Family Trusts and Retirement Planning in New Zealand

Margaret and Colin set up a family trust 15 years ago, transferring their Auckland home and investment portfolio into it. Their lawyer assured them it would protect their assets if either of them ever needed residential care. Fast forward to today: Colin requires full-time care, and Margaret has just learned their trust might not protect their assets the way they'd hoped.

They're not alone. Around 300,000 to 500,000 trusts exist in New Zealand, many established for retirement and aged care planning. But the landscape has changed dramatically. The Trusts Act 2019, which came into full effect in 2021, introduced stricter transparency and trustee obligations. Meanwhile, Work and Income has tightened its scrutiny of trust arrangements when assessing eligibility for the residential care subsidy.

If you have a trust or are considering one as part of your retirement plan, understanding what trusts can and cannot do has never been more important.

A family trust is a legal structure where trustees hold and manage assets for the benefit of beneficiaries. In New Zealand, most family trusts are discretionary trusts, meaning trustees have discretion over which beneficiaries receive distributions and when.

The basic structure involves:

• Settlor: The person who establishes the trust and transfers assets into it
• Trustees: People who legally own and manage the trust assets (often family members)
• Beneficiaries: People who can benefit from the trust (typically family members and future generations)
• Trust deed: The legal document setting out the rules

Here's what often surprises people: once you transfer assets into a trust, you no longer personally own them. The trustees do. This distinction matters enormously for retirement planning, because if you don't own the assets, you also don't have automatic rights to use them or receive income from them.

Under the Trusts Act 2019, trustees now have mandatory duties including acting in good faith, in the best interests of beneficiaries, and in accordance with the trust deed. They must also provide trust information to beneficiaries on request, a significant change from the previous secrecy that often surrounded trusts.

This is where many retirement plans built around trusts come unstuck. The residential care subsidy helps pay for aged care when you can no longer afford it yourself, but eligibility depends on a means test. Work and Income assesses both your income and assets, and here's the critical point: they look through trusts.

The current rules include a five-year lookback period. If you transferred assets into a trust within five years of applying for the subsidy, those assets may still be treated as yours for assessment purposes. This is sometimes called the "gifting rule," and it's strictly enforced.

Even if your trust is older than five years, Work and Income will scrutinize:

• Whether you continue to benefit from trust assets (living in a trust-owned home, receiving distributions)
• Whether you control the trust as a trustee
• Whether the trust was set up primarily to avoid aged care costs
• Whether you've made recent gifts from the trust

The assessment isn't just about timing. If Work and Income determines you've "deprived yourself of assets" to qualify for the subsidy, they can include those assets in your means test regardless of the trust structure. The residential care subsidy rules are designed to ensure public funding goes to those genuinely in need, not to protect inheritances.

What does this mean practically? If you're 60 and thinking a trust will protect your home from aged care costs, you're likely planning too late. And if you're 70 and considering it, a trust probably won't achieve this goal at all.

Trust taxation is simpler than it used to be but can still catch people off guard in retirement. Trusts pay tax at a flat rate of 33% on income they retain (don't distribute to beneficiaries). When income is distributed to beneficiaries, those beneficiaries pay tax at their personal rate.

This creates an interesting dynamic in retirement. If you're receiving NZ Super and have modest additional income, your personal tax rate might be 17.5% or 30%. Having income accumulate in a trust at 33% could mean paying more tax than necessary. Conversely, if you're a high-income earner still working at 39%, a trust might offer some tax efficiency.

Here's what commonly happens: people transfer their rental property or investment portfolio into a trust, then in retirement, they need income from those assets. The trustees (often including themselves) distribute income to them personally. They pay tax on it at their personal rate. The trust structure hasn't saved tax, it's just added complexity and compliance costs.

According to Inland Revenue, all trusts must file annual tax returns, and there are specific rules about how trust losses can be used and how distributions are taxed. Many trusts also require annual financial statements and meeting minutes documenting trustee decisions.

The compliance burden isn't trivial. Annual costs for maintaining a trust typically include:

• Accounting fees: $800-$2,500+
• Legal review (periodic): $500-$2,000
• Tax return preparation: often bundled with accounting

Over a 20-30 year retirement, these costs add up. You're potentially spending $20,000-$60,000+ to maintain a structure that may not be delivering the benefits you expected.

Despite the limitations around aged care planning, trusts remain useful tools for specific purposes. Understanding what they do well helps you make informed decisions.

Relationship property protection: Assets held in a trust established before a relationship (or inherited during a relationship) can be protected from relationship property claims if structured properly. This matters for people entering new relationships later in life who want to preserve assets for children from previous relationships. However, the family home is treated differently under the Property (Relationships) Act 1976, so simply putting your home in a trust doesn't automatically protect it.

Succession planning and family governance: Trusts can help manage intergenerational wealth transfer and provide structure for family decision-making about assets. For families with significant wealth or family businesses, this governance function can be valuable. The trust deed can set out how assets should be used and who should benefit across multiple generations.

Business ownership: Holding business assets or shares in a trust can provide continuity and liability protection. If you're a business owner approaching retirement, a trust might be part of succession planning, though this requires specialist advice.

Blended family situations: Trusts can help navigate complex family dynamics where you want to provide for a current partner during their lifetime while ultimately preserving assets for children from a previous relationship. This is one area where trusts can genuinely solve problems that are difficult to address through wills alone. Our article on blended families and retirement explores these situations in more detail.

What trusts don't do well: provide tax advantages for most middle-income retirees, protect assets from creditors in all situations (trustees can still be personally liable in some cases), or create privacy in the way they once did (beneficiaries now have stronger rights to information).

The Trusts Act 2019 was the first major overhaul of trust law in New Zealand in over 60 years. If your trust was established before 2020, these changes affect how it must now operate.

The key changes include:

Mandatory trustee duties: Trustees must now know the terms of the trust, act in accordance with those terms, act honestly and in good faith, and act for the benefit of beneficiaries. These were always considered best practice, but now they're legally required. Trustees who breach these duties can face personal liability.

Trust information disclosure: Beneficiaries have a presumptive right to trust information, including the trust deed, financial statements, and information about trust property. Trustees can only withhold information in specific circumstances, and the burden is on them to justify non-disclosure. This is a significant shift from the previous culture of secrecy.

Variation and termination: The Act clarifies how trusts can be varied or terminated, giving the court wider powers to intervene when trusts are no longer serving their purpose or when unforeseen circumstances arise.

Trustee liability and indemnity: The Act sets out rules about when trustees can be indemnified from trust assets and when they might be personally liable. This has made some people more hesitant about acting as trustees, particularly for trusts with complex assets or family dynamics.

If you're a trustee approaching retirement, these obligations matter. You have legal duties that require time and attention. Some people find that as they age, they want to step back from trustee roles, but finding suitable replacement trustees (especially professional trustees) can be expensive and complicated.

If you already have a family trust, retirement is a good time to review whether it still serves your needs. Many trusts were established 10, 20, or even 30 years ago for circumstances that no longer apply.

Consider these questions, ideally in discussion with a lawyer who specializes in trust law:

Is the trust still serving its original purpose? If you set up a trust for relationship property protection and you've been in a stable relationship for 25 years, or for business asset protection but you've since sold the business, the trust might no longer be necessary.

Do you need access to trust assets for retirement income? If the trustees (even if that includes you) will regularly be distributing all trust income to you personally, you're maintaining an expensive structure for little practical benefit. You might be better off unwinding the trust and owning assets personally.

Is your trust deed compliant with the Trusts Act 2019? Many older trust deeds don't align perfectly with the new Act's requirements. While the Act applies regardless of what your deed says, having an updated deed can make trust administration clearer and easier.

Who will be trustees if you can't continue? If you're a trustee and you're thinking about cognitive decline or serious illness, who will step in? Appointing family members can work, but it can also create conflict. Professional trustees charge annual fees (often 1-2% of trust assets or $3,000-$10,000+ annually).

What are the ongoing costs versus benefits? Total up what you're spending on accounting, legal, and administration. Then honestly assess what benefits the trust is providing. For some people, this exercise reveals they're spending thousands of dollars annually to achieve very little.

Some trusts should be maintained. Others should be unwound. There's no shame in dissolving a trust that no longer serves you, it's often the sensible choice. The process is called "resettlement" or distribution of assets, and it requires careful tax and legal planning.

If you don't currently have a trust, should you establish one as part of retirement planning? For most New Zealanders in their 50s and 60s, the answer is probably no, at least not primarily for aged care asset protection.

The residential care subsidy lookback period means a trust established now won't protect assets if you need care within five years. And even after five years, the scrutiny around deprivation of assets means protection isn't guaranteed. You'd be committing to ongoing costs and complexity for uncertain benefits.

Trusts might still make sense if:

• You're in a new relationship and want to protect assets for children from a previous relationship
• You own a business and need succession planning and liability protection
• You have significant wealth and want structured intergenerational planning
• You have specific family dynamics (like a child with a disability who needs long-term support) where trust structures genuinely help

What trusts are not: a substitute for proper retirement savings, a way to qualify for benefits you wouldn't otherwise receive, or a simple solution for avoiding aged care costs.

For many people, better alternatives exist. Focusing on building retirement savings through KiwiSaver, paying down debt, and having proper estate planning documents (updated will, enduring power of attorney) will achieve more for less cost and complexity.

Many people establish trusts when what they really need is straightforward estate planning. A well-drafted will can achieve a lot of what people think they need a trust for, at a fraction of the cost.

A will can:

• Specify who inherits your assets
• Provide for different beneficiaries in different ways
• Establish testamentary trusts (trusts created on death) if there are specific needs
• Appoint guardians for minor children
• Express your wishes about funeral arrangements and organ donation

Combined with enduring powers of attorney (for property and personal care/welfare), you have robust planning that covers incapacity and death without the ongoing costs of maintaining a trust during your lifetime.

The key difference: with a will, you maintain full control and flexibility over your assets during your lifetime. You can change your mind, spend your assets as you wish, and respond to changing circumstances without trustee meetings or legal complexity.

For assets you want to protect for specific beneficiaries while providing for others, testamentary trusts created through your will can be a middle ground. These only come into existence on your death, so there are no ongoing costs or compliance obligations during your lifetime.

Disclaimer: This article is general information only and does not constitute personalised financial advice. For advice tailored to your situation, speak with a licensed Financial Advice Provider. You can find a registered adviser at fma.govt.nz. For legal advice about trusts, consult a lawyer who specializes in trust and estate law.