We Kiwis are currently experiencing difficult economic conditions. Higher interest rates and costs of living, reduced liquidity, thinner margins, and weak property prices are placing real strain on our households and businesses. Unsurprisingly, we are seeing more business failures, ‘restructuring’, and debt collection (both privately and by IRD).  In this environment, capitalism demands we look after ourselves and our families first. The careful use of a well-structured and properly managed family trust will usually go a long way to providing that protection.

Economic cycles

Periods of economic growth often mask risk. Credit is readily available, asset values increase, and business performance can give a false sense of security. The opposite applies in a downturn:

• Cashflow dries up, and debtors don’t pay so quickly (if at all)
• Businesses fail more readily, which can lead to personal guarantees being called on
• Lending arrangements are often tightened or reassessed
• People are more likely to take legal action against you when their backs are against the wall

What we are seeing now is not unusual in a cyclical sense, but it is a timely reminder that asset protection planning is most valuable before problems arise, not after.

The core benefits of family trusts

While trusts now only offer limited tax advantages (the trust tax rate is now aligned with the top personal rate), their fundamental value remains intact:

1. Separation of ownership and control

A family trust can be used to separate legal ownership of assets. Properly structured, this can provide:

• A degree of insulation from personal liabilities
• Protection from third-party claims (including business creditors)
• Clear and practical isolation of personal assets (including the family home and bank accounts)

This is particularly relevant for business owners operating in higher-risk industries or where personal guarantees are unavoidable.

2. Asset protection (against business failure/personal liability)

We are currently seeing an increase in business failures, debt collection, mortgagee sales, and redundancies. Any of these situations cause immense stress and force us to make decisions we wouldn’t ordinarily face. A properly established trust, with assets genuinely owned and properly managed, can play a key role in limiting your exposure. 

3. Relationship property planning

Financial pressure also tends to increase relationship pressure. Trusts can be a useful tool in:

• Ring-fencing intergenerational wealth
• Protecting assets intended for your children (not future spouses!)
• Providing flexibility around distributions and control

That said, poorly managed or “sham” trusts can be attacked. Courts are increasingly willing to look through structures that are not administered properly or where control sits entirely with one party.

4. Intergenerational planning and control

Family trusts remain one of the most effective vehicles for:

• Preserving wealth across generations
• Providing staged access to assets

Trusts also enable the elder generation to teach their children about financial planning and investment, in advance of inheritance. The advantage of this can’t be understated - financial literacy isn’t often taught in schools, and your children don’t know what they don’t know. Early involvement and visibility of your success (via access to the trust’s financial accounts) can open their eyes and educate them on the time value of money, compounding interest/investment returns, property leveraging, dealing with lawyers/financial advisors, and otherwise.

The critical caveat: Trusts must be established and managed properly

As lawyers, we are often asked to advise regarding what turn out to be poorly managed trusts with little to no documentation. Alas, it is often too late to rectify these trusts! Just as you service your car, your trust must be properly maintained to remain safe and sound.

There is a growing body of case law noting the risk around:

• Failure to comply with the Trusts Act 2019
• Lack of independent trustee oversight
• Informal or undocumented decision-making
• Treating trust assets as if they are personal assets
• Relationship property claims ‘trumping’ Trust protection

Trusts that aren’t property managed may cease to be able to provide asset protection. Equally, there is increasing scrutiny on whether trusts still add value in every situation - particularly given tax changes and compliance costs.

A sensible option in the current climate?

“It’s the economy, stupid”. Yes, it’s a mess, and has been for a few years now. But is it the ‘right time’ for you to set up or update a Trust? Or possibly wind up? As always, “it depends” on your circumstances…and factors you should consider include:

• Is your Trust compliant with the Trusts Act 2019 and case law?
• Cost-benefit analysis i.e. is a Trust ‘worth it’ for you?
• What assets are best owned by your Trust (vs a company or personal ownership)?
• Tax implications and advantages?
• Who should be managing your Trust?
• More important than anything:  what are you trying to achieve?

Protection before problems arise

Economic downturns tend to clarify priorities. For business owners and families alike, the old adage applies:  plan for the worst, hope for the best. Properly structured and managed Trusts are an insurance policy against risk, with the additional benefit of helping you plan for your family’s future.

If you haven’t reviewed your current Trust, or haven’t got one at all, now would be a prudent time to act - before market pressures, creditor claims, or personal circumstances force the issue.