Why we keep improving your Trust deed — and what’s new
A current deed is a stronger deed. Here is what has changed, and why it matters.
A trust deed is not a “set and forget” document. The law that governs trusts — tax, relationship property, creditor protection, the rules around distributions and estates — keeps moving. We review and update our precedent deed regularly so that clients who come to us have a current, robust document, rather than one frozen at the date it was signed.
That ongoing work is deliberate. It is also why two versions of “the same” deed can read differently: each reflects the law as it stood when it was prepared. Below is a real example of how that plays out, and a summary of the latest improvements now built into our deeds.
A real example: who pays the outgoings on a Trust-owned home
Over the past few years, the tax treatment of interest on residential property has gone full circle, and our deeds have moved with it.
From 1 October 2021, the previous Government began removing the ability to deduct interest on borrowings for residential property — the “interest limitation rules” — phasing deductibility down to nil by 31 March 2025 for affected loans. For a Trust with a mortgage on its family home, that change could create a tax cost. To manage it, our deeds were updated so that the Trust covered the home's outgoings — but always with the important words “unless the Trustees decide otherwise.”
The current Government has reversed the policy. Interest became 80% deductible from 1 April 2024 and 100% deductible from 1 April 2025. With the tax reason gone, our current deeds revert to the long-standing position that a beneficiary living in the home meets the outgoings — again, subject to “unless the Trustees decide otherwise.”
Interest deductibility, at a glance
Before 1 Oct 2021 — interest fully deductible
1 Oct 2021 — interest limitation rules begin; deductibility progressively reduced
1 Apr 2024 — 80% deductible (restoration begins)
1 Apr 2025 — 100% deductible; rules repealed
Residential ring-fencing rules still apply, so residential losses generally cannot offset other income — worth a word with your accountant.
A worked example: the cost of a $1 million mortgage
Take a Trust that bought its family home in 2020 with a $1,000,000 mortgage on a five-year fixed rate. The Settlors — who are the principal beneficiaries — lived in the home and paid the outgoings. Inland Revenue treated those payments as rent, so the Trust had rental income and could deduct rental expenses (Inland Revenue’s full guidance is at ird.govt.nz/property-interest-rules). Rates and insurance wash out — the beneficiaries pay them, and the Trust deducted them, so they net to nil. The interest was where the problem occurred.
The mortgage was on a five-year fixed rate of 3.45% p.a. — ANZ’s carded five-year first-mortgage rate in 2020 — so interest was $34,500 a year. The beneficiaries paid that interest in full, and the Trust was taxed on all of it as rent. From 1 October 2021, the Trust could no longer deduct all of the interest, and the slice it could not deduct became taxable income on which the Trust paid tax — even though it made no real profit:
Worked example — $1m mortgage, 5-year fix at about 3.45% (≈ $34,500 interest a year)
1 Oct 2021 – 31 Mar 2022: 75% of interest deductible → $4,313 taxed as income → $1,423 extra tax
2022–23: 75% deductible → $8,625 taxed → $2,846 extra tax
2023–24: 50% deductible → $17,250 taxed → $5,693 extra tax
2024–25: 80% deductible → $6,900 taxed → $2,277 extra tax
Total: ≈ $37,088 taxed as "phantom" income → ≈ $12,239 extra tax
Interest at 3.45% p.a. on $1,000,000; the 2021–22 figure covers the half-year from 1 October 2021. Tax shown at the 33% trustee rate; from 1 April 2024, the trustee rate is 39% on trustee income over $10,000, which can increase the 2024–25 cost where the Trust has other income.
Over the period, roughly $37,000 in interest the beneficiaries had actually paid was taxed in the Trust’s hands, with no matching deduction — about $12,200 in tax on income the Trust never truly earned. A Trust with no mortgage never had this problem: its beneficiaries’ payments simply equalled its deductible rates and insurance, leaving nothing to be taxed. That is exactly why our deeds were updated so the Trust could pay the outgoings instead — removing the rent, and with it the phantom income — and why the clause has now reverted, with interest fully deductible again.
The drafting lesson
Because the outgoings clause has always been subject to the Trustees’ discretion, the deed flexes with the law on its own. The Trustees can decide who meets the outgoings by a simple resolution, at any time, without re-drafting the deed each time tax policy changes. A well-drafted discretion does heavy lifting, so the document does not have to be rebuilt every few years.
Please note this is general information, not tax advice. Whether any of it affects you depends on your own circumstances — in particular, whether the home is mortgaged. Speak with your accountant or us before changing any existing arrangement.
What’s new: the latest enhancements to our deeds
Our current deeds also strengthen the protections available to you and your beneficiaries. In summary, the latest version adds or sharpens the following.
Stronger protection of beneficiaries and Trust property
• Relationship-property guidance — clearer direction that the Trustees may encourage beneficiaries to keep distributions separate, obtain advice, and use contracting-out agreements where appropriate, so Trust benefits are less likely to become relationship property.
• No fixed entitlements — confirmation that no beneficiary has a guaranteed right to income or capital; benefits remain at the Trustees’ discretion.
• No assignment or charging — a beneficiary cannot sell, assign or charge their expectation of a benefit, and any attempt to do so does not bind the Trustees.
• Protection from creditors — express power to withhold, defer, redirect or convert a distribution to a loan where creditors, bankruptcy or the Official Assignee would otherwise put Trust property at risk.
Protection where a benefit might be squandered
Where a beneficiary is affected by addiction or lacks the judgment to manage funds safely, the Trustees may withhold or reduce a distribution and instead apply the funds for that beneficiary’s welfare.
Beneficiaries with disabilities or special needs
Support can be structured so that, as far as possible, government assistance (such as residential care subsidies) is preserved, with Trust funds used for “extras” — better care, equipment, accommodation, travel and quality-of-life support — rather than replacing what the state already provides.
Clearer distribution machinery
A controlled route for distributing to the estate of a principal beneficiary where that is in the beneficiary’s best interests, with safeguards drawn from the Administration Act 1969.
Clear rules — with a sensible default if the Trustees do not decide — for how the Trust Fund is shared among beneficiaries on the final Distribution Day.
You don’t need to do anything, but a review is worthwhile
If we have recently updated your deed, you already have these improvements. If your deed is a few years old, it may be worth reviewing to bring it up to current best practices. And remember: the Trustees’ discretion means most day-to-day decisions — including who meets the outgoings on a Trust-owned home — can be handled by a simple trustee resolution rather than a new deed.
How can we help?
If you would like your Trust deed reviewed or updated, or you have a question about any of the above, email us at rossholmes@rossholmes.co.nz or call +64 9 415 5700. We are always happy to help.
Ross Holmes Virtual Lawyers Limited
Protect what matters most – your family, your home, your future.
This article is general information only and is not legal or tax advice. It does not take account of your particular circumstances, and you should obtain advice specific to your situation before acting. Tax positions described are current as at June 2026 and may change.
