Is a family trust worth it in New Zealand?

Are you a New Zealand based business owner wondering whether it’s worth setting up a family trust?

I’m here to lay out some basics and let you decide if it’s worth your time and money.

You’re obviously new to family trusts, so let me give you an overview of what they are, first.

The basics of family trusts

A family trust is a legal entity set up by one person, for the benefit of another. These are called the trustee’s and beneficiaries of the trust.

The trustee has the legal title to the trust assets, while the beneficiary gets the beneficial use of the assets.

For example, the family trust owns the family home while the beneficiaries of the trust, being your children, get to use that home. You, the parent, are normally the trustee of the trust and have legal ownership.

Trusts have been around for a very long time. They can first be traced back to the Middle Ages when they were used by knights to transfer their land to a trusted third party when leaving to fight in the crusades.  

Unlike the Companies Register for New Zealand incorporated companies, there is no public register for trusts in New Zealand.

Furthermore, trusts are a separate legal entity, yet the legal title on any trust owned assets, such as property, simply shows as the trustee’s names. Anyone looking at the property title would have no idea that the property is owned by a trust.

This leads me to a trusts best use in NZ

To protect your family and personal assets.

This is what trusts are most commonly used for in New Zealand.

You see, because they are a separate legal entity, it is no longer you who owns the family home. It’s the trust.

And hence, it is not a personal asset.

This is INCREDIBLY important. You don’t want to own any personal assets as a business owner in New Zealand.

You see, your personal assets can be exposed and vulnerable to third party creditors who want your assets to repay your company’s debts.

A family trust is an important tool used to protect your personal assets.

How is this so?

Isn’t this why I have a company? To protect me personally?

Yes, having your business in a registered company is the first step. Though, having a company means you have obligations. And if you don’t uphold those obligations, you can be found personally liable.

Those obligations are called Directors Duties

These are a set of duties that directors of New Zealand companies must uphold, or else risk your personal assets and bankruptcy.

Here are the duties:

1. Act in good faith and in the best interests of the company

2. Directors must not engage in reckless trading

3. Directors must avoid conflicts of interest

There are a few more, and you can read more about them here.

Remember Mainzeal, the huge construction company that went bust a few years ago?

The creditor appointed liquidators sued the company directors as they believed they had not upheld their director duties and sought to recover from the directors PERSONALLY.

They were found liable for $39.8 million.

Back to trusts – in conclusion

Yes, they are worth it.

Sure, there is a little more compliance cost annually. But this is far outweighed by the peace of mind you will have knowing your assets are safe and your kids will have a home regardless of the ups and downs of your business.

Do you want to have a trust formed? I don’t form trusts myself, however I am happy to refer you to solicitors who do.