Why You Shouldn’t Wind Up Your Trust Without Expert Advice
⚠️ Why You Shouldn’t Wind Up Your Trust Without Expert Advice
There’s a lot of confusion about trusts now. Friends, family, or even professionals who aren’t trust specialists may suggest winding up your Trust—especially with the new 39% tax rate from 1 April 2024.
But before you make any decisions, it’s important to understand the facts.
📈 Understanding the New Trust Tax Rate
From 1 April 2024, income retained in a trust is taxed at 39%.
However, if the income is distributed to beneficiaries, it’s taxed at their personal tax rates, which may be lower.
The 39% rate only applies to individuals earning over $180,000 per year, so it may not affect your trust at all.
🛡️ Why Keeping Your Trust is Important
Winding up your Trust might seem easier—but it could expose your assets to serious risks. A trust helps you preserve your wealth from:
Residential care subsidy means testing – Your assets may be counted against you if not held in a Trust.
Creditors – Your Trust can protect assets from claims, including liability from car accidents in countries overseas that do not have an accident compensation scheme where you're underinsured.
Relationship property claims – Pre-relationship Trusts can protect your assets in case of a relationship breakdown.
Think of a trust like insurance. You hope never to need it, but if you do, it can be a lifesaver.
❤️ How a Trust Protects Your Loved Ones After Your Death
If you wind up your Trust, your estate will be distributed directly to your loved ones under your will—regardless of their personal circumstances. That can create real problems:
If a beneficiary is then in a rest home, their inheritance will be used to pay their residential care fees.
If a beneficiary is then bankrupt, their creditors will receive the inheritance.
If a beneficiary’s relationship later breaksdown, their inheritance may be lost in a property settlement.
By keeping your Trust in place, your loved ones can apply common sense and flexibility after your death. They can:
Keep the Trust going for ongoing protection; or
Transfer their share to a new Trust in their name.
This ensures that your legacy is safeguarded from external claims, and sensible decisions can then be made, taking into account whatever their life circumstances are at that time.
🚘 Not in Business Anymore? You’re Still at Risk
Some clients believe that because they are no longer in business, they don’t need their Trust anymore. However, other serious risks remain—especially if you travel or drive overseas. In most countries, there is no accident compensation scheme like ACC in New Zealand. If you are involved in a car accident and injure or kill someone, you may be personally liable for:
Substantial damages
Significant legal costs.
If your insurance cover is insufficient, your personal assets are at risk. A Trust helps shield those assets—offering protection that isn’t limited to your business activities.
🧾 Real-Life Examples
Example 1: Mary’s Trust
Mary transferred her $180,000 home into her Trust in 1986. That home is now worth $1.18 million.
Had she wound up her Trust, only $291,825 of that value would be protected for geriatric care subsidy purposes. The full $1 million gain remains protected because the home is still in her Trust.
Example 2: John & Lisa’s Trust
John and Lisa sold their Trust’s home for $800,000. Their lawyer advised them to wind up the Trust and use the proceeds to buy a retirement apartment in their own names.
Because they followed that advice, only $291,825 was protected—the remaining $508,175 was exposed to residential care means testing.
If they had kept their Trust and signed a Deed of Loan from the Trust to them to purchase the retirement apartment for $800,000, they could have preserved full protection.
These examples show why it’s essential to get specialist advice before winding up a Trust.
⚖️ Will-Based vs Trust-Based Estate Plans
📜 Will-Based Estate Plan
Pros:
Takes effect upon death, ensuring assets go to your chosen beneficiaries.
Allows you to appoint guardians for minor children.
No need for a separate bank account or tax return for investments.
Cons:
Revoked upon marriage unless stated otherwise.
Probate required for assets over $40,000—delaying access to funds.
Subject to claims under the Family Protection Act and Testamentary Promises Act.
Offers no asset protection during your lifetime.
Inheritances are unprotected from beneficiaries' creditors or government charges.
🧾 Trust-Based Estate Plan
Pros:
Protects assets during your lifetime and after your death.
Trust deed provisions cannot be overturned by court claims under the Family Protection Act.
Reduces risks from future partners, creditors, and geriatric care costs.
Avoids probate delays—trustees can act immediately.
Trust assets can be retained for specific purposes.
Much harder to challenge than a will – Unlike wills, which can be contested, a properly prepared and administered trust is extremely difficult to challenge in court.
Cons:
May require separate tax return and bank account.
Must avoid mixing personal and trust assets (we provide clear templates to help).
🔧 Simplifying Trust Administration
Non-active trusts: No tax return needed if income is under $1,000. More info here:
👉 Non-Active TrustsSell investments to yourself: We can prepare a Deed of Loan ($360) to help avoid tax returns while maintaining protection.
Home ownership only: If the Trust only owns your home, no separate bank account is needed. You manage costs just as if you owned it personally.
Need help with IRD forms? Kirsty Hourigan from our team can assist with this year’s simple tax return and show you how to simplify future compliance.
🔍 How to Decide if You Should Wind Up Your Trust
Consider:
How much the Trust’s assets have grown – that gain is protected from means testing.
What you’ve gifted to the Trust – gifts made over 5 years ago (up to $27,000 per year per couple) are safe.
What the Trust has received from wills – those funds are fully protected.
Also, ask: What risks does my Trust still protect me and my family from?
📘 Resources
The need to update your trust deed to comply with the Trusts Act 2019, simplifying trusts, and winding up trusts or watch a replay of that webinar by clicking here and entering the code: ?Kj!Im4#.
🤝 We're Here to Help
Unless you're permanently leaving New Zealand, we strongly advise against winding up your Trust without careful evaluation.
If you’re still considering winding it up:
We’ll help guide you through the process and create a new estate plan that protects your legacy.
You’ll need new wills first—your current wills likely leave everything to your Trust.
Our fees for advice apply as outlined in our terms of engagement.
❓Still Have Questions?
Please reply to this email, and one of our team members will be in touch to help you make the best decision for your situation. We’re here to support you every step of the way.
