A trust is a legal arrangement where certain persons (called trustees) hold property for the benefit of others (called beneficiaries).
A trust is usually established by way of a trust deed - a document setting out the rules for the trust, signed by the persons putting assets into the trust (called the settlors) and the trustees. The most common type of trust in New Zealand is a discretionary family trust, which usually has family members as beneficiaries.
Once assets are transferred to the trustees, the settlors lose legal ownership of the transferred assets. The trustees then become the legal owners, with an obligation to act in the best interests of the beneficiaries and in line with the terms of the trust deed, the Trustee Act 1956 and common law. A new Trustee Act has been proposed, which will provide more clarity to trustees and beneficiaries of their rights and obligations. That proposal imposes a duty on trustees to disclose the existence of the trust to its beneficiaries, which will be a significant departure from the current law.
Beneficiaries are the only people entitled to benefit from a trust’s assets. It is common for those establishing a trust to be both trustees and beneficiaries, but most trusts will have at least one independent trustee (a trustee who is not a beneficiary).
When a trust is established, it is vital that proper consideration is given to who the beneficiaries should be, who the trustees should be and who will have the power to appoint and remove trustees (both now and in the future). To do so, it is important to understand the roles, responsibilities and rights of each participant in the trust, and to take advice from experts. It is also important to ensure trustees are actively involved in the management of the trust. Most trusts provide for unanimous decision making by the trustees. Trustees will usually have a meeting at least once a year, and must be involved in any decisions regarding the trust’s assets.