If you’re building wealth, running a business, or buying property in New Zealand, you’ve probably heard someone say “set up a trust” as if it’s a magic shield.
The reality is a bit more nuanced - and that’s a good thing. A discretionary trust can be a powerful structure for the right person, but only if it’s set up properly and actually used the way the law expects.
This guide is current and reflects modern trust administration expectations (including the way trustees’ duties and record-keeping are treated today), so you can make decisions with confidence.
What Is A Discretionary Trust (In Plain English)?
A discretionary trust is a type of trust where the trustees have discretion (choice) about:
- who receives trust income or capital,
- how much each beneficiary receives, and
- when those distributions happen (if at all).
In other words, beneficiaries don’t have a fixed entitlement to trust assets or income just because they’re named as beneficiaries. Instead, the trust deed sets the rules and the trustees make distribution decisions within those rules.
In NZ, you’ll often hear “family trust” used to describe a discretionary trust set up for family wealth planning (for example, holding the family home, an investment property, or shares in a trading business).
If you want a deeper definition and common use cases, the term discretionary trust is worth understanding properly before you commit to one.
Who’s Involved In A Discretionary Trust?
Most discretionary trusts have a few key roles:
- Settlor: the person who creates the trust by “settling” an initial amount (often a nominal amount like $10). The settlor usually signs the trust deed and gets the trust up and running.
- Trustees: the people (or a company) who legally own and manage trust assets for the benefit of beneficiaries, and who must follow the trust deed and NZ trust law.
- Beneficiaries: the people who can potentially receive distributions. In a discretionary trust, they don’t automatically “own” trust assets.
- Appointor (or similar power-holder): some trust deeds include a role with power to appoint/remove trustees. The specific name and powers depend on the deed.
These roles can overlap in some cases (for example, a settlor may also be a trustee and beneficiary), but that overlap needs to be considered carefully - especially if your goal is asset protection, because too much control in one person can create legal risk.
How Does A Discretionary Trust Actually Work In New Zealand?
A discretionary trust works through the trust deed (the written document that creates the trust) and the trustees’ ongoing decisions.
The trust deed usually covers things like:
- who the beneficiaries are (often a wide class, such as family members and related companies),
- what powers trustees have (for example, buying/selling assets, investing, lending),
- how trustee decisions must be made (for example, unanimous vs majority),
- how trustees can be appointed or removed,
- how distributions work, and
- when and how the trust ends (often tied to a “final vesting date”).
Trustees’ Duties Aren’t Optional
Trusts in NZ aren’t informal “arrangements” you can set and forget. Trustees have real obligations - including duties under the Trusts Act 2019 - and they must act in accordance with the trust deed and for proper trust purposes.
Trustees also owe core duties that resemble a fiduciary duty - meaning trustees must put the interests of beneficiaries (as defined by the trust deed and the law) ahead of their own personal interests.
That’s why trust administration matters. If a trust exists “on paper” but is treated like the settlor’s personal bank account, it can be challenged in disputes (for example, relationship property disputes or creditor claims) and may not deliver the protection you hoped for.
What Can A Discretionary Trust Own?
A discretionary trust can generally own many types of assets, including:
- real estate (family home, investment properties),
- shares in NZ or overseas companies,
- business assets (depending on structure and risk),
- cash and term deposits,
- managed funds and other investments, and
- intellectual property (in the right circumstances).
Whether it should own those assets depends on your goals and risk profile. For example, some operating businesses are better held in a company, with the trust owning the shares in that company (rather than the trust running day-to-day trading directly).
Why Set Up A Discretionary Trust? (Benefits And When It Makes Sense)
People often set up discretionary trusts for a mix of asset protection, succession planning, and flexibility. Done well, a trust can be a helpful long-term structure - but it’s not a one-size-fits-all solution.
1) Flexible Distributions And Family Wealth Planning
Because trustees can decide who receives distributions, discretionary trusts can be useful where:
- family circumstances change over time,
- you want to support children at different life stages (for example, education vs buying a first home), or
- you want to support vulnerable beneficiaries in a controlled way.
This flexibility can also help when beneficiaries’ needs and tax positions are different - but it must always be done within the trust deed and tax rules.
2) Asset Protection (With Important Limits)
Asset protection is one of the biggest reasons people consider trusts - for example, if you operate a business with commercial risk.
However, it’s important to be realistic. A discretionary trust is not an “asset protection button” you can press after something goes wrong.
In broad terms, trust-related asset protection can be weakened if:
- assets were transferred to the trust to defeat creditors,
- the trust is not administered properly (for example, no trustee resolutions, no proper records),
- the settlor retains too much effective control, or
- personal guarantees are given (which can cut straight through structures).
Also, if you use a corporate trustee (which is common), you still need to understand director exposure. Directors can face risk in certain situations - so it’s worth being across personal liability considerations before you assume a company automatically removes risk.
3) Succession Planning And Continuity
If you’re thinking long-term, a discretionary trust can help you plan for what happens when:
- you pass away,
- you lose capacity,
- your family structure changes (marriages, separations, blended families), or
- you want to transition control of a business over time.
Depending on how the trust deed is drafted and how trusteeship is structured, the trust can provide continuity of ownership and decision-making without needing to transfer assets each time something changes.
4) Holding Business Interests (Without Running The Whole Show)
A common approach is:
- the trust owns shares in the trading company,
- the company operates the business day-to-day, and
- profits can be paid as dividends (subject to company and tax rules), with trust-level planning happening from there.
This can separate operational risk (in the company) from long-term wealth (held by the trust via share ownership), but it needs to be set up and maintained properly to avoid messy disputes later.
How Do You Set Up A Discretionary Trust? (A Practical Step-By-Step)
Setting up a trust isn’t just about signing a deed. You also want the structure around it to match your real-world goals - and to hold up under scrutiny.
Step 1: Get Clear On Your Goal (And Be Honest About It)
Before you draft anything, clarify the “why”. For example:
- Are you trying to protect family assets from business risk?
- Are you building an investment portfolio?
- Do you want a structure for succession planning?
- Are there relationship property considerations you’re trying to manage?
The right trust deed and trustee structure can look very different depending on your answer.
Step 2: Choose The Trustees (People Vs Corporate Trustee)
You can have individual trustees, or you can use a corporate trustee (a company acting as trustee).
Corporate trustee structures are common because they can help with continuity (a company doesn’t “die” like an individual) and can make administration cleaner in some cases.
If you’re using a corporate trustee, you may need a company set up specifically for that trustee role, and you’ll want to think carefully about who will be the directors and shareholders of that company.
Where multiple family members (or business partners) are involved, it can also be wise to document decision-making expectations using something like a Shareholders Agreement for the corporate trustee company, so governance issues don’t become personal disputes later.
Step 3: Draft A Trust Deed That Matches Your Situation
This is the core legal document. A good trust deed should be tailored - because small drafting choices can have big consequences.
For example, the trust deed needs to get right:
- beneficiary definitions (and whether companies/trusts can be beneficiaries),
- trustee powers and limits,
- process for trustee decisions and conflict management,
- appointment/removal powers (and who holds them),
- distribution mechanics, and
- what happens on a vesting date or wind-up.
This is one of those areas where DIY templates can create expensive problems. Trust deeds are not “fill in the blanks” documents - they’re the legal engine room of the structure.
Step 4: Transfer Assets Properly (And Document It)
A trust doesn’t protect assets it doesn’t actually own. Once the trust is created, you may decide to transfer assets into it (for example, cash, shares, or property).
Transfers need to be done correctly and documented properly. Depending on the asset type, this can involve:
- property conveyancing and registrations,
- share transfer documentation and company registers,
- loan documentation (if assets are sold rather than gifted), and
- valuation considerations.
This step is also where you need to be careful about creditor risk and relationship property implications. If you’re transferring assets when there are known claims on the horizon, that can create legal vulnerability.
Step 5: Set Up A Simple Administration System From Day One
Even a small trust should have basic governance habits, like:
- a trust bank account (separate from personal accounts),
- trustee resolutions/minutes for key decisions,
- records of distributions (and reasons for them),
- annual financials and tax filings as required, and
- a secure place to store the trust deed and variations.
This is the unglamorous part - but it’s what helps your trust hold up when it really matters.
What Ongoing Legal And Tax Obligations Should You Know About?
Once a discretionary trust exists, the work isn’t “done”. Trustees need to keep meeting obligations over time, especially around decision-making, records, and tax.
Trusts Act 2019: Disclosure And Record-Keeping Expectations
Under the Trusts Act 2019, trustees have clearer duties around keeping core documents and, in many cases, providing information to beneficiaries (subject to exceptions). You don’t need to memorise the Act, but you do need systems that make compliance realistic.
Practically, this means trustees should expect to keep (at a minimum):
- the trust deed and any amendments,
- financial statements/records of trust property,
- records of trustee decisions (minutes/resolutions),
- details of trustee appointments/removals, and
- records of distributions to beneficiaries.
If you’re a trustee, think of this as part of your job. If you’re setting up a trust, build this into the plan from the start so compliance doesn’t feel overwhelming later.
Tax: Trusts Have Their Own Rules
Tax treatment depends on your trust’s income, distributions, and beneficiary circumstances. In NZ, trusts can have different tax rates applying to trustee income and beneficiary income, and there are rules around how income is allocated.
Because tax outcomes are fact-specific, it’s worth getting tailored advice from your accountant and lawyer together - especially if the trust will own business interests, rental property, or investments.
Relationship Property, Estate Planning, And “Real Control” Risks
Many people use trusts hoping to separate assets from personal ownership. But in the real world, disputes can arise (especially after a separation or death) where the focus shifts to questions like:
- Who really controlled the trust?
- Were trustee decisions genuine and properly documented?
- Were assets treated like personal property in practice?
That’s why trust administration matters just as much as trust set-up. Strong governance habits can reduce the risk of a trust being challenged as a “sham” or being treated as effectively personal property in a dispute.
Common Mistakes We See (And How To Avoid Them)
Here are a few issues that regularly cause trouble:
- Mixing money: using personal accounts for trust transactions, or vice versa.
- No documentation: major decisions made “informally” with no trustee minutes or resolutions.
- Unclear roles: nobody knows who the trustees are, who has appointment powers, or what the deed actually says.
- Outdated structure: the trust was set up years ago, but family and business circumstances changed and documents weren’t updated.
- Assuming protection is automatic: relying on the trust to protect assets while still signing personal guarantees or running risky trading activity in the trust name.
If any of those sound familiar, it’s usually fixable - but it’s much easier (and cheaper) to tidy things up early than in the middle of a dispute.
Key Takeaways
- A discretionary trust can be a flexible way to manage family wealth, plan succession, and (in the right circumstances) improve asset protection - but it needs to be tailored and properly administered.
- In a discretionary trust, beneficiaries don’t have fixed entitlements; trustees decide distributions within the rules of the trust deed.
- Trustees have real legal duties under NZ law (including under the Trusts Act 2019), and good record-keeping is essential for the trust to work as intended.
- Many NZ trust structures use a corporate trustee, but you still need to consider governance and director risk, especially if the trust holds valuable assets.
- Trust deeds and asset transfers shouldn’t be DIY - small drafting or process mistakes can create major tax, creditor, or dispute issues later.
- If your family, assets, or business have changed since your trust was set up, it’s worth reviewing the structure now to avoid headaches down the track.
If you’d like help setting up or reviewing a discretionary trust (or you’re not sure whether a trust is right for you), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
