How To Set Up A Discretionary (Family) Trust In New Zealand

If you’re running a small business, it’s normal to start thinking about “how do I protect what I’m building?” once revenue grows, staff come on board, or you take on bigger contracts.

One structure that often comes up is a discretionary (family) trust in New Zealand, which business owners sometimes use as part of an asset-protection and succession-planning strategy.

But trusts can feel intimidating. There are new roles (like “settlor” and “trustee”), ongoing duties under New Zealand trust law, and tax and accounting angles to think through.

The good news is: once you understand the moving parts, setting up a trust becomes a lot more manageable.

Below, we’ll break down what a discretionary (family) trust is, why business owners use them, and a practical step-by-step guide to getting one set up the right way.

What Is A Discretionary (Family) Trust In New Zealand?

A discretionary trust (often called a “family trust”) is a legal relationship where a trustee holds and manages assets for the benefit of a group of beneficiaries. The key feature is discretion: the trustees decide if, when, and how much each beneficiary receives (as long as it’s consistent with the trust deed).

In plain terms: instead of you personally owning an asset (like shares in your trading company), the trust owns it, and the trustees manage it for your family group.

If you want the concept explained at a high level first, the basics are covered in What Is A Discretionary Trust.

Key Roles You’ll Hear About

• Settlor – the person (or people) who sets up the trust and usually provides the initial settlement sum (often a nominal amount).
• Trustee(s) – the decision-makers who legally own the trust assets and must manage them in line with the trust deed and the Trusts Act 2019.
• Beneficiaries – the people (often family members, sometimes related entities) who may receive distributions.
• Appointer / Protector (optional, depends on the deed) – a person with certain powers, commonly the ability to appoint or remove trustees.

How Is This Different From A Company?

A company is its own legal entity and generally has limited liability for shareholders. A trust is not a company and isn’t a separate legal person in the same way. Trustees can have personal liability in some circumstances, which is why it’s important the structure is set up and run properly (and why DIY templates can create headaches).

A Quick Reality Check

A discretionary family trust in New Zealand can be useful, but it’s not a guaranteed “asset protection” shield. Courts can look at substance over form, and there are laws that can claw back transactions in certain situations (for example, if assets are transferred to defeat creditors).

That’s why it’s worth treating a trust as one part of a wider legal foundation, not a last-minute fix after something goes wrong.

Why Business Owners Use Discretionary Family Trusts

Business owners typically look at trusts for a few practical reasons. Here are the most common ones we see.

Asset Protection (When Structured Properly)

If your business operates in a higher-risk space (construction, hospitality, manufacturing, professional services with contractual liability, etc), you may want to separate personal assets from business risks.

A common planning idea is to keep certain long-term or “non-trading” assets (like shares in a trading company, investment assets, or intellectual property) in a separate holding structure rather than in your personal name. Whether a trust is the right vehicle (and whether it helps in practice) depends heavily on the facts, how it’s administered, and what other personal exposures you have (for example, personal guarantees).

For example, in some cases a trust may hold shares in your company - this is often referred to as holding shares through a trust.

Succession Planning And Keeping Control In The Family

If you want your business to remain within your family group, a trust can help you plan for what happens if you step back, become unwell, or pass away.

Instead of shares being distributed via your estate in a way that triggers disputes, you may be able to set rules in the trust deed around control, trustee appointments, and how benefits are distributed.

Flexibility In Distributions

Because trustees have discretion, distributions can be adapted over time (for example, considering different family circumstances, education costs, or beneficiaries who may need extra support).

Tax outcomes can also be a factor, but tax is very fact-specific. You should involve your accountant or tax adviser early so distributions are planned correctly and compliantly (Sprintlaw can help with the legal structure, but we don’t provide tax advice).

Ring-Fencing “Non-Trading” Assets

Even if your trading business is profitable, it’s often sensible not to leave surplus cash or valuable assets sitting inside the trading entity where day-to-day commercial liabilities arise.

Trusts are one way to hold “outside” assets, but there are other structures too (like a holding company). The best option depends on your goals, risk profile, and whether you have other shareholders or investors.

Step-By-Step: How To Set Up A Discretionary Family Trust

Setting up a discretionary family trust in New Zealand that business owners can actually rely on usually involves more than signing a deed and moving on. You want a structure that’s workable and compliant, not a trust that sits in a drawer and gets ignored.

Here’s a step-by-step process we typically recommend as a starting point (noting the right setup depends on your situation).

1. Get Clear On What You’re Trying To Achieve

Before drafting anything, define your “why”. For business owners, this often includes:

• protecting personal assets from business risk
• holding shares in a trading company
• long-term family succession planning
• separating business operations from investments or retained wealth
• clarity around control if relationships change (family and business)

This is also the time to identify what you don’t want - for example, a structure that creates complex admin or puts you at risk of trustee non-compliance.

2. Decide What Your Trust Will Own

Common trust assets for small business owners include:

• shares in the trading company
• loan accounts (where the trust lends money to the company or vice versa)
• investment assets (term deposits, managed funds, etc)
• intellectual property (sometimes via licensing structures, where appropriate)
• property (noting there are lending and tax considerations here, and you may also need separate advice on relationship property/family law issues)

If you’re still choosing between operating as a company or another structure, you may also want to align the trust plan with your wider setup - for example, your Company Set Up and governance documents.

3. Choose The Trustees (And Think About Practical Governance)

Trustees have legal duties and real decision-making obligations. Under the Trusts Act 2019, trustees must generally:

• know the terms of the trust deed
• act honestly and in good faith
• act for the benefit of the beneficiaries
• exercise powers for a proper purpose
• manage trust property with appropriate care and skill
• keep proper records and provide certain information to beneficiaries (subject to exceptions)

When choosing trustees, business owners should think beyond “who do I trust?” and ask:

• Will the trustees be available and engaged enough to actually make decisions?
• Do we need an independent trustee (for governance, credibility, or risk reasons)?
• If the trust will own company shares, how will trustee decisions interact with company decisions?

4. Define The Beneficiaries (And Keep It Future-Proof)

Most family trusts name:

• primary beneficiaries (often the founders/parents)
• a wider class of discretionary beneficiaries (children, future children, grandchildren, family trusts or companies in some cases)

It’s also common to include a “final beneficiaries” clause (who receives the trust assets when it ends), and a vesting date (when the trust must distribute assets).

Because families and business structures change over time, it’s important the trust deed is drafted with enough flexibility for the future - without being so broad it becomes unclear.

5. Draft And Sign The Trust Deed

The trust deed is the core legal document. It sets out:

• who the trustees and beneficiaries are
• how trustee decisions are made
• how trustees can be appointed or removed
• what powers trustees have (including investment powers)
• how distributions are handled
• administration requirements (meetings, resolutions, record keeping)

This is one of those areas where templates can create expensive problems later. A trust deed needs to match how your business and family actually operate.

6. Record The Initial Settlement And Establish The Trust Properly

To establish the trust, the settlor typically provides an initial settlement sum (often a small amount). The key is that it’s properly documented so there’s a clear starting point for the trust.

Depending on how your trust is set up, you may also want supporting documents like:

• a memorandum of wishes (non-binding guidance for trustees)
• trustee appointment/resignation documents if trustees change
• trustee resolutions for key decisions (asset purchases, distributions, loans)

7. Transfer Assets Into The Trust (Carefully)

This is often where business owners trip up. Moving assets into a trust is not always as simple as “sign and transfer”. Depending on the asset type, you may need to consider:

• share transfer documentation (if moving company shares)
• third-party consents (for example, lender consent)
• valuation issues
• tax consequences (your accountant or tax adviser should advise on this, as it’s very fact-specific)
• whether the transfer could be challenged (for example, if you’re already insolvent or facing creditor pressure)

If the trust is going to hold shares in a company with multiple shareholders, you’ll also want the company’s governance to line up - for example, a Company Constitution and, where relevant, a Shareholders Agreement.

8. Set Up Administration: IRD, Bank Accounts, Accounting Records

Trusts typically need their own admin “rails” so they don’t get mixed up with your personal finances or business accounts. Practically, this can include:

• getting an IRD number for the trust (your accountant or tax adviser can assist)
• setting up a separate trust bank account
• ensuring trust income and expenses are recorded properly
• preparing annual financial statements and tax returns where required (your accountant or tax adviser can help with this)

This step might not feel exciting, but it’s where a trust becomes “real” in the eyes of banks, accountants, and (if it ever matters) a court.

How To Run Your Trust Day-To-Day (So It Actually Protects You)

A trust that isn’t properly administered can create more risk, not less. If you’re going to use a discretionary family trust in New Zealand as part of your business structure, you want to treat it like an ongoing compliance obligation.

Hold Trustee Meetings And Document Decisions

Trustees should make key decisions as trustees - not as individuals - and those decisions should be recorded.

Examples of decisions you’ll usually want documented include:

• distributions to beneficiaries
• buying or selling trust assets
• lending money to (or borrowing from) a related company
• appointing or removing trustees
• any decision involving potential conflicts of interest

Keep Trust Money Separate

Mixing trust funds with personal or business accounts is one of the fastest ways to undermine the structure. If the trust pays for something, it should be a trust expense. If you pay for something personally, treat it as personal (or document it as a loan to/from the trust where appropriate and properly recorded).

Be Extra Careful With “Related Party” Deals

Business owners commonly have the trust dealing with an entity they control (like the trading company). That’s not automatically a problem, but it must be handled carefully and documented so it’s clearly in the trust’s interests.

For example, if the trust licenses IP to the trading company, or lends funds to the company, you want those terms clear and commercial where appropriate.

Know Your Trustee Duties Under The Trusts Act 2019

The Trusts Act 2019 modernised New Zealand trust law and puts more emphasis on trustees understanding and meeting their obligations (including record-keeping and information duties).

If you’re acting as a trustee “because it’s our family trust”, it’s still a legal role. If you’re unsure what your duties require in practice, it’s worth getting tailored legal advice early rather than trying to fix issues later.

Common Mistakes And Red Flags For Business Owners

Trusts can work well, but there are a few patterns that tend to create legal and tax problems. Here are some common red flags we recommend business owners watch for.

Setting Up A Trust Too Late

If a trust is created (or assets are transferred into it) when a business is already under financial pressure, those transfers may be challenged.

Asset protection planning is most effective when it’s done before trouble appears - ideally from day one, or at least while the business is healthy.

Assuming A Trust Automatically Protects Assets From Every Claim

A trust is not a guarantee against all risk. Claims can still arise depending on:

• how the trust is run (including whether it’s treated as separate)
• your personal guarantees to banks/suppliers
• director obligations and company law risks
• relationship property and family law considerations (which often require specialist advice beyond business structuring)
• insolvency and creditor claim rules

If you’re also a director, it’s worth understanding where personal exposure can still arise, because your structure needs to match your risk profile. (For background reading, Personal Liability Company Director is a helpful starting point.)

Not Aligning The Trust With Your Business Documents

Imagine this: your trust owns 60% of your company, your co-founder owns 40%, and you’ve never agreed on what happens if one of you wants out. If you later try to sell, raise funds, or restructure, you can end up stuck in disputes.

Trust planning should sit alongside the core documents that actually run your business (company governance, shareholder arrangements, and key contracts).

DIY Deeds And Generic Templates

Trusts can look deceptively simple on paper. But small drafting issues (unclear trustee powers, outdated clauses, missing admin provisions) can cause real problems later - especially when the trust holds business assets or shares.

It’s usually far cheaper to set it up properly than to unwind or repair a trust deed after it’s been relied on for years.

Forgetting Ongoing Compliance

If your trust is treated like a “set and forget” document, you risk:

• poor record-keeping (making tax and legal compliance harder)
• trustee decisions being challenged
• banks or counterparties refusing to deal with the trust
• reduced asset protection benefits in practice

Good administration is unglamorous, but it’s what keeps the structure working when you actually need it.

Key Takeaways

• A discretionary (family) trust in New Zealand is usually designed to hold assets for a family group, with trustees having discretion over distributions.
• For business owners, trusts are commonly used for asset protection planning, succession planning, and holding company shares - but they’re not a guaranteed shield against all claims.
• Setting up a trust properly means thinking through trustees, beneficiaries, what assets the trust will own, and how it will interact with your trading company and shareholders.
• The trust deed is the core legal document, and generic templates can create serious issues when your trust holds valuable business assets.
• Ongoing trust administration matters: trustee decisions should be documented, trust funds kept separate, and trustee duties under the Trusts Act 2019 taken seriously.
• Trust structuring works best when done early - trying to move assets into a trust once financial pressure hits can increase legal risk.

If you’d like help setting up a trust as part of your business structure (or checking whether a trust is the right fit for your goals), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.