A trust arises when a person (called a trustee) holds assets on behalf of another person or group (called beneficiaries). The trustee may be an individual, individuals, or a company or a combination of them. The beneficiaries may also include the trustee.   The most common form of family trust in New Zealand is a discretionary trust. It is discretionary because the trustee has the right to decide which of the beneficiaries will receive the income and capital from the trust’s assets.

Because of the trustee’s ability to allocate income to a discretionary beneficiary, you can imagine the flexibility this allows distributing income between beneficiaries.  Usually the trust deed also allows the trustees to capitalise income in the trust 6 months after the financial year ends.  Both of these tools are beneficial from a tax planning point of view.  However the major disadvantages of trusts are their inability to pass on tax losses to beneficiaries and the personal liability of trustees.