Winding Up a Trust

Trusts are used by many New Zealanders to protect their assets, optimise their tax positions, and help plan who will inherit their property.

However, recent changes in tax regulations, increased compliance obligations, and rising administrative costs are making trusts more burdensome and expensive for some people. In addition, trusts are created for a purpose, and once they’ve served that purpose, it may be better to move on. Is it time to wind up your trust? But, some benefits can outweigh these downsides.

In the past, one of the biggest advantages of using a trust was effective tax planning. Now the trustee tax rate has increased to match the top marginal tax rate of 39%, which reduces the tax benefits of most trusts. However, there may be small tax benefits in some cases.

The Trusts Act 2019 has also brought in greater disclosure and compliance obligations, and accountability of trustees to beneficiaries. Anti-money laundering requirements have added further complexity, and it is now more difficult to borrow as a trust. Independent trustees, accountants, and lawyers need to charge fees to manage and maintain trust records. On the whole, keeping up a trust has become more complicated, time-consuming, and expensive. Maintaining your trust could possibly be more trouble than it’s worth.

However, there may still be significant benefits from maintaining your trust. Your trust may still be vital for protecting your key assets from creditors, and from relationship property claims by any future partner of your spouse if you die. They can also enable you to receive your inheritance separate from your spouse, partners of children or other family members under the Family Protection Act 1955. Trusts can also be very useful for family and estate planning, allowing you to set aside money for particular purposes, such as a child’s education.

Even though there is no longer a saving to be made on earnings by having them taxed at the trustee rate, a trust may still allow you to lower your family’s overall tax burden by distributing income to beneficiaries who would be taxed at lower marginal income tax rates. These are all factors to be mindful of when considering whether to wind up your trust.

You may come to the conclusion that your trust has served its purpose and is no longer worth the trouble and expense of maintaining it. Winding up trusts, and the conveyancing it involves, is something we’re very experienced in. So if you’re thinking of winding up your trust or simply want some advice, we’re more than happy to help.