Discretionary Trusts: What You Need To Know

A discretionary trust in New Zealand is a trust where the trustees choose which beneficiaries receive income or capital, how much they receive, and when. If you're named as a beneficiary, you're usually only a potential recipient until the trustees make a valid distribution decision under the trust deed.

That flexibility can be useful for your family wealth, business succession and asset planning, but a trust isn't a magic shield. It only works if it's set up for the right purpose, documented properly, and administered in line with the Trusts Act 2019 and the trust deed.

What Is A Discretionary Trust In NZ?

A discretionary trust is a type of trust where trustees have discretion, or choice, about:

• who receives trust income or capital,
• how much each beneficiary receives, and
• when those distributions happen, if they happen at all.

The key point is that beneficiaries don't automatically own trust assets just because they're named in the trust deed. The assets are legally held by the trustees, who must manage them for the purposes of the trust and for the benefit of the beneficiaries.

In everyday New Zealand conversations, you'll often hear the phrase discretionary trust used alongside family trust. A family trust is often a discretionary trust set up for family wealth planning, business succession, or long-term asset management.

A trust can be useful, but it isn't the right structure for every business or family. If you're still weighing up whether a sole trader, partnership, company or trust structure makes sense, the business structure decision tool can help you think through the starting point before you get tailored advice.

Who Is 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 small sum like $10, and signing the trust deed.
• Trustees: the people or company that legally own and manage the trust assets. Trustees make decisions, keep records and must follow the trust deed and New Zealand trust law.
• Beneficiaries: the people, companies or other entities who may receive distributions from the trust.
• Appointor Or Power-Holder: some deeds include a person with power to appoint or remove trustees. The name and powers depend on the deed.

These roles can overlap. For example, you may be a settlor, trustee and beneficiary. However, too much practical control in one person can create risk, especially if your trust is intended to provide asset protection or separate family wealth from business risk.

How Does A Discretionary Trust Work?

A discretionary trust works through two things: the trust deed and the trustees' ongoing decisions. The trust deed is the legal rulebook. It sets out who the beneficiaries are, what the trustees can do, how decisions are made, and when the trust ends.

A well-drafted trust deed usually covers:

• the trust's purpose and name,
• the initial settlement amount,
• the beneficiaries or classes of beneficiaries,
• trustee powers, including investment, lending and distribution powers,
• how trustees make decisions, such as unanimously or by majority,
• how trustees can be appointed, removed or replaced,
• rules for income and capital distributions, and
• the final vesting date, which is when the trust must end and assets are distributed.

For many modern New Zealand trusts, the maximum duration can be up to 125 years, depending on the deed and when the trust was created. Older deeds may have a shorter perpetuity period or vesting date, so it's worth checking the actual wording rather than assuming your trust can run indefinitely.

Trustees' Duties Are Real Legal Duties

Trustees can't treat trust property as their personal property. Under the Trusts Act 2019, trustees have mandatory duties, including knowing the terms of the trust, acting in accordance with those terms, acting honestly and in good faith, acting for the benefit of beneficiaries or to further the permitted purpose of the trust, and exercising powers for a proper purpose.

Trustees may also have duties that resemble a fiduciary duty, meaning they must put the trust's interests and the beneficiaries' interests ahead of their own personal advantage when acting as trustee.

This is why administration matters. If your trust exists on paper but the trustees never meet, never record decisions, and use the trust bank account like a personal account, the structure may not deliver the protection or certainty you expected.

What Is A Discretionary Family Trust?

A discretionary family trust is usually a discretionary trust where the beneficiary group is built around your family. The deed might name parents, children, grandchildren, spouses, family companies, or related trusts as beneficiaries, depending on your planning goal.

Families often use these trusts to:

• hold long-term investments,
• support children or grandchildren at different life stages,
• plan how wealth will be managed after death or loss of capacity,
• separate long-term family assets from business trading risk, and
• create a decision-making structure for family wealth.

Some family trusts hold land or a family home. If land, mortgages, refinancing or conveyancing are involved, you'll need specialist property and tax advice from advisers who handle that work.

For business owners, a common structure is for a family trust to own shares in a trading company, while the company runs the business day-to-day. This can help you separate operating risk from long-term wealth planning, although it doesn't remove all risk. For example, personal guarantees, director duties and poor record-keeping can still create exposure. If you're a director, it's worth understanding personal liability before assuming a company or trust automatically protects you.

Who Is A Discretionary Beneficiary In NZ?

A discretionary beneficiary is someone who can receive trust income or capital if the trustees decide to make a distribution to them. If you're a discretionary beneficiary, you usually don't have a fixed entitlement to a specific amount or asset unless and until the trustees exercise their discretion in your favour.

For example, if a deed names three adult children as discretionary beneficiaries, none of them automatically owns one third of the trust fund. The trustees might distribute income to one child in one year, retain income in another year, and distribute capital to another beneficiary later, as long as the deed allows it and the trustees act properly.

Beneficiaries still have important rights. The Trusts Act 2019 includes rules about trust information. There's a presumption that trustees should make basic trust information available to beneficiaries, such as the fact that they're a beneficiary and who the trustees are, unless the trustees reasonably decide not to after considering the relevant factors.

This means trustees shouldn't assume a trust can be kept completely secret from beneficiaries. At the same time, beneficiaries don't automatically get every document or every piece of financial information. The right approach depends on the deed, the type of information, the beneficiary's position, and the trustees' reasons.

Why Set Up A Discretionary Trust?

You might set up a discretionary trust for different reasons. The structure is most useful where flexibility, continuity and careful administration are genuinely needed.

Flexible Distributions

Because trustees can choose how income and capital are distributed, a discretionary trust can adapt as your family or business circumstances change. One beneficiary might need support for study, another might be financially independent, and another might need funds held back until they're older.

Business Succession And Continuity

A trust can help with continuity if it owns shares in your company. Instead of ownership changing personally each time a family member dies or steps back, the trust can continue holding the shares while trustees manage control according to the deed.

If a corporate trustee is used, the company acting as trustee is registered with the Companies Office and will generally have a New Zealand Business Number. You'll still need to decide who controls that trustee company, including directors and shareholders. Where more than one person is involved, a Shareholders Agreement for the corporate trustee company can help set expectations for decision-making.

Asset Protection With Limits

Asset protection is a common reason for using a trust, especially if you run a business. The basic idea is that assets held by the trust aren't personally owned by the individual founder or beneficiary.

However, a trust isn't an asset protection button you can press after a problem appears. Protection can be weakened if assets are transferred to defeat creditors, trustees fail to document decisions, the settlor retains too much real control, or personal guarantees are given for business debts.

Holding Intellectual Property Or Investment Assets

In some cases, a trust may hold shares, investment assets or intellectual property. If your trust will own trade marks, copyright or other IP, the ownership and licensing arrangements should be clear. For registered trade marks, the owner recorded with IPONZ should match the intended legal owner, and any licence to a trading company should be documented.

How Do You Set Up A Discretionary Trust?

Setting up a discretionary trust is more than signing a template. Your structure should match your goals, assets, tax position and governance needs.

Step 1: Get Clear On The Purpose

Start by identifying the reason for the trust. Are you trying to hold shares in your business, separate investment assets from trading risk, plan for family succession, or manage distributions over time? The answer affects the deed, trustees, beneficiaries and administration process.

Step 2: Choose Individual Or Corporate Trustees

You can appoint individual trustees, a corporate trustee, or a mix. A corporate trustee is a company that acts as trustee. It can make administration cleaner and provide continuity because the company doesn't die or lose capacity like an individual.

If you need a new company to act as trustee, a company set up process can be used to register it. You'll also need to decide who will be the directors and shareholders, and how control of that company will be managed.

Step 3: Draft The Trust Deed

The trust deed should be tailored to your circumstances because small drafting choices can change who benefits, who controls the trust, and what the trustees can do.

A practical trust deed outline usually includes:

1. Parties And Settlement: identifies the settlor, initial trustees and initial settled amount.
2. Trust Name And Purpose: records the trust's name and broad purpose.
3. Beneficiaries: defines named beneficiaries and any classes of beneficiaries.
4. Trustee Powers: sets out powers to invest, borrow, lend, insure, own shares, licence IP and make distributions.
5. Decision-Making Rules: explains how trustee decisions are made and recorded.
6. Appointment And Removal: states who can appoint, remove or replace trustees.
7. Income And Capital Distributions: explains how trustees may distribute or retain income and capital.
8. Records And Information: sets expectations for trust documents, accounts and beneficiary information.
9. Vesting And Winding Up: explains when the trust ends and how final assets are distributed.

Step 4: Transfer Or Issue Assets Properly

A trust only controls assets that are actually held by the trustees. For your business structure, this might mean the trust subscribes for shares in a new company from day one, or receives assets under properly documented arrangements. Share registers, trustee resolutions and accounting records need to line up.

If land, mortgages or conveyancing are involved, get specialist property advice. If your trust will receive valuable assets, ask your accountant about tax, valuation and timing before anything is moved.

Step 5: Set Up The Administration System

Good trust administration isn't glamorous, but it's what keeps your structure credible. From the start, trustees should keep a trust bank account, trustee minutes or resolutions, financial records, distribution records, copies of tax filings, the original deed, and any variations.

What Ongoing Legal And Tax Obligations Apply?

Once a discretionary trust exists, trustees need to keep doing the work. A trust that's ignored for years can become difficult to rely on when it matters.

Trust Records And Beneficiary Information

Trustees should keep core trust documents for the life of the trust. This includes the deed, variations, records of trustee changes, records of trust property, financial statements, trustee decisions, distribution records and contracts entered into by trustees.

If beneficiaries ask for information, trustees need to consider their obligations under the Trusts Act 2019. A documented decision-making process is important, especially if trustees decide to provide limited information or withhold certain documents.

Tax Rules

Trusts have their own tax rules. From the 2024-25 income year, trustee income is generally taxed at 39 percent in New Zealand, with some exceptions and special rules. Beneficiary income can be taxed differently depending on the beneficiary, timing and allocation rules.

Don't guess the tax result from the legal structure alone. Before distributions are made, check with your accountant so trustee income, beneficiary income, imputation credits and filing obligations are handled correctly.

A Worked Example With Numbers

Imagine Aroha and Ben run a design business through a company. Their family trust owns 100 percent of the shares in the company. The company pays a fully documented dividend of $60,000 to the trust at the end of the financial year, after company tax and company law requirements have been considered.

The trust deed allows income distributions to Aroha, Ben and their adult daughter Maia. Before the required tax timing deadline, the trustees meet and record a resolution to allocate $20,000 to Aroha, $15,000 to Ben, $10,000 to Maia, and retain $15,000 in the trust for future investment.

The outcome isn't just a bank transfer. The trustees need minutes, accounting entries, beneficiary statements and tax treatment that match the resolution. The retained $15,000 may be taxed as trustee income, generally at the trustee rate unless an exception applies. The distributed amounts may be beneficiary income if the tax rules are satisfied.

Discretionary Trust Checklist Before You Commit

Before you set up or rely on a discretionary trust, work through this checklist:

1. Define The Goal: write down whether the trust is for business succession, investment holding, family wealth planning or another purpose.
2. Map The Assets: list what the trust will own now and later, including shares, cash, IP or other investments.
3. Choose The Trustees: decide whether individuals or a corporate trustee are more appropriate for continuity and governance.
4. Check Control: identify who can appoint and remove trustees, and whether one person has too much practical control.
5. Tailor The Deed: make sure beneficiaries, powers, distribution rules and vesting provisions match your actual plans.
6. Document Asset Movements: use resolutions, registers, contracts and accounting records so ownership is clear.
7. Set Calendar Reminders: diarise annual trustee meetings, tax deadlines, distribution decisions and deed reviews.
8. Review After Big Changes: revisit the structure after marriage, separation, new children, business growth, new investors, or major asset changes.

If your trust was set up years ago, this checklist is also a useful review tool. Many trust problems come from old deeds that no longer match your family, your business, or modern Trusts Act 2019 expectations.

Key Takeaways

• A discretionary trust lets trustees choose which beneficiaries receive income or capital, how much they receive, and when.
• A discretionary beneficiary is usually a potential recipient, not an owner of a fixed share of trust assets.
• Trustees must follow the trust deed and the Trusts Act 2019, including duties around proper purpose, records and beneficiary information.
• Family trusts can be useful for business succession and long-term wealth planning, but they aren't automatic asset protection.
• The trust deed, trustee choices, asset records and annual administration are what make your structure work in practice.

If you'd like help with discretionary trust setup, corporate trustee company setup, trust deed review or trustee governance documents, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.