What is a trust?

by The FindLaw Team

Although there are different types of trusts with various purposes, they all have the same fundamental structure.  A trust is a legally binding arrangement when a person (the settlor) transfers legal ownership of assets to certain chosen persons (trustees) to be held on trust for the benefit of persons named by the settlor (the beneficiaries).

Crucial to the understanding of a trust is, however, the fundamental principle that trusts are not separate legal entities, like companies.

Trusts are not only used in the personal and family wealth contexts but also as a structure for managing collective investments, such as unit trusts and superannuation trusts, in the commercial context with trading trusts and for charitable purposes.

Components of a trust

Once a trust is created, the settler loses legal ownership of the assets in question.  However, the settlor may be a beneficiary and even a trustee too.  This would assist the settlor to retain some form of control over the trust.

Legal ownership of the trust assets is transferred to the trustees under the directions laid out in the trust deed.  As a result, from the time the trust comes into existence, trustees are always registered as the legal owner of trust assets.  By way of example, on a certificate of title for a property, you will always see the names of the trustees recorded as owner.  Being the legal owner of the trust assets, the trustees have a duty of the utmost good faith to both the settlor and the beneficiaries to deal with the trust assets in the required way, as set out in the trust deed read together with the Trustee Act 1956.  Despite legal ownership, the trust assets do not form any part of the trustees’ estate or property.  A trustee may be a person such as a family member, friend, a lawyer or accountant, or it may be a trustee corporation.   Professional firms such as lawyers and accountants often establish trustee corporations to accept appointments as trustees of trusts for their clients.

The beneficiaries are the only persons entitled to benefit from the trusts assets held on trust by the trustees.  From a legal point of view, any person can be a beneficiary of a trust, whether that person is alive or as yet unborn.  This could be your family or even a charity.   You can even appoint yourself as a beneficiary.   You could even leave your trustees with discretion as to who the beneficiaries may be and each beneficiary’s share. It would be entirely up to you as settlor. However, it would be one of the most important decisions you make.    Ultimately, the only persons who can enforce the trustees’ obligations are the beneficiaries themselves.

A trust deed would normally set out the directions from the settlor to the trustees on the way in which the distribution of the trust assets to the beneficiaries would take place as well as recording the powers the trustees have in dealing with them.  The Trustee Act itself also affords trustees and beneficiaries certain rights too.   At all times, the trust deed will need to be read together with the applicable provisions of the Trustee Act. Any type of asset may be transferred to a trust, such as cash, real property, investments, jewellery, shares and securities.  Additional assets may be added at any time.

Why would I want to set up a trust?

Some of the more common reasons for forming a trust are:

  • Privacy – assets are held in the trustees’ names, with the identity and interests of the beneficiaries being kept confidential until the trust terminates.
  • Preservation of wealth – a trust may be used to preserve the continuation of certain assets, such as a property or business, within a family.
  • Implementation of a forced savings plan – a trust can help with retirement, health and welfare or education planning.
  • Asset protection – a trust may protect assets from legal claims to the extent permitted by law.  By way of example, it is important to bear in mind that certain legislation prohibits you from transferring your assets to a trust in order to defeat creditors’ claims, defeat spouse’s claims, avoid asset or means tests, or avoid or reduce your personal liability to pay taxes and duties.  However, there are proper and legal methods available to use trusts as mechanisms to transfer assets to trustees.  Where legally permitted, those trust assets would no longer be taken into account.
  • Asset consolidation and management – a trust may be a preferable way of placing all your assets in one holding structure, with the intended result of simplifying your asset management and financial reporting.  This may have tax implications too.
  • Succession planning – a trust is an effective tool to deal with succession planning for your family members, friends and charities in the way that you wish, without fear of legal challenge.
  • Commercial purposes – a trust can be used for various commercial purposes such as unit trusts or similar investments, NZ energy trusts, and superannuation (pension) trusts.

Need help on this issue?

As you can see, the creation of trusts is an extremely complex area of the law.  Different types of trusts for various situations have been developed over time.  There are also many issues that impact on them.  If you are thinking about establishing a trust, you will need to have a clear understanding of all the relevant issues.  If you require legal advice on setting up a trust you can use the Find a Lawyer database on FindLaw NZ to locate a lawyer in your area.

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