Winding Up A Family Trust

Obsolete, financially unviable, or no longer fit for purpose? Five reasons to consider winding up your Family Trust.

Family trusts are a popular legal arrangement in New Zealand. Indeed, the New Zealand Ministry of Justice describes them as "an important part of New Zealand society and the economy" and estimates that there are currently between 300,000 and 500,000 trusts in Aotearoa.

What is a Family Trust?

Historically, family trusts have allowed families to create intergenerational wealth, protect assets, and provide flexibility for estate administration.

This could include:

• Managing the assets of a family member who is not able to take care of their own financial affairs
• Putting money aside for a specific purpose (e.g., to pay for a child's or grandchild's higher education)
• Mitigating the risk of unwelcome claims on an estate (e.g., relationship property from an ex-partner)

Of course, there are numerous rules around trusts' set-up and management. For example, under the Trusts Act 2019, trusts have a maximum duration of 125 years from the date it was originally established. On or before this "final distribution" date, the trustees will need to distribute all of the trust's assets to the final beneficiaries and ensure there are no outstanding liabilities, such as debts or tax payable.

Depending on the wording of the trust deed, the final distribution date can usually be brought forward. If trustees do decide to wind up the trust, they are still obliged to distribute assets and manage all outstanding liabilities.

Why might you choose to wind up your Family Trust before its final distribution date?

There are several common reasons why trustees may choose to wind up a trust earlier than originally planned. For example:

1. The trust is no longer fit for purpose. Possibly it's not been kept up to date or was previously not managed correctly. In these circumstances, winding up or resettling the trust could be preferable to trying to figure out what is required to make the trust compliant.
2. The management costs of the trust outweigh the potential value. Many "mum and dad" trusts were set up as a means of holding the family home. If that's the trust's only asset, the cost of management might be greater than the benefits.
3. The reasons for which the trust was set up no longer apply. For example, qualifying for a residential care subsidy or achieving tax savings by distributing income to beneficiaries on a lower tax bracket.
4. There's been a familial split, and the assets need to be distributed.
5. For whatever reason, there are now more appropriate investment vehicles to achieve the required outcomes (for instance, a limited liability company).

Make sure you understand your obligations and potential repercussions before you wind up your family trust

Trustees have duties owed to discretionary beneficiaries of the trust, and meeting these obligations and liabilities is crucial. It's important, therefore, to seek professional legal and accountancy advice before taking any action.

All decisions about the family trust need to be appropriately recorded, and the trust's accounting and tax matters will need to be properly completed. If you're a settlor of the Trust, personal wills may also require updating.

If you're the settlor or trustee of a trust wanting to discuss your options to see if winding up the trust could be a prudent move, please get in touch with the experts at Turner Hopkins on (09) 486 2169 or contact us.