Issues to consider and steps to take when winding up a trust

Reasons why you may want to wind up a trust

Some of the reasons why you may want to wind up a trust are :-

• The purpose or purposes for which the trust was originally established are no longer relevant e.g. you may no longer require protection of assets against claims from creditors if you are no longer in business.
• The cost of maintaining the trust are too high. e.g. annual accounting and legal fees.
• You may have created the trust to protect assets from residential care costs, but the application of the subsidy rules could mean that you will never qualify for a residential care subsidy, even though some assets are held in the trust.
• You may wish to simplify your affairs.
• There are no longer any tax advantages that may have been relevant when the trust was set up.

Matters to check before winding up a trust

Before deciding to wind up a trust it is important to:-

• Obtain legal and tax advice. In particular you need to ensure that a distribution does not trigger a tax liability for the trust or a beneficiary.
• Check the terms of the trust deed to ensure that the deed allows for the trust to be wound up early.
• Consider the circumstances of the beneficiaries and the terms of the trust deed.
• Determine how assets are to be distributed.

It is important to note that trustees continue to remain liable for a trust’s liabilities after the trust’s assets have been paid out.  Once a trust’s assets are fully paid out the trust will be at an end and there will be no assets left for the trustees to pay any liabilities.  If any liabilities subsequently arise, the trustees are personally liable to pay those liabilities.  Accordingly, prior to making a decision to distribute the assets of a trust the trustees should ensure that there will be sufficient funds to pay any debts.

How to wind up a trust

The steps to wind up a trust can include:-

• Preparation of a distribution deed and trustee minutes.
• Dealing with any trust liability e.g. bank loans, including forgiving any debt owed to or by the trust, for example, loans made by a settlor to the trust.
• Transferring trust assets to the beneficiaries.
• Registering the transfer of any assets e.g. land, company shares.
• Advising the trust’s bank that the trust has been wound up and closing any bank accounts.
• Arranging for the trust’s accountant to prepare the final accounts for the trust, notify the IRD and file a final tax return.
• If required, deregister for GST.

The settlors should also review their wills.  When a trust is set up, it is usual for settlors to leave all of their assets to the trust.

The decision to wind up a trust should not be taken without careful consideration of the circumstances of the settlor, trustees and beneficiaries, the terms of the trust deed, as well as obtaining tax and legal advice.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.