Protection Given by a Family Trust

For most families, the objective in establishing a family trust is to safeguard yourfamily’s assets against business and other risks. The sections below brieflydescribe some of the most commonly used protections offered by family trusts.It’s important to keep in mind that assets are only protected if they have beencompletely given away to a trust. If you have retained some assets, or the truststill owes you money, then this will be vulnerable to a variety of claims.

Business owners

Without a family trust, business owners run a considerable risk that theirfamily assets could be vulnerable. A range of situations could bring this about,including:

  • Creditors, if there is a business failure
  • Compliance issues, resulting in action taken against you or your businessunder, say, occupational health and safety laws, and/or
  • Action taken against directors or senior management of a company.

Trusts are not only for employers. Looking to the future, if you establish yourown business or are in a senior position in business, you should also considersome method of protecting your assets as this type of business activity may expose you to legal claims.

Trading and development trusts

Conducting business in New Zealand is carried out on a personal basis as asole trader, or through a joint venture, partnership, company or trust. When atrust is used as a vehicle to run a business it’s commonly called a ‘trading trust’or a ‘development trust’.

Trading in land and property development

Special rules apply if your business involves trading in land or developing realestate. These activities need to be separated from your other business and personal assets to avoid association for tax purposes.

There are specific tax rules covering land sales and associated persons. If youare a property dealer or developer, anyone you are associated with can also betaxed as a property dealer or developer. This can happen unwittingly. The resultcan be that a profit may become taxable when the property is sold. If you canavoid being treated as associated, any profit can be a tax-free capital gain.The structures that need to be put in place in these circumstances arecomplex; we would expect both your lawyer and your accountant to be involvedin advising about this.

Relationship property claims

Trusts are often used to help avoid claims by a former spouse or partner; forexample a claim against your son or daughter’s inheritance.When a couple separates – whether they were married or in a civil union, defacto or same sex – the basic rule is that they share equally in all ‘relationship property’. These are the assets they have built up together during theirrelationship. There are some exceptions, such as inherited property, and the court has some overriding discretion. In reality, however, it’s easy for aninheritance to become relationship property if, for example, you use inheritedmoney to pay off your joint mortgage.

One solution is to ensure that any inheritance is kept in a trust separate from relationship property. Putting your children’s inheritance in a trust will help avoidclaims from a rogue son-in-law or daughter-in-law.

Before you enter a de facto relationship, marriage or civil union, if you havesignificant assets you should carefully consider how best to protect yourpersonal assets in case you later separate or one of you dies.

The equal sharing rule does not apply to short duration relationships (usuallyless than three years). However, transferring your assets to a trust just beforethe three year period ends is not likely to be effective. Relationship property law has claw-back rules which apply if you have given away assets with theintention of defeating a future claim.

If you are going into a second or subsequent relationship, civil union or marriage, and you have children from an existing or from previous partnerships, it’s even more important to ensure that your assets are preserved in order to make the division ofproperty fair and just, and to ensure your children’s interests are preserved.

Children with special needs

A trust can help to ensure your assets are safeguarded for achild with special needs such as a disability. This protectionmight be given through the family trust, or by setting up aseparate trust for the individual child. However, you need to beaware that trust assets can be treated by the authorities asfinancial resources that should be used first before askingfor government help, such as a benefit.The trustees can exercise their discretion to make available to the beneficiariesany income and/or capital to help meet their legitimate cash requirements. Thetrust could also make loans for capital needs such as housing, or even buy ahome for occupation by a beneficiary.

Similar protection can be arranged when you have doubts about the ability of a child or other family member to manage their financial affairs.

You may feel the need to protect your children or other family members fromtheir own folly or lifestyle. It can be left up to the trustees to give these children control of some or all the assets held in trust at a future date and, in themeantime, provide for their reasonable needs.

Education trusts

Sometimes parents or grandparents want to establish aseparate trust or trusts to help fund education costs fortheir children or grandchildren. Often these trusts specifylevels of education to be funded, such as high schoolcosts, boarding fees and/or tertiary level expenses.

Claims against estates

Establishing a trust will help protect your estate against family protection andtestamentary promise claims.

Family protection

If your Will doesn’t provide adequately for your spouse or partner, children, grandchildren or other close family members you may have been significantly financially supporting, claims may be made against your estate after your death, under the Family Protection Act 1955.

The claimant/s must show that you had a moral obligation to provide for themand that your Will did not provide for their adequate maintenance and support. If provision is made under your trust for those for whom you have a moralobligation to provide, claims can usually be avoided. However, your children in particular have a right to be acknowledged as members of the family.

Testamentary promises

A testamentary promise claim can be made against an estate if the deceasedpromised to reward someone by his or her Will in return for work or services. These claims are made under the Law Reform (Testamentary Promises) Act1949. To support a claim there must have been something done for youby the claimant, such as looking after you without being paid (for example, housekeepers or companions).While evidence is needed to prove the claim, often the promise will be implied in the circumstances. Assets held in a trust at your death are not part of yourestate and cannot be claimed under the testamentary promises legislation.

Minimising tax liability

Establishing a trust principally to avoid paying tax is not likely to be effective.If there is a tax saving by establishing a trust, it must be seen as an incidentalbenefit, not the sole or dominant purpose of the trust.

Tax savings can be made if the trustees have flexibility to decide whichbeneficiaries should receive income each year. Trusts are taxed at the maximumindividual rate (currently 33%) but income distributed to beneficiaries is taxed attheir own personal rate. Using a trust for tax efficiency requires careful advice.A decision as to how much income is to be allocated to a beneficiary must bemade within 12 months of the balance date for the trust.

The 2011 Supreme Court decision, Penny & Hooper v Inland Revenue,emphasises that an artificial arrangement intended mainly to avoid tax can beignored by the Inland Revenue (IRD) for income tax purposes even if the trust itself is perfectly valid.

Penny & Hooper v Inland Revenue2Two surgeons (Messrs Penny and Hooper) each put their business into a company.Each company was owned by a family trust. In each case the company paid the surgeona salary far lower than what he was previously earning. Most of their earnings werechannelled through their trust. Because this reduced the amount of tax in each case,the IRD invoked the anti-avoidance rule in the Income Tax Act 2007.

The Supreme Court agreed with the IRD; the trust and company arrangement was legallyvalid but the surgeons must pay income tax on what they actually earned, not just thenotional salary. The surgeons also had to pay $25,000 towards the IRD’s legal costs.

A trust or a company?

Other structures such as Look Through Companies (LTCs – previously calledLoss Attributing Qualifying Companies), partnerships, and Portfolio InvestmentEntities (PIEs) may offer tax advantages for individual investors. It’s important to remember, however, that these structures do not offer the asset protectionavailable through a trust.

State assistance and benefits

Strict rules apply if you want to apply for a government benefit or assistancesuch as legal aid, student loans, the unemployment benefit, etc. These ruleshave been in place for a long time. Assets transferred to a trust can be treatedas resources that you should use first before asking for government help.Even if you have transferred assets to a trust of which you are not a beneficiary,you may still be denied assistance from the state.

The same is true also of using a trust in order to qualify for a rest home subsidy.In that situation, there are strict limits on how much you may put into a trusteach year.


Please contact Tina McLennanAnna Ferguson, Gemma Keystone or Jo McLennan for more information.

Capital gains or succession tax

New Zealand does not currently have any capital gains tax or any inheritanceor estate tax. Gift duty (a tax on gifts of large amounts) was abolished in 2011. This means property of substantial value can now be given to a trustimmediately. In recent years, some political parties have indicated they wouldlike New Zealand to adopt a capital gains tax similar to the Australian model.Having family wealth in a trust could help defer such a tax for a generationor more.

Maximum duration of trusts

By law, most trusts cannot last forever. To avoidthe uncertainty of the old legal rules, most familytrusts now adopt a fixed period of 80 years. Undercurrent law, this is the maximum number of yearsallowed for trusts other than purely charitabletrusts. The New Zealand Law Commission isconsidering reform of the law but this could takesome years before it takes effect.

If your assets are owned by a trust they maybe preserved for the next generation. It mustbe remembered, however, that most trusts willmature after 80 years and the process mustthen be started again. Many families may notbe taking this trust life cycle into account.


There is currently no requirement for public registration or disclosure for privatetrusts. A trust’s annual accounts and activities are not available to anyone elseexcept the settlor, trustees and the beneficiaries.

The trust deed can also restrict the type of information beneficiaries can access.This is limited by recent court decisions which set the minimum informationa trustee must provide beneficiaries who request it. Beneficiaries are usuallyentitled to see deeds, accounts and the record of decisions of the trustees, but are not entitled to know the reasoning of the trustees when exercisingtheir discretion.

Charitable purposes

Charitable trusts and foundations must be registered in order to obtain their taxexemptstatus. Trust information is publicly available on the Charities Register, unless you ask for confidentiality.

Your family trust could include named charities or charitable purposes generallyas potential beneficiaries. If charitable purposes or named charities are includedthe trustees can make charitable payments without the need to register asa charity.

Since 2008 trustees have been entitled to a tax rebate up to 100% of trustincome distributed for charitable purposes.

Dealing with changes in the law

There is always the possibility of changes to trust law, or associated lawsaffecting trusts, which may remove some of the benefits attached to a trust orfrustrate some of the original objectives of the trust.

No one knows what future law changes there might be or when they mightoccur. However, it is comforting to know that the fundamental structure of a trusthas stood the test of time over hundreds of years.

If there are changes to the law, modern trust deeds usually provide the trusteeswith a power to vary some of the terms of the trust, which may ensure theprovisions of the deed can be adjusted to comply with law changes. It’simportant that your trust deed includes wide powers to resettle and to varythe trust.


Please contact Tina McLennanAnna Ferguson, Gemma Keystone or Jo McLennan for more information.