their children can be potential beneficiaries, but if the relationship breaks down, it is relatively straight forward to each then agree to exclude the other from being beneficiaries, and for the property to be effectively separated along with the family separation.

To form parallel trusts using the LawOnline system, you need only to prepare 2 trusts, giving each its own name and appointor.

These involve a similar arrangement to those used in parallel trusts and involve again 2 trusts, but each trust excludes the spouse of the person who is establishing the trust from being a beneficiary.

The use of mirror trusts was a useful way of avoiding or reducing death duties when they were a feature of the law in New Zealand. The law used to provide that the assets of a deceased person included assets held in a trust in which he or she was a beneficiary, for the purpose of calculating death duties payable. This is no longer the law and so mirror trusts are seldom now formed.

Trusts are subject to various legal constraints and there are several provisions in the law that allow property in a trust to be "clawed back". "Clawing back" in these circumstances, means that the process by which the asset has been transferred to the trustees was invalid. The result is that the property is brought back into the ownership of, and belongs to, the person who tried to transfer it, making it available to the creditors, a matrimonial property claimant or the taxing authority. This inevitably defeats the purpose for which the trust was set up in the first place. An example of a clawed back transfer is where someone sets up a trust, and transfers property to the trust, but later becomes bankrupt. The previous transaction may be invalid. This is particularly likely to be the case if the transfer occurs in the 5 year period prior to the transfer.

A court may set aside transfers of assets that were made with the intention of defeating the rights of creditors, or the rights of spouses or partners under the Property (Relationships) Act. If a couple's relationship property has been transferred into a trust, and that transfer has the effect of defeating the rights of one of the partners under the Property (Relationships) Act, the court may order the other partner to compensate the partner whose rights are defeated.

Transferring assets into trust may affect your eligibility for a residential aged care subsidy. These subsidies are not available to you if the value of your assets exceeds the prescribed asset threshold, or if your income exceeds a prescribed amount. Items given away, for example, transferred to trustees within the preceding 5 year period, are included in the calculation of the value of the person's assets, when the assets test is carried out.

You should assess whether a trust is a suitable vehicle to meet your objectives. You should weigh up the advantages and disadvantages of your various options, including the on-going management compliance costs of each. Your lawyer will be able to help you determine what is required to meet your needs.