Setting up a Trust in New Zealand

Will you need to set up a family trust in New Zealand when you emigrate?

Family trusts are quite common in New Zealand, and can be a useful way of protecting your assets and even for tax planning purposes.

If you are interested in setting up a trust before you move to New Zealand to assist with your tax and asset planning, please take a look at our separate article on pre-migration trusts for UK emigrants to New Zealand, which covers the opportunities this offers and the issues involved.

As part of our commitment to your financial wellbeing when you emigrate to New Zealand, we have commissioned the following article on Making a Will in New Zealand from noted Christchurch lawyer Henry Brandts-Giesen from Helmore Ayers Lawyers. 

New Zealand Family Trusts

A family Trust is a very common and effective arrangement in New Zealand to hold and protect property such as real estate and investments. The usual objective of a family Trust is to preserve and enhance family wealth and wellbeing for the current generation and to leave a legacy for future generations.

There are a number of risks which can threaten family wealth and wellbeing including:

1. Claims arising from business dealings (for example, customers, patients and creditors),
2. Claims by family members (for example, de facto or marriage partners),
3. Sickness, death or disability within the family,
4. Tax,
5. Inflation,
6. Poor investment strategy
7. Future Government legislation.

Many of these risks can be managed through intelligent planning at an early stage.

A Trust can safeguard family assets because it effectively takes them off your balance sheet and puts them on the balance sheet of the Trust. However, you can still benefit from those assets and even retain a degree of control over how they are managed and distributed.

What is a Trust?

Where a person or a company in New Zealand holds property for the benefit of another person or group of persons then you have a simple Trust in existence.

• The person holding the property (the legal owner) is the Trustee.
• The people who benefit from the property held are the Beneficiaries.
• The person putting property into the Trust is called the Settlor.
• The rights and obligations of the Trustee are normally recorded in a Trust Deed. The terms of the Trust Deed are decided by the Settlor.

Typically, a husband and wife will be the Settlors of a Trust and they will also be Beneficiaries together with their children. The choice of Trustee is a very important one. It is important that the right person is chosen for the job. That person must be trustworthy, experienced, independent, accountable to others (such as a professional body) and have the right skills. Often lawyers are chosen for this role together with one or more of the Settlors and sometimes others. It is a specialist role with very important duties and responsibilities.

Trusts are very specifically dealt with under New Zealand law. Trustees are subject to very strict duties and responsibilities. Always seek good legal advice from the outset so that the Trust is properly established and managed and the right people are selected as Trustees.

Setting Up a New Zealand Trust

Transfer of Assets: This is most commonly done by the Settlor selling the assets to the Trust at market value and creating a debt owed by the Trust to the Settlor. The Settlor then reduces the debt by gifting at rate that can allow Gift Duty in New Zealand to be avoided.

Another option for new migrants to New Zealand is for the property to be transferred outright before the Settlor arrives in New Zealand. In some circumstances it may be appropriate for a Trust to be established on the flight over or at a stop off point along the way (sometimes known as a "bed and breakfast trust"). That might help to avoid certain duties in either New Zealand or their jurisdiction of origin.

Terms of the Trust: Other than the maximum duration of the Trust, which is usually 80 years, the Settlor can effectively decide the terms of the Trust. The Settlor or another person can retain the power to vary the other terms of the Trust as family circumstances change.

Other common powers which the Settlor can retain include:

1. the power remove Trustees and appoint new ones;
2. the power to direct how the assets of the Trust are invested;
3. the power to suggest or veto distributions to beneficiaries; and
4. the power to appoint and remove beneficiaries.

Investment Strategy: One of the most important duties of a Trustee is to ensure that the investments of the Trust perform sufficiently well to allow the objectives of the Trust to be fulfilled. Often a Trust will have a passive investment strategy because its sole asset will be a family home. However, often Trust investments are more complex and diverse and require active management. In such cases Trustees may not be qualified to manage investments and it is generally prudent for a qualified and competent investment manager to be appointed by the Trustee (either in consultation with or at the direction of the Settlor). The investment manager should be monitored and held accountable by the Trustee on a regular basis.

Specific Uses of New Zealand Trusts

Pre-migration planning:

A pre-migration Trust can be used to prepare for migration and take advantage of tax exemptions. However, it is very important to take good tax and legal advice well in advance of actually moving. For more information please see our separate article on pre-migration trusts for Brits emigrating to New Zealand.

Protecting against claims:

Holding certain family assets in a Trust can provide some peace of mind in undertaking business activities by putting them out reach from creditors. Family wealth can also be protected from claims by former spouses and future partners / spouses of children.

The crucial factor in transferring assets to a New Zealand Trust for asset protection reasons is the timing of the transfer. The transfer should be made some considerable time prior to any claims. The transfer should be made for full market value and without the intention of defeating existing creditors or other people with a legitimate claim to the assets.

Confidentiality:

A Trust is confidential. There is usually no requirement for the Trustee to disclose the names of the Settlor or Beneficiaries of the Trust to any regulatory authority or other people in New Zealand. This can reduce the risk of assets held by the Trust being traced back to the people who will benefit from the Trust.

Providing for children's education:

By paying for children's education and travel from the income from a Trust then the benefits of the children's lower income tax rates may be obtainable. There are tax rules which relate to payments to children who are under the age of majority but generally speaking distributions can be engineered so that they are tax efficient.

In today's climate of user pays for education providing a secure fund for children's education may be of primary concern. A Trust which provides for your children's education and maintenance may be established.

Rest home care subsidies:

The New Zealand government provides financial subsidies to elderly people who require rest home care. However, this entitlement to a subsidy is dependant on the level of income and assets owned by the person who requires care. A Trust can be effectively used to enhance the prospects of receiving a government subsidy for rest home care.

However, there are strict rules in place and so good advice is essential.

Minimising or deferring certain taxes:

Trust income which is paid to a Beneficary resident in New Zealand within the same tax year as the income is earned is taxed at the Beneficary's individual rate of income tax when it is received by that Beneficiary. Therefore a high income earner who receives a distribution of income would pay tax on that income distribution at a rate of 38%. However, a university student or other low income earner would pay tax at a much lower rate.

Therefore if a Settlor pays tax at the top rate of tax in New Zealand then he or she may be able to transfer income producing investments to a Trust and distribute the income to his or her children and spouse at lower tax rates.

Similarly, if the family is not reliant on income from the Trust then that income does not need to be distribution and can be rolled up as capital. The Trust would then pay tax at a rate of 33% on the income. If the Settlor's marginal tax rate is 38% then there may be some tax savings to be made.

Anticipating future government legislation

At present there is no inheritance tax, death duty or estate duty in New Zealand. However, as revenue authorities all over the world struggle to fill the coffers there is no guarantee that this privileged position will continue indefinitely. 

Many social services and government benefits in New Zealand are already dependent on asset testing. Transferring major assets to a Trust well in advance of a reintroduction of such taxes or other steps by future governments may effectively preserve and enhance family wealth for future generations.

IMPORTANT NOTE: As individual circumstances vary it is imperative that tax and legal advice be taken on a case by case basis. This information is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, professional advice. Helmore Ayers Lawyers accepts no liability in this respect.

Please contact Henry Brandts-Giesen of Helmore Ayers Lawyers for further advice on setting up enduring power of attorney in New Zealand.

Broadbase International will work with you every step of the way to help you make a confident start to your new life in New Zealand. Please contact us if you have any questions about the financial side of life in New Zealand, and don't forget to order your free copy of our comprehensive New Zealand Guide.