Discretionary Trusts: What You Need To Know

Setting up a trust is a common method to manage assets for the benefit of others in New Zealand. Many businesses utilise trusts as part of their structure for asset protection and tax management purposes.

Essentially, a person or company (the trustee) holds property for the advantage of another party (the beneficiary).

A trust is not a separate legal entity in New Zealand. It is important to understand that the assets within a trust are legally owned by the trustee, who is then required to manage those assets in the best interests of the beneficiaries.

There are various types of trusts in New Zealand, each with its own set of rules, so it’s crucial to understand the differences between them. For instance, how does a discretionary trust differ from a unit trust? When might a corporate trustee be beneficial?

Let’s explore some key features and distinctions.

Discretionary Trusts

A discretionary trust, often referred to as a family trust, is commonly used by families in New Zealand for estate planning and tax purposes.

What sets discretionary trusts apart?

The defining characteristic of discretionary trusts is the distribution of profits. The trustee has the discretion to decide which beneficiaries receive profits and in what amounts.

This means that the beneficiaries’ entitlements are not fixed or guaranteed.

However, the trustee’s discretion is bound by the terms set out in the trust deed.

Unit Trusts

Unit trusts in New Zealand operate by distributing profits based on the number of units each beneficiary holds, which equates to a fixed entitlement rather than being at the trustee’s discretion.

Who Is Involved In A Trust?

Typically, a trust arrangement in New Zealand involves three main parties:

1. Trustee

The trustee is the entity responsible for administering the trust, with a duty to manage the trust’s assets in the best interests of the beneficiaries.

Trustees legally own the trust’s assets, which means they are personally liable for the trust’s liabilities, although this differs for corporate trustees.

2. Beneficiaries

Beneficiaries are those who benefit from the trust’s assets and income.

3. Settlor

The settlor is the individual who creates the trust by signing the trust deed, often an independent third party.

Why Should I Set Up A Discretionary Trust?

There are several advantages to establishing a discretionary trust in New Zealand:

• Effective asset protection
• Flexibility in operation
• Beneficial for tax planning (the trustee’s discretion can simplify tax management)
• Capability to include an unlimited number of beneficiaries

What Is A Corporate Trustee?

A corporate trustee is a company that acts as the trustee of a trust, with appointed directors and shareholders.

Corporate trustees offer better protection against liabilities, as their liability is limited to the assets of the company, not the personal assets of the individuals involved.

Need Help?

Establishing a trust in New Zealand can be a strategic way to manage assets and plan for your business’s future, but it can also be complex. Proper guidance is essential.

If you would like a consultation on your options, please contact us at 0800 002 184 or [email protected] for a free, no-obligation chat.

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