COMMON MISCONCEPTIONS ABOUT FAMILY TRUSTS

By Garreth Collard, Senior Property Accountant | November 30, 2024

Common misconceptions about family trusts. Here we tackle 7 of them. But first, a brief summary:

30-Second Summary

Even in 2026, family trusts remain popular in New Zealand. However many trustees misunderstand how they work. Some believe trusts automatically save tax. Others think they can treat trust assets as their own, leave everything to their lawyer, or ignore annual accounting requirements because the trust only owns the family home. Unfortunately, these misconceptions can create significant legal, tax and administrative problems. In this article, we examine seven of the most common misunderstandings about family trusts and explain what trustees actually need to know.

Common misconceptions about family trusts in new zealand

Why Family Trust Misconceptions Matter

A family trust can be a powerful tool for asset protection, succession planning and long-term family wealth management. However, a trust only works properly if trustees understand their obligations and actively manage it.

Many trusts were established years ago when advisers promoted them heavily. Some trustees signed the paperwork and then assumed they never needed to think about the trust again. That assumption can create problems. The Trusts Act 2019 strengthened trustee obligations and beneficiary rights. Inland Revenue has also increased disclosure requirements for many trusts. As a result, trustees must pay more attention than ever before to compliance, record keeping and decision making.

Let’s examine some of the most common misconceptions.

Myth 1: A Family Trust Automatically Saves Tax

This is probably the most widespread misconception of all. Many people still believe that creating a trust automatically reduces the amount of tax they pay. In reality, a family trust is not a magic tax-saving vehicle. Trust income may sometimes be taxed differently depending on how trustees distribute income and how the trust operates. However, the trust structure itself does not automatically reduce tax. Inland Revenue pays close attention to arrangements designed primarily to obtain a tax advantage.

Trusts normally exist for reasons such as:

Asset protection
Succession planning
Family wealth management
Protection of vulnerable beneficiaries
Long-term family governance

These are entirely different objectives from tax minimisation.

When someone says:

“Should I set up a trust to save tax?”

they may already be asking the wrong question.

A better question would be:

“Do I have non-tax reasons for using a trust?”

If the answer is no, a trust may not be the right structure.

Myth 2: I Can Treat Trust Assets As My Own

Many people transfer a house into a trust and then continue treating it exactly as they did before. This creates problems. Once a trust owns an asset, the trustees own and control that asset on behalf of the beneficiaries. The asset no longer belongs to the settlor personally. That distinction matters.

For example, trustees should avoid:

Treating trust bank accounts as personal accounts
Paying personal expenses from trust funds
Ignoring trustee decision-making processes
Using trust property however they please without documenting decisions

A trust only works when trustees recognise the separation between themselves and the trust structure. The courts have repeatedly looked unfavourably upon situations where people treat trust assets as though they still own them personally. Good trustees remember that trust assets belong to the trust.

Myth 3: My Lawyer Manages Everything

Many trustees assume their lawyer takes responsibility for trust administration. Unfortunately, that is rarely true.

A lawyer may:

Establish the trust
Draft the trust deed
Prepare legal documents
Advise on trust law issues

However, trustees remain responsible for running the trust.

Trustees must:

Understand the trust deed
Make decisions
Consider beneficiaries
Keep records
Manage trust assets
Maintain compliance

A lawyer can provide advice. A lawyer cannot replace the trustees. Some people refer to themselves as “passive trustees”. That phrase has little practical value. A trustee has duties whether they actively participate or not. You cannot avoid responsibility simply by assuming another trustee, accountant or lawyer handles everything. Trustees must remain involved.

Myth 4: The Trust Only Owns the Family Home So I Don’t Need to Do Anything

We hear this one regularly.

A client says:

“The trust just owns the house.”

Or:

“The trust doesn’t earn any income.”

They then assume no administration is necessary. However, trust obligations do not disappear simply because a trust owns only the family home.

Trustees still need to:

Manage trust records
Track trust liabilities
Document decisions
Maintain knowledge of trust assets
Act in beneficiaries’ interests

Family-home trusts often involve:

Settlor loans
Mortgage obligations
Rates payments
Insurance costs
Property improvements

Over time, these transactions can become surprisingly complex. Ironically, some of the messiest trust files we encounter involve trusts that own nothing more than a family residence.

Trustees frequently lose track of:

Loan balances
Gifting history
Advances made to the trust
Property-related expenditure

When the property eventually sells, years of missing records can create substantial difficulties. The trust’s simplicity does not remove trustee responsibilities.

Myth 5: Trusts Don’t Need Annual Financial Statements

This misunderstanding has become increasingly risky. Historically, some trustees prepared little or no financial information. Modern trust administration requires a different approach. Many trusts filing income tax returns now face expanded Inland Revenue disclosure obligations. Trustees often need reliable accounting records to support those disclosures.

Annual financial statements help trustees:

Track assets
Track liabilities
Monitor settlor loans
Record gifting
Support tax compliance
Demonstrate proper trust administration

The importance of financial statements extends beyond tax. They also help trustees fulfil their broader responsibilities under trust law. Even where a trust only owns the family home, trustees can benefit from maintaining annual financial records. Without them, it becomes difficult to answer fundamental questions about the trust’s financial position.

For a detailed discussion of this topic, read:

Myth 6: Beneficiaries Have No Rights

Many trustees still assume beneficiaries remain largely uninformed about trust affairs. That assumption no longer reflects modern trust practice. The Trusts Act 2019 significantly strengthened beneficiary rights. Trustees must now actively consider the provision of information to beneficiaries.

Beneficiaries may have rights regarding:

Knowledge that they are beneficiaries
Information about trustees
Information about trust administration
Access to trust-related documentation in some circumstances

This does not mean trustees must disclose everything to everyone. However, trustees cannot simply pretend beneficiaries do not exist. The days of complete secrecy have largely passed. Prudent trustees understand who their beneficiaries are and carefully consider their information obligations. Beneficiaries have interests that trustees must take seriously.

Myth 7: Trust Law Changes Don’t Apply to Older Trusts

This misconception can be particularly dangerous. Many trusts were established long before the Trusts Act 2019. Some trustees assume newer rules only affect recently established trusts. That assumption is incorrect. The Trusts Act applies to many existing trusts, not merely newly created ones.

Trustees with older trust deeds should understand:

Their mandatory duties
Their record-keeping obligations
Their obligations toward beneficiaries
Their governance responsibilities

Some older trust deeds may also benefit from review because they predate significant law changes. Many trustees have not reviewed their trust arrangements for years. That creates risk. An annual review with an accountant and lawyer can often identify issues before they become serious problems.

How to Avoid These Common Trust Mistakes

Trust administration does not need to be complicated. In most situations, trustees should focus on a few core principles:

Stay Involved

Do not assume your lawyer, accountant or co-trustee handles everything.

Keep Good Records

Maintain documents relating to:

Assets
Liabilities
Trustee decisions
Loans
Gifting

Understand Your Trust

Know:

Who the trustees are
Who the beneficiaries are
What the trust owns
What obligations apply

Review Things Regularly

An annual review often prevents small issues from becoming major problems.

Seek Advice Early

The cost of professional advice usually proves much lower than the cost of fixing years of neglect.

Final Thoughts

Family trusts remain useful structures for many New Zealand families. However, they only work properly when trustees understand their responsibilities and actively fulfil them. The most common misconceptions about family trusts often arise because people assume the trust can simply operate in the background without attention or administration. That approach creates risk.

Key Takeaways

✅ Trusts do not automatically save tax.

✅ Trust assets belong to the trust, not to you personally.

✅ Lawyers advise trustees but do not replace them.

✅ Family-home trusts still require active management.

✅ Many trusts benefit from annual financial statements.

✅ Beneficiaries have important rights that trustees must consider.

✅ Modern trust law applies to many older trusts.

The best trust structures are not necessarily the most complicated ones. They are the ones that trustees properly understand and properly manage.

Need Help With Trust Accounting or Compliance?

If you’re unsure whether your trust complies with current requirements, or you have not prepared trust financial statements for several years, now is an excellent time for a review.

Read our detailed guides:

Or contact EpsomTax.com for practical, plain-English advice on trust accounting, trustee obligations and trust compliance. A small amount of proactive planning today can save significant stress and expense later.

Posted in FAQS, Structures and tagged advice, compliance, explanations, instructions, law changes, trust, trusts, useful