Running a Family Trust in New Zealand: Complete Management Guide

Setting up a family trust is only the first step. Proper ongoing management is essential to maintain the trust's asset protection benefits, comply with the Trusts Act 2019, and ensure your trust achieves its intended purposes. This guide explains everything trustees need to know about running and managing a family trust in New Zealand.

Understanding Your Role as a Trustee

Being a trustee is a serious legal responsibility. The Trusts Act 2019 imposes mandatory duties that trustees must fulfill. Breaching these duties can result in personal liability, including repayment of lost trust funds.

Mandatory Trustee Duties (Cannot Be Modified)

• Know the trust terms: Read and understand the trust deed thoroughly. You can't fulfill duties if you don't know what they are.
• Act in accordance with trust terms: Follow the trust deed's provisions exactly. The deed is the trust's rulebook.
• Act honestly and in good faith: Put beneficiaries' interests ahead of your own. No self-dealing or conflicts of interest.
• Act for benefit of beneficiaries: All trustee decisions must benefit beneficiaries as a whole, considering both current and future beneficiaries.

Default Duties (Can Be Modified in Trust Deed)

• Exercise care and skill: Standard of a prudent businessperson managing their own affairs
• Invest prudently: Diversify investments and manage risk appropriately
• Not profit from being trustee: Unless trust deed authorizes trustee fees
• Act unanimously: All trustees must agree on decisions (unless deed allows majority)
• Avoid conflicts of interest: Disclose and manage any personal interests that conflict with trust interests
• Impartiality: Balance interests of different beneficiaries fairly

Annual Trust Administration Tasks

Running a trust effectively requires regular attention. Here's what trustees should do every year:

1. Annual Trustee Meeting (Before 31 March)

Hold at least one formal trustee meeting each year. The meeting should:

• Review the trust's financial position (income, expenses, assets, liabilities)
• Discuss beneficiaries' current needs and circumstances
• Make distribution decisions (who gets what, how much)
• Review and approve annual accounts
• Consider any trust deed amendments needed
• Discuss upcoming year's plans (property purchases, investments)
• Confirm trustees' understanding of their duties

2. Trustee Meeting Minutes

Document all trustee meetings in written minutes. Minutes should include:

• Date, time, and location of meeting
• Names of trustees present
• Review of trust's current position (assets, income, beneficiaries)
• Specific decisions made (distributions, investments, purchases)
• Reasons for decisions (especially distribution decisions)
• Any dissenting views (if trustees disagreed)
• Actions to be taken following the meeting
• Signatures of all trustees present

3. Distribution Resolutions

When trustees decide to distribute income or capital to beneficiaries, prepare formal resolutions:

• State the amount being distributed
• Identify the beneficiary receiving the distribution
• Specify whether it's income or capital
• Record the decision date (must be before 31 March for income distributions)
• Document reasons for the distribution decision
• All trustees must sign the resolution

4. Financial Statements

Prepare annual financial statements showing:

• Income received (rental, dividends, interest, business income)
• Expenses paid (rates, insurance, maintenance, professional fees)
• Distributions made to beneficiaries
• Assets owned by the trust (property, investments, cash)
• Liabilities owed (mortgages, loans)
• Current financial position (net assets)

5. IRD Tax Return (IR6)

All trusts must file an annual tax return with Inland Revenue:

• Due date: 7 July (or extension date if using a tax agent)
• Report all trust income and distributions
• Declare trustee income retained (taxed at 33%)
• Report beneficiary distributions
• Calculate and pay any tax owing
• File even if trust has no income (nil return)

6. Gifting Program (If Applicable)

If you transferred mortgaged property to the trust, manage the gifting program:

• Calculate annual gift amount (typically $27,000 per person)
• Prepare gift documentation and trustee resolution
• Record gift in trust accounts
• Track remaining debt owed to settlors
• Continue until debt fully forgiven

Record-Keeping Requirements

The Trusts Act 2019 requires trustees to keep comprehensive records. Essential documents include:

Core Trust Documents

• Original trust deed
• Any amendments or variations to the trust deed
• Trustee appointment and removal documents
• Settlor documentation

Financial Records

• Bank statements for all trust accounts
• Receipts for all expenses
• Annual financial statements
• Tax returns and IRD correspondence
• Asset register (list of all trust property)
• Valuation reports for property or business interests

Governance Records

• Trustee meeting minutes (all meetings)
• Distribution resolutions
• Investment decisions and rationale
• Correspondence with beneficiaries
• Beneficiary information requests and responses

How Long to Keep Records

Retain records for:

• Trust deed and amendments: Forever (essential trust documents)
• Trustee minutes: Forever (evidence of proper governance)
• Financial records: Minimum 7 years (IRD requirement)
• Tax returns: Minimum 7 years
• Distribution records: Minimum 7 years

Making Distribution Decisions

One of trustees' key responsibilities is deciding when and how to distribute trust income or capital to beneficiaries.

Factors to Consider

• Beneficiary needs: Education, housing, medical, living expenses, age and capability
• Trust purposes: Why the trust was established (settlor's intentions)
• Tax efficiency: Distributing to beneficiaries in lower tax brackets
• Asset protection: Once distributed, assets become beneficiary property
• Fairness: Treating all beneficiaries equitably over time
• Future needs: Maintaining capital for long-term objectives
• Beneficiary circumstances: Financial position, capability to manage money

Income vs. Capital Distributions

Income distributions:

• Profits from trust investments (rent, dividends, interest)
• Must be resolved by 31 March to be taxed in beneficiary's hands that year
• Common for regular financial support

Capital distributions:

• Distribution of trust assets themselves (property, cash from asset sales)
• Can be made at any time
• Often used for major purchases (home deposit, business investment)
• Generally not taxable to beneficiaries
• Reduces trust capital permanently

Documenting Distribution Decisions

Always record in trustee minutes:

• Which beneficiary receives distribution
• Amount and type (income or capital)
• Reasons for the distribution
• How beneficiary will benefit
• Consideration of other beneficiaries
• Tax implications
• Payment method and timing

Managing Trust Property and Investments

Trustees have a duty to invest trust property prudently and protect trust assets.

Investment Duties

• Diversification: Don't put all eggs in one basket
• Risk management: Balance risk and return appropriately for trust purposes
• Regular review: Monitor investment performance
• Professional advice: Seek expert advice for significant investments
• Liquidity: Maintain adequate cash for expenses and distributions

Property Management

If the trust owns real estate:

• Keep property adequately insured (building and contents)
• Pay rates, insurance, and maintenance promptly
• Maintain property in good condition
• Address tenant issues professionally (if rental property)
• Comply with Residential Tenancies Act requirements
• Review property values periodically

Trust Bank Accounts

• Maintain separate trust bank account (never mix with personal finances)
• Account should be in trust's name
• Require multiple signatories for transactions (usually 2 trustees)
• Keep detailed records of all transactions
• Reconcile accounts monthly
• Separate accounts for different trust purposes if helpful

Beneficiary Rights and Communication

The Trusts Act 2019 strengthened beneficiary rights. Trustees must provide information to beneficiaries on request.

Beneficiary Information Rights

Beneficiaries can request:

• Copy of the trust deed
• Names and contact details of trustees
• Terms of their beneficiary interest
• Trustee meeting minutes (subject to limitations)
• Trust financial statements
• Reasons for trustee decisions affecting them

When Trustees Can Withhold Information

Trustees may withhold information if:

• Trust deed expressly prohibits disclosure
• Disclosure would be contrary to settlor's intentions
• Disclosure would be seriously detrimental to trust beneficiaries or third parties

If withholding information, trustees must explain why and offer limited disclosure where possible.

Best Practice: Proactive Communication

• Inform beneficiaries of their status as beneficiaries
• Provide annual updates on trust affairs
• Explain distribution decisions clearly
• Respond promptly to beneficiary inquiries
• Be transparent about trustee duties and limitations
• Consider beneficiary views in decision-making

Common Trust Management Mistakes

1. Treating Trust Assets as Personal Property

Mistake: Using trust bank account for personal expenses, living in trust property without proper arrangement, or mixing trust and personal finances.

Solution: Maintain strict separation between trust and personal affairs. If using trust property personally, document proper rental or license arrangements.

2. No Annual Meetings or Minutes

Mistake: Not holding trustee meetings or documenting decisions. "We discuss it informally" isn't sufficient.

Solution: Hold at least one formal meeting annually. Document all decisions in proper minutes. This evidences active trust governance.

3. Not Maintaining Separate Bank Account

Mistake: Using personal bank account for trust transactions or not having a trust account at all.

Solution: Open a separate bank account in the trust's name. All trust income goes in, all trust expenses come out. Never mix trust and personal money.

4. Ignoring IRD Obligations

Mistake: Not filing annual IR6 tax returns, missing tax payment deadlines, or poor record-keeping for tax purposes.

Solution: Engage an accountant familiar with trust taxation. File all returns on time. Keep detailed records of income, expenses, and distributions.

5. Making Decisions in Own Interest

Mistake: Trustees prioritizing their own interests over beneficiaries', or making decisions primarily for personal tax benefit.

Solution: Always act in beneficiaries' best interests. Consider all beneficiaries fairly. Balance tax efficiency with genuine beneficiary welfare.

When to Seek Professional Help

Professional trust administration ensures compliance and protects trustees from liability. Engage professionals when:

Annual Administration Services

• Preparing trustee meeting minutes
• Drafting distribution resolutions
• Managing gifting programs
• Maintaining trust records
• Filing IRD tax returns
• Responding to beneficiary information requests
• General trustee advisory support

Cost: $800-$2,500/year depending on trust complexity and services required

Legal Advice Required For:

• Trust deed amendments or variations
• Adding or removing trustees
• Significant property transactions
• Beneficiary disputes or challenges
• Relationship property implications
• Complex distribution decisions
• Winding up the trust

Tax Advice Required For:

• Distribution tax planning
• Bright-line test implications
• Trust restructuring
• IRD audits or investigations
• Complex income splitting

Trust Administration Checklist

Conclusion: Active Management Preserves Benefits

A family trust is not a "set and forget" arrangement. The Trusts Act 2019 requires active, ongoing governance. Trustees who fail to maintain their trust properly risk:

• Loss of asset protection benefits
• Personal liability for breaches of duty
• IRD penalties and tax issues
• Beneficiary claims and disputes
• Court intervention in trust affairs

Proper trust management involves:

• Annual trustee meetings and comprehensive minutes
• Thoughtful distribution decisions benefiting beneficiaries
• Detailed record-keeping of all trust affairs
• Compliance with IRD reporting requirements
• Professional administration support

The cost of professional trust administration ($800-$2,500/year) is small compared to the value of asset protection and the risk of getting it wrong. Well-managed trusts provide decades of benefit for families. Poorly managed trusts become expensive liabilities.