Family Trusts in New Zealand: The Reckoning

New Zealand's trust rules have changed more in the last five years than in the previous fifty. The trustee tax rate has risen to 39 percent and the Trusts Act 2019 sets duties every trustee must meet. Inland Revenue gathered four years of detailed data before its disclosure regime was repealed in 2026, and the New Zealand Supreme Court has clarified when a trust protects assets in a relationship property dispute. If you are the settlor of a family trust, or one of its trustees, the useful exercise is exploring whether it still does a job worth its time and effort.

Few countries are as besotted with trusts as New Zealand. Somewhere between 300,000 and 500,000 trusts operate across a population of just over five million, roughly one for every 10 to 17 people, which is more trusts per capita than any other nation on earth. Tax specialist Terry Baucher's figures, reported by NBR, show one New Zealander in 23 files a tax return for a trust. By comparison, the figure is one in 26 for Australians, one in 105 for Americans and one in 108 for Canadians. In the United Kingdom, birthplace of the common law trust, it is only one in 441.

For decades the family trust was the Swiss Army knife of New Zealand financial life. The trust structure was expected to deliver asset protection from business creditors, tax efficiency while the trustee rate sat below the top personal rate, and a way to pass assets to the next generation under rules set in advance. It was also meant to shield assets in a relationship property dispute and give a head start on the residential care subsidy. It did all of this, or appeared to, for a few thousand dollars in setup costs and a modest annual accounting bill. "Two or three decades ago, nearly anyone who saw a financial adviser was encouraged to consider establishing a family trust. Now the opposite is true: financial advisers regularly end up questioning why the family trust still exists," says Hayden Mulholland, one of Become Wealth's financial advisers.

Those days are over. Trusts still serve a valid purpose in many cases, but the rules around them have changed so profoundly, in such a compressed period, that many New Zealanders hold assets inside structures they only partly understand. Each change on its own would have warranted a serious conversation with your lawyer. Together, they amount to the most significant overhaul of the New Zealand trust environment in half a century.

New Zealanders appear to have noticed. The number of trusts and estates filing a tax return peaked at 263,700 in 2017 and had fallen to 233,000 by the 2024 tax year. Inland Revenue attributes part of the decline to a higher threshold for inactive trusts. Baucher told NBR three groups are driving the wind-ups he sees: retirees whose business risk has passed, settlors uneasy about sharing information with beneficiaries, and trusts with beneficiaries overseas.

The tax hit: from 33 percent to 39 percent

The single most talked-about change is the increase in the trustee tax rate from 33 percent to 39 percent, effective from 1 April 2024. This happened because, after the government introduced a 39 percent top personal income tax rate in 2021, IRD data revealed a sharp spike in income flowing through trusts. Trustee income jumped from $11.4 billion in the 2020 tax year to $17.1 billion in 2021. Income-producing assets were being shifted into trusts to sidestep the top personal rate, and the government moved to close the gap.

The behaviour continued right up to the deadline. In the 2024 tax year, the last before the 39 percent trustee rate applied, trustee income spiked to $41.5 billion, almost three times the previous year. Companies paid dividends up to their trust shareholders while the lower rate still applied. Once the new rate took effect, trustee income fell to $6.7 billion. The share of trust income kept by trustees dropped from 86 percent to 46 percent in a single year, with the balance allocated to beneficiaries. Inland Revenue attributes most of the swing to dividend timing by companies owned through trusts, so it probably says more about trusts which own businesses than about a typical family trust holding a rental and a share portfolio. Either way, trustees adapted quickly.

For trusts, there is no marginal income tax banding. If a trust's net income after deductible expenses is $10,000 or less, all of it is taxed at 33 percent. Above $10,000, the entire amount is taxed at 39 percent, so a trust earning $10,001 pays 39 percent on the full $10,001. Deceased estates receive a three-year grace period at 33 percent, and trusts established for disabled beneficiaries are similarly protected.

The nuance which many people miss: the 39 percent rate applies only to income retained in the trust. Income distributed to beneficiaries is taxed at their personal marginal rates. A beneficiary earning under $180,000 pays tax at 33 percent or less on distributed trust income, and one earning under $78,100 pays 30 percent or less. The incentive to distribute income is obvious, and it needs care. When trustees allocate income to a beneficiary, the amount is usually credited to the beneficiary's current account and becomes a debt the trust owes them, which they can call on. Allocate $30,000 to an adult child purely to reduce the tax bill and the child is entitled to ask for the money. The allocation also lands in the child's own tax return, where it can affect provisional tax, student loan repayments and income-tested entitlements. Inland Revenue has said it will look closely at allocations made on paper with no intention of paying them out.

The PIE alternative

One choice the tax rate change has brought into sharper focus is investing via a Portfolio Investment Entity, or PIE. The choice arises only for assets a PIE fund can hold, which means shares, bonds and cash, so it is irrelevant to a trust whose main asset is a rental property or properties, for instance. For a trust which does hold investments, the comparison is simple. Held directly, retained income is taxed at 39 percent. Held through a PIE fund, the trust can elect a prescribed investor rate (PIR) capped at 28 percent, and at that rate the PIE's tax is final. Overseas shares complicate the comparison, because both routes tax a deemed return each year regardless of what the shares earn, and PIE fund fees come off the top. Conditions attach to the 28 percent election.

Because the tax is final, that income stays out of the trust's return and is unavailable for allocation to beneficiaries on lower rates. A trustee who wants to keep that flexibility can elect a lower rate, but the PIE income then goes into the trust's return and is taxed there.

Inland Revenue has signalled it will watch for contrived arrangements built around the 39 percent rate, while accepting ordinary PIE investment and distributions to beneficiaries as legitimate. Which election suits a given trust is a conversation for your accountant.

Beneficiaries overseas

Trust beneficiaries, and even trustees, who live abroad can run into substantial international tax issues, including in countries such as Australia whose tax systems might otherwise be thought similar to New Zealand's. About 13 percent of New Zealand citizens live overseas, one of the highest rates in the OECD, so that situation now describes a great many New Zealand trusts. Australia, for instance, taxes its residents on most money, assets, loans and benefits received from a foreign trust under section 99B of its Income Tax Assessment Act 1936. The trust's original capital is generally excluded, but accumulated income and gains are caught. A capital gain which attracted no tax in New Zealand becomes assessable income in the Australian beneficiary's hands, taxed at their marginal rate. The 50 percent discount Australian residents usually receive on capital gains is unavailable, and even capital losses offer no relief. The Australian Taxation Office's own worked example is a New Zealand trust which sells land and distributes the proceeds to a beneficiary living in Australia.

This rule catches anyone resident in Australia at any point in the income year of the distribution, so a child who emigrated in March can be taxed on a payment made the previous October. The capital exclusion depends on records tracing each distribution back to its source, and the ATO expects beneficiaries to obtain that information from the trustees. Appointing an Australian-resident trustee can be even worse, because Australia can then treat the whole trust as Australian tax resident and tax its capital gains at source. The United Kingdom works differently though reaches a similar conclusion: a capital payment to a UK-resident beneficiary is matched against gains accumulated in the trust and taxed accordingly. International tax rules are complex enough on their own. Once a trust is involved, specialist advice for the relevant country is best sought well before a trustee or beneficiary moves overseas. That leaves time to re-evaluate the assets in the trust, the distributions it may make, and if need be the trust itself.

The Trusts Act 2019: more than paperwork

If the tax changes hit the wallet, the Trusts Act 2019 hit the filing cabinet. In force since 30 January 2021, the Act replaced trust law provisions dating back over 60 years and introduced a framework of mandatory and default duties for trustees.

The mandatory duties apply to every trust, whatever the deed says. Trustees must know the terms of the trust deed, act in accordance with those terms, act honestly and in good faith, act for the benefit of beneficiaries, and exercise powers for a proper purpose.

Default duties apply unless the trust deed specifically overrides them, and they are more granular: exercising reasonable care and skill, investing prudently, avoiding conflicts of interest, acting impartially among beneficiaries, and keeping the role free of personal profit. For the many New Zealand trusts where Mum and Dad serve as trustees alongside an old friend from the rugby club, the duties create personal accountability.

Trustees must retain the trust deed and any variations, records of trust property, trustee decisions, written contracts, accounting records and financial statements, documents relating to trustee appointments and removals, and any letter or memorandum of wishes from the settlor. When a trusteeship ends, all of this must be passed to at least one continuing trustee.

For a trust established in 1995, for example, digging up over three decades of records is a sizeable task.

Beneficiary rights have expanded

The Act also strengthened beneficiaries' rights to information. Trustees are now presumed to have to tell beneficiaries they are beneficiaries, which was previously optional, give them trustee contact details, and inform them of trustee changes. Beneficiaries can request copies of the trust deed and other trust information.

The presumption can be displaced in specific cases. Trustees may withhold information after weighing the factors the Act sets out, among them the beneficiary's age and the likely effect on family relationships, perhaps to keep a young beneficiary from learning too early about a substantial inheritance.

IRD trust disclosure: the regime that came and went

Layered on top of the Trusts Act were enhanced IRD disclosure requirements, introduced under urgency in late 2020 and applying from the 2021-22 income year. For four years most New Zealand trusts had to file additional information with their annual IR6 tax return: all settlors and settlements (form IR6S), beneficiaries and distributions (IR6B), and persons holding powers of appointment (IR6P). Trusts also had to prepare financial statements to minimum standards and hold them for Inland Revenue on request. The stated purpose was to find out whether trusts were being used to sidestep the 39 percent personal rate.

The cost landed on trustees. A 2023 CA ANZ survey found 70 percent of members' clients' trusts faced increases of up to $1,000 a year from the new reporting. In the more complicated trusts we see, annual accounting bills rose by substantially more.

A post-implementation review published by IRD in April 2025 recommended keeping the regime with simplifications: less granular reporting, better forms and clearer guidance. The government went further. The Taxation (Annual Rates for 2025-26, Compliance Simplification, and Remedial Measures) Act 2026 received assent on 30 March 2026. It repeals the specific trust disclosure provisions from the 2026-27 income year, because Inland Revenue already holds broad powers to require information when it needs it. Returns for the 2025-26 year still have to comply.

The repeal removes the forms, though the obligation to keep good records remains. Inland Revenue now holds four years of detailed data on who settled what, who received what and who controls each trust, and it is still deciding what to keep collecting under its general powers. The Trusts Act record-keeping duties and Inland Revenue's general information powers continue independently of the forms.

Trusts and relationship property: recent Supreme Court cases

Several recent court cases have clarified the protections which trusts do or don't offer. Recent Supreme Court decisions settled the central issue: when a person's powers under a trust deed can be treated as relationship property, and therefore shared on separation:

1. The first was the 2016 case of Clayton v Clayton. Mr Clayton was sole trustee of a family trust, could add or remove beneficiaries at will, and could distribute all of the assets to himself without breaching any duty to anyone. The trust itself was valid, but the Supreme Court held his powers over it were so extensive they were "tantamount to ownership". It treated those powers as an asset in their own right, worth the whole of the trust fund. Because the trust had been settled during the marriage, that asset was relationship property to be divided.
2. Cooper v Pinney in December 2024, involved a more conventional trust. Ms Cooper argued her former partner's powers under the trust should be treated the same way. Mr Pinney was a settlor, trustee and discretionary beneficiary with the power to appoint and remove trustees. But the deed required at least two trustees acting unanimously, trustees had to act independently, and he was unable to remove every beneficiary other than himself. The Supreme Court dismissed her claim. Those constraints meant Mr Pinney's powers fell short of ownership, and his duties to the other beneficiaries were real and enforceable.

For the hundreds of thousands of trusts built on the standard template, with two or more trustees, at least one of them independent, and limits on self-benefit, Cooper v Pinney is reassuring. As law firm Duncan Cotterill concluded, most trusts look like Mr Pinney's and few look like Mr Clayton's. However, the deed provisions are only part of the protection. Trust and personal assets need separate accounts, decisions need minutes and resolutions, and trustees need to treat beneficiaries the way the deed says, because a court reads conduct as well as drafting. A trust where one person effectively decides everything, including who the trustees and beneficiaries are, or where assets are intermingled, remains vulnerable. Other remedies also exist and are available to the courts, such as compensation where relationship property was moved into a trust to defeat a partner's rights.

Trusts and the residential care subsidy myth

While we are dismantling comfortable assumptions, let us address the elephant in the retirement village. Many trusts were established, at least partly, on the premise they would help the settlor qualify for the government's Residential Care Subsidy.

The reality is considerably more complicated than many people may have been led to believe when they set up their trust. The Ministry of Social Development now looks past legal ownership. It examines gifting histories, deemed income from trust assets, and whether the settlor deprived themselves of assets to qualify. Where it finds deprivation, the assets can be added back into the means assessment regardless of when the transfer occurred.

The gifting thresholds are modest. Under Work and Income's current guidance, in the five years before a subsidy application only $8,500 per year is exempt, up to $42,500 in total for an applicant and partner combined. Beyond five years, the threshold is $27,000 per couple per year. These thresholds are subject to change, so if this is relevant you will want to check the latest figures. For a home transferred recently, the trust usually owes the settlor the purchase price, and that debt is forgiven in instalments. A $1 million debt forgiven at $27,000 a year takes 37 years, an unworkable timeframe for most. An older trust whose debt was fully forgiven decades ago is in a different position. Even then, allowable gifting settles only the gifting question; MSD still looks at excess gifts, outstanding debts and other deprivation on the facts.

The rules can reach further. Suppose the trust still owes the settlor part of the price of the home, and the settlor charges no interest and never calls on the debt. Under Work and Income's deprivation rules the unpaid debt remains the applicant's asset, and the interest foregone can be counted as income the applicant chose to give up. Lawyer Juliet Moses told NBR that trusts stopped being useful for avoiding aged-care costs long ago, and can leave a family worse off than if the trust had never existed.

So, should you keep your trust?

The honest response will frustrate anyone hoping for a simple yes or no. It depends on the purpose of the trust, what it holds and who benefits from it, what it costs, and how much of the family's time and attention it consumes. Trusts remain highly valuable in selected situations, including:

• Business owners might face ongoing liability risk, and a trust holding the family home separately from commercial assets can provide protection. The same applies to anyone carrying personal liability for a business, including directors and guarantors who hold no shares.
• A member of a blended family can use one to hold assets for particular children under rules which outlast the parents.
• Parents who want an inheritance released in stages, say to a 22-year-old, instead of as a single lump sum, still need a trust or something very like one.

Other trusts can be more trouble than they are worth. "In our experience, an active trust requiring annual accounts, tax work, trustee administration and periodic legal input readily costs $3,000 to $5,000 a year. Over a decade, a trust without a compelling purpose might be a $30,000 to $50,000 commitment," says Become Wealth financial adviser Nik Velkovski. Fees to accountants, and possibly a lawyer and professional trustee, are only part of the burden. Trustees have to meet, decide and record; someone has to chase the accountant and read the deed; and there are potentially higher taxes too. Even opening a trust investment or bank account comes with substantially more paperwork than doing so in joint or sole names. A family whose affairs would be simpler with the trust gone is paying in time as well as money.

Consider, too, the risk the trust is guarding against. Much of the litigation that drives trust use in places like the United States is absent here, because ACC takes personal injury claims off the table. The negligence risk which worries doctors, lawyers and accountants is met first by professional indemnity cover, whose limits and exclusions should be thoroughly explored before deciding a trust is needed in addition. For a salaried household, exposure to creditors (those you owe money to) is usually close to nil. The exposures which do bite are usually the personal guarantees people sign: a business owner guaranteeing the company's bank, landlord and suppliers, a director who guarantees company debt without holding shares, or parents who guarantee an adult child's mortgage. Director duties under the Companies Act and relationship property are the other two. A contracting-out agreement, insurance or a company structure sometimes does the job better than a trust. Our view is that a trust structure pays off mainly for people with substantial assets and liabilities or contingent liabilities they can name.

There is another respectable argument for keeping a trust. Tax rules keep changing, and a capital gains tax or wealth tax, should one arrive, might treat assets already inside a trust differently from assets moved in later. Some practitioners therefore advise keeping an existing trust as an option on an uncertain future. Tax expert John Cuthbertson, who is working with officials on behalf of CA ANZ, made that case in an NBR analysis. Nobody knows whether a future regime would treat existing trusts differently, whether transitional or anti-avoidance rules would cancel the advantage, or whether any saving would outweigh years of fees, potentially higher taxes and inconvenience. The capital gains tax designs New Zealand has debated, including the 2019 Tax Working Group's, excluded the family home.

Example trusts under review

The trusts most likely to be worth keeping are those which solve a clearly identifiable problem. To bring the principles above to life, the trusts below are illustrative examples, and each assessment is a reading of a simple set of facts, which falls well short of formal advice on trust suitability.

• ‍A retired couple have about $1.5 million worth of assets, mostly comprising the family home, and all of it held in a trust settled in the early 2000s. The trust earns nearly nothing, so the 39 percent rate is of little concern, but the couple find the ongoing administration a chore. Both the couple's adult children are established, and the home would pass under their wills. The role the trust might still perform is residential care positioning, which depends on the debt having been forgiven years ago within the thresholds of the day and on MSD accepting the arrangement. Assessment: the trust is unlikely to serve a purpose.‍
• A man in his second marriage has children from both marriages. A rental property and a share portfolio sit in a trust settled before the second relationship; everything else is owned jointly with his second wife. The trust keeps assets intended for his first children apart from the relationship property pool and will pass them to those children when the time comes. The trust retains about $50,000 of net income a year, so the rate rise costs it roughly $3,000 a year in extra tax, or $30,000 over a decade if income and rates stay where they are. He regards that as the price of the protection. Assessment: the trust likely serves a purpose, provided it is properly run.‍
• A wealthy business owner in the construction industry has signed personal guarantees to the bank and two suppliers and carries director duties. Liability cover is held, which is intended to meet claims that might arise in the ordinary course of business; the guarantees are what reach personal assets if the company fails. A trust holding the home and other assets intended for protection, kept apart from the company, probably addresses that exposure. That holds provided conditions are met, including that the trust was settled while the owner was solvent and well before any trouble, and has been appropriately maintained. Assessment: the trust likely serves a purpose.

Where to start

If you are the settlor of a family trust, or one of its trustees, start with the purpose. Why does the trust exist, and does that reason still hold? If it does, conversations follow with:

1. A trust lawyer, who can check the deed against the Trusts Act 2019 and against the factors clarified in the Cooper v Pinney court case.
2. Your accountant, who can advise on whether the trust should retain or distribute income, how the trust and any company it might own fit together, and, where it holds investments a PIE fund could hold, which election suits.

Anyone connected with the trust who lives overseas belongs in both conversations. If the original reason has gone, the lawyer's advice covers the alternatives, which run from changing trustees or varying the deed through to winding up. Winding up has one-off costs of its own: title transfers, bank consent or refinancing, tax on any gains realised, and settling beneficiary current accounts.

The bottom line: New Zealand family trusts

New Zealand's trust regime has been modernised, taxed more heavily and scrutinised more closely than ever before. For trusts serving a genuine purpose, properly structured and competently administered, the foundations remain solid. The costs are higher, the obligations heavier, and the consequences of getting it wrong, in tax, compliance or the Family Court, are more severe than they have ever been.

If your trust deed is sitting in a drawer somewhere collecting dust, now is a great time to read it and start a conversation you might have been putting off. A structure you may only half understand is hard to use well.

Your lawyer, your accountant and your financial adviser are all going to be involved. You may as well invite them to the same table. If you would like us to coordinate with the other two, book a complimentary consultation.

_{Disclaimer: This article is for general information purposes only and does not constitute legal or tax advice. Trust law is complex, and individual circumstances vary significantly. Always seek professional advice from a qualified lawyer and accountant before making decisions about your trust.}