7 Costly Trust Mistakes Families Make — and How to Avoid Them
Family trusts have long been used in New Zealand to protect assets, plan for succession, and support future generations. But the landscape has changed. With the introduction of the Trusts Act 2019 and increased attention from Inland Revenue on how trusts are used, having a trust is no longer a “set and forget” strategy. A trust that isn’t regularly reviewed can become outdated — and in some cases, even risky, especially for trustees who are personally liable for losses.
Below are seven of the most common issues that arise when trusts are left unchecked, along with steps that can help keep things on track.
1.Appointing Trustees Without Considering Practical Realities
Trustees have serious legal obligations and duties. If a trustee doesn’t have the time, interest, or ability to act, it can affect the administration of the trust. Delays in decision-making, misunderstandings, or even invalid actions can result — particularly if trustee decisions aren’t made unanimously.
What to do:
Trustees should meet annually, at a minimum, or as required to discuss Trust matters. Review the trustee appointments from time to time. It’s important that trustees are not only legally capable, but also practically engaged. Consider whether the structure would benefit from an independent trustee or someone with relevant experience.
2.Making Distributions Without Considering Legal or Tax Consequences
Whether it’s rent-free use of a home, paying out income, or distributing capital, every trust distribution must comply with the terms of the deed — and be properly recorded. Failure to document distributions, or doing so in breach of trustee duties, can create legal exposure and open the door to disputes or tax consequences.
What to do:
Trustee decisions should be supported by formal resolutions or minutes and the IRD should be notified of distributions in the Trust’s annual tax return. Where there is uncertainty — especially about tax implications — it’s best to seek advice before making a distribution.
3.Not Reviewing the Trust Deed After the Settlor’s Death
After the death of a settlor (or a key person in the trust), certain powers in the deed (like the ability to appoint or remove trustees and beneficiaries) may lapse or transfer to another person. If these powers haven’t been reviewed or clarified, confusion or unintended outcomes can follow — sometimes requiring court intervention.
What to do:
Review your trust deed to identify how roles and powers are structured. A review is also an opportunity to modernise outdated provisions or remove ambiguity before it becomes a problem.
4.Poor Record-Keeping Around Gifting
Many older trusts were established when gifting programmes were required to reduce or eliminate loans from the settlors and to avoid incurring gift duty on gifts over $27,000. If gifting was incomplete, questions may arise around who truly owns the assets. This can be relevant for protecting assets from creditors, for means-tested subsidies, or what is available for distribution to beneficiaries— particularly if calculating a trust’s corpus is needed for tax free distributions.
What to do:
Review the Trust’s gifting position and recommence a gifting programme to meet your objectives (creditor protection v residential care subsidies— they’re very different reasons so need expert advice to get it right). Trust deeds of forgiveness, and trustee resolutions should be held by the trustees. If records are missing, it's worth reviewing what documentation can be created or reconstructed to bring the trust up to date.
5.Assuming Enduring Powers of Attorney Can Be Used for Trusts
A common misunderstanding is that an enduring power of attorney allows someone to act as trustee if another trustee loses capacity. It does not. An attorney can only manage your personal affairs or property — they step into your shoes as a person, whereas when you are acting as a trustee you are managing trust property, which doesn’t legally belong to you — it belongs to the trust. So, it’s not something you can delegate just by signing an EPA.
What to do:
Trust deeds should include clear provisions about how trustees can be replaced in the event of incapacity. Where those provisions don’t exist, the default process under the Trusts Act may be required — which can cause delays and uncertainty.
6.Not Updating the Trust as Family Dynamics Change
Over time, family structures and dynamics shift. A trust created years ago may no longer reflect the current situation — whether that’s a second relationship, grandchildren, or changing relationships with children or other beneficiaries. Older trusts may even include wide classes of beneficiaries you never intended to benefit!
What to do:
A trust review is a chance to re-evaluate the structure in light of current relationships and intentions. It may include updating the terms of the trust deed, or the memorandum of wishes, reviewing the list of beneficiaries, or considering whether the trust is still fit for purpose.
7.Failing to Review the Trust Regularly
Trusts that haven’t been touched in years often come to light only when there’s a triggering event — like a death, property transaction, or request from a bank or accountant. By then, gaps in compliance or clarity can be difficult (and costly) to fix, especially if getting unanimous consent of all beneficiaries or making an application to the High Court is required.
What to do:
Trusts benefit from regular check-ins, especially after major life events. A review can confirm whether the structure is still valid, well documented, and aligned with current goals — helping avoid unnecessary complexity or risk later on.
Looking ahead
A trust isn’t something that can simply be left to run itself. Over time, the law changes, family dynamics shift, and documents that once felt clear may no longer reflect what’s needed.
Regularly reviewing your trust helps ensure it remains functional, legally sound, and aligned with its original purpose. It’s an opportunity to clarify roles, update records, and address potential risks before they become problems — not just for trustees, but for those the trust is meant to support.
If it’s been a few years since your last review, it may be worth taking a fresh look — just to be sure everything is still working the way it should. Get in touch.