Trusts are a popular way to protect assets, manage wealth, and ensure financial security for future generations. In New Zealand, both family trusts and trading trusts offer distinct advantages and disadvantages depending on your financial goals.

Whether you're looking to safeguard your family home, streamline business operations, or minimise tax liabilities, understanding how these trusts work will help you make an informed decision.

What is a family trust?

A family trust is a legal arrangement where assets are transferred to a trustee who manages them on behalf of beneficiaries. This type of trust is commonly used in New Zealand for asset protection, estate planning, and tax advantages. The trust structure allows families to safeguard wealth for future generations while ensuring flexibility in managing financial resources.

What are the benefits of a family trust in New Zealand?

A family trust offers several advantages, including:

Asset Protection: It helps shield assets from potential creditors, lawsuits, and financial claims, making it a popular option for business owners and professionals.

Estate Planning: A trust ensures a smooth transition of  wealth to future generations without the complications of probate.

Tax Efficiency: Trusts can help manage tax liabilities, although careful structuring is required to remain compliant with tax  laws.

Safeguarding Against Relationship Property Claims: In the event of a relationship breakdown, assets held in a trust may not be subject to division under the Property (Relationships) Act.

Supporting Family Members: Trustees can distribute assets as needed to beneficiaries, providing financial stability and support over time. They can also manage the risk of unwanted claims on our estate when we die, such as from a former partner.

What are the disadvantages of a family trust?

Despite their advantages, family trusts also come with drawbacks:

Compliance and Costs: Establishing and maintaining a trust involves legal, accounting, and administrative costs.

Loss of Personal Control: Once assets are transferred to a trust, they are legally owned by the trustees, meaning the original owner has limited say in their use.

Tax Scrutiny: Inland Revenue closely monitors trusts, and improper structuring can lead to unexpected tax liabilities.

Potential for Disputes: Family conflicts can arise regarding the distribution of assets, leading to legal challenges.

What is a trading trust?

A trading trust is a business structure where a trust operates a business, typically through a corporate trustee. Unlike a family trust, which primarily holds passive assets, a trading trust actively engages in commercial activities. This model is often used by small businesses and professionals seeking asset protection while maintaining business operations.

What are the benefits of a trading trust in New Zealand?

Operating your business through a trust offers advantages due to the unique legal structure of trusts. They provide stronger asset protection in case of business failure and allow for more efficient tax management through income distribution to beneficiaries. Key advantages are:

Limited Liability: A corporate trustee can limit personal  liability, reducing financial risk for individuals involved in the business.

Asset Protection: Business assets are held within the trust, shielding them from personal financial troubles.

Tax Planning: A well-structured trust can provide tax benefits, such as income distribution flexibility among beneficiaries.

Succession Planning: A trust allows for smooth business continuity, ensuring the company can transition seamlessly to the next generation.

What are the disadvantages of a trading trust?

Trusts are complex and come with strict legal requirements. It’s essential to understand these intricacies and seek legal advice to ensure compliance and effectiveness.

While trading trusts can be beneficial, they also have downsides:

Complex Administration: Managing a trading trust involves significant legal and accounting responsibilities.

Tax Complications: Tax compliance can be challenging, and failure to meet requirements may lead to penalties.

Limited Access to Capital: Many lenders hesitate to provide financing to trading trusts due to the complexity of ownership structures.

Trustee Liability: If the trust operates without a corporate trustee, individual trustees may be personally liable for business debts.

What happens to your home loan if you transfer your home to a family trust?

If your home has a mortgage, the bank’s consent will be required before transferring it to a family trust. In many cases, the loan remains in the original borrowers' names(the current homeowners), while the trustees provide a guarantee instead of re-documenting the loan under the trust.

How Benchmark Mortgages can help

At Benchmark Mortgages, we can walk you through the different ways to structure the loan and bank documents, helping you weigh the pros and cons to determine the best approach for your situation.  

Understanding whether a family or trading trust is right for you requires careful planning and professional advice. If you're looking to secure your family's financial future, we can help you make informed decisions and guidance on mortgage solutions tailored to your needs

Get in touch with us today to discuss your options and ensure your financial security for years to come.

DISCLAIMER: The information contained in this blog is general in nature. We cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you. Before making financial decisions, we highly recommend you seek professional advice from someone who is authorized to provide financial advice.

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