Winding Up a Family Trust in NZ: 5 Reasons to Consider It
The Trusts Act 2019, which came into full effect in 2021, has significantly changed the landscape for family trusts in New Zealand. With stricter rules and increased compliance, many Kiwis are now questioning whether their trust is still necessary.
While thousands of trusts in New Zealand are no longer needed, deciding to wind one up requires careful thought. Here are five common reasons why you might consider dissolving your family trust.
1. The Trust’s Original Purpose No Longer Exists
Many trusts are set up for a specific reason that is no longer relevant. Common examples include:
- Completed Goals: The trust was established to fund your children’s education, and they have now all graduated.
- Succession Planning Changes: The trust was created for the benefit of you and your children, but you are now the sole remaining beneficiary. The children may decide it is simpler to wind up the trust and distribute the assets directly.
If the trust has served its purpose, keeping it active may create unnecessary cost and administration.
2. The Cost and Complexity of New Compliance Rules
The Trusts Act 2019 introduced more demanding obligations for trustees. This includes stricter reporting requirements and mandatory duties to disclose information to beneficiaries. For many, the increased time, cost, and administration involved in running a trust now outweigh the benefits, making winding it up a practical choice.
3. Changes in Personal Relationships
A trust is often established by a couple during their relationship. If that couple later separates or divorces, a key reason for the trust’s existence is gone. As part of their relationship property settlement, the couple may agree that the simplest path forward is to dissolve the trust and divide the assets.
4. Residential Care Subsidy (RCS) Concerns
In the past, trusts were a popular tool for asset protection when applying for the Residential Care Subsidy. However, rule changes have limited their effectiveness. The Ministry of Social Development has strict limits on gifting (currently a total of $27,000 per couple, per year in the years leading up to an application). Any gifting beyond this can be considered deprivation of assets, impacting your eligibility.
5. The Trust Holds a Mortgage or Debt
Managing a trust that owns mortgaged assets can be complicated. If you decide to wind up the trust, you cannot simply close it down. Your lawyer will need to work with your bank or other creditors to rearrange the debt into the names of the new owners, which requires the lender’s consent.
How to Wind Up Your Trust
Closing a trust is a formal legal process. It involves reviewing the Trust Deed, preparing final accounts, distributing all assets to the beneficiaries, and signing a Deed of Dissolution.
Before you make any decision, it is essential to get professional legal and accounting advice. An expert can help you understand the tax implications, creditor arrangements, and legal steps required.
If you’re thinking about dissolving your trust and would like some advice, it is just one click away.
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