Winding up a trust

Termination of a trust

Currently in New Zealand law, a trust is automatically wound up, or terminated, at the end of 80 years from the date of the trust deed.  However, a trust may be wound up earlier than the 80 years (if the trust deed allows for this) and the trust assets are distributed.

Trustees may decide to wind up the trust earlier for various reasons, including:

• the purpose of setting up the trust no longer applies, eg avoiding creditor protection no longer exists;
• the settlors or trustees may be immigrating to another country;
• the trust assets are so significant in value, that the settlor or trustees can never qualify below the threshold limits for government-funded residential care subsidiary; or
• simplification of structures in retirement.

Practical matters

Trustees should ensure that there are good records of: distributions made, assets owned by the trust, debts which may be owed to, or by, the trustees, and trustees receiving any gifts.

When trustees are winding up the trust and distributing assets they should also obtain tax and accounting advice to ensure that the distribution does not trigger a tax liability for the trustees.

Trustees will continue to remain liable for the trust’s tax liabilities following the winding up of the trust. Once a trust’s assets are fully distributed the trustee’s right to indemnity from the trust assets is in effect limited as there are no assets.

Mechanics of winding up a trust

Winding up a trust usually involves lawyers attending to, and advising on, the following:

• reviewing the trust deed to check if it allows for the trust to be wound up earlier
• preparation of a distribution deed or deeds
• preparation of trustee minutes
• dealing with any trust liabilities, including forgiving any remaining debt owed to or by the trust, discharge of mortgage
• transferring trust assets to the beneficiaries; and
• registering the transfer of the assets, eg landonline registration of the transfer.

Trustees should also do the following:

• notify the trust’s bankers that the trust is wound up and close any bank accounts
• arrange for the accountant to prepare final accounts of the trust and provide copies to the beneficiaries
• notify the IRD that the trust is no longer trading and is wound up, file a final tax return, and obtain confirmation from the IRD that there are no outstanding tax matters; and
• deregister the trust for GST (if applicable).

Winding up a trust can be relatively straightforward and there are various reasons why the trustees choose to wind up before 80 years. Trustees need to ensure they have obtained legal and accounting advice about distributing trust assets, so that trustees do not incur liabilities.