Should I be using a trust? When a family trust is the right move?

A decade ago, as Opes Partners' Ed McKnight puts it, "every man and his dog had a trust." That default has quietly collapsed — three regulatory shifts (the Trusts Act 2019, the 39% trustee tax rate, and tighter IRD disclosure) have raised the bar for needing one. But every law-firm page online still answers the same generic question: what is a trust? That's almost never what a household actually wants to know. The real question is sharper: should I be using one, and if so, when?

In this episode, SortMe Founder & CEO Carl Thompson puts that question to three NZ advisory firms who field it every week — Lighthouse Financial, Opes Partners and Naked Finance — and gets the honest answer most law-firm pages won't give you. The panel separates the two motives people conflate (tax efficiency vs asset protection), explains why the 39% trustee rate hasn't actually killed the income-splitting case — "when you distribute any cash flow out to the beneficiaries of that trust, it is taxed at their marginal rate. So it hasn't changed the advice too much" (McKnight) — and lays out who genuinely needs a trust in 2026 versus who's just buying expensive paperwork.

In this episode:

• Why the "every man and his dog had a trust" era is over — and the three regulatory shifts (Trusts Act 2019 disclosure rules, 39% trustee tax rate, tighter IRD disclosure) that raised the bar for needing one
• The crucial detail on the 39% rate most articles get wrong — it taxes income retained inside the trust, not income distributed to adult beneficiaries at their own marginal rate (10.5% up to 39%)
• Reason one — tax efficiency: why a trust is a structure property investors usually graduate into (typically the third or fourth property, once the portfolio is positive cash flow) rather than start with
• Reason two — protection: Lighthouse's Vaishnu Krishnan on shielding inheritances from late-teen/early-twenties relationship breakdowns; McKnight on business owners needing it from property number one; Naked Finance's Jamie on intergenerational wealth — "$10 million invested… provides an income to the beneficiaries that can be distributed on an annual basis without eating into the capital"
• When it's the wrong tool — Jamie's blunt take: "for mum and dad investors, a trust really is just unnecessary complexity" — and Krishnan's rule of thumb that a simple estate and uncomplicated family dynamics can usually be handled with a Will alone
• The pre-legal checklist the panel would run before you book the lawyer — what are you actually trying to achieve, do you really need it, what does your portfolio and risk picture look like, and would simpler structures (will, s21 contracting-out agreement, joint ownership, KiwiSaver nominations) do the job
• The biggest misconception clients arrive with — that a trust is a magic shield and the assets are still really "yours" — and how confusing ownership with control can have a trust ruled a "sham"
• The "we already have one" question — when a trust set up years ago for a reason that no longer applies is just an annual bill
• How SortMe's entity management feature tracks assets, liabilities and tagged transactions across personal name, LTCs, companies and trusts — and turns end-of-financial-year from days of reconstruction into a clean handover to the accountant

Read the full article: sortme.com/post/should-i-be-using-a-trust

Transcript

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Should I be using a trust when a family trust is the right move? Article by Carl Thompson, CEO and co-founder of Sort Me. Search Family Trust NZ and you'll drown in law firm pages, all answering the same generic question. What is a trust? That's almost never what a household actually wants to know. The real question is sharper and more personal. Should I be using one? And if so, when? And under that sits what most people are really weighing. Is a trust good for the tax efficiency, the protection, or both? Those two things, saving money and keeping assets safe, are what the decision comes down to, and they shape the rest of this piece. It's also a question most Kiwis ask their financial advisor or property strategist long before they ever sit down with a lawyer. The should we conversation happens at the kitchen table and in the advisor's office. The legal setup comes later. So we put it to three New Zealand advisory firms who field it every week, two of them deep in investment property, one holistic, and ask them to tell households the truth about when a trust earns its place and when it's just expensive paperwork. The panel, Lighthouse Financial and Oopes Partners, both property investment weighted and naked finance, a holistic financial practice. What's changed and why this is now a do I need the friction question? A decade ago, as OPES partners Ed McKnight puts it, every man and his dog had a trust. That default has quietly collapsed, and three regulatory shifts explain why. The Trusts Act 2019 rewrote the housekeeping. According to Lighthouse Financials Trust Manager and solicitor Vaishnukrishnan, it changed the disclosure requirements around trusts, meaning it became harder to hide trust information from beneficiaries. It also made record keeping stricter, and trustees cannot simply make decisions without exercising their mind a little. His practical read Clients now have to weigh whether disclosing the family's asset position to their children affects family harmony, and those unwilling to shoulder the admin are looking at independents as their trustees. Then there's the 39% trustee tax rate, in effect since 1st April 2024. The detail that matters for households is what the rate actually applies to. It taxes the income a trust retains, earnings left sitting inside the trust rather than paid out. Income the trust distributes to an adult beneficiary is still taxed at that beneficiary's own marginal rate, which starts at 10.5% and only reaches 39% on personal income above $180,000. So the long-standing move, allocating trust income to lower-earning family members so it's taxed at their rate, still works exactly as it did. The 39% is the price of parking income inside the trust, not of passing it through to the people it's meant for. That distinction is why the panel's advice has barely moved. The trustee tax rate might be 39%, says McKnight. But when you distribute any cash flow out to the beneficiaries of that trust, it is taxed at their marginal rate. So it hasn't changed the advice too much. Krishnan makes the same point from the other side. The underlying tax benefits remain the same as in the past, with the one real shift being that clients now need to consider the retention of income within trusts rather than assuming they can bank earnings cheaply at the trustee level. Naked Finance's Jamie puts the sharpest edge on it. For a household whose only reason for the trust was to shelter income, and who then leaves that income sitting in the trust, the 39% rate strips much of the point out of the structure. If tax was the sole motive, there's little left to justify the admin. Finally, tighter IRD disclosure means, in Krishnan's words, settlers and trustees need to be more transparent with what they are doing with trust funds and specifically where distributions are going. The through line across all three regulatory changes is the same. More friction, more cost, more transparency. None of it kills the trust as a tool, but it raises the bar for needing one. When a trust is the right move, is it tax or protection? Strip the question back, and almost every household weighing up a trust is really asking about one of two things tax or protection. Will it save us money or will it keep our assets safe? They sound related, but the panel treats them as separate questions with separate answers, and conflating the two is how people talk themselves into a structure they don't need. Reason one, tax efficiency. The tax case for a trust is at its heart income splitting, directing income to family members on lower tax rates so less of it is lost to tax. As above, income a trust distributes is taxed at the beneficiary's marginal rate, 10.5% up to 39%. So the benefit only switches on when two things are both true. The trust is throwing off surplus income to distribute, and there are beneficiaries on lower rates to receive it. That's why for property investors, the panel sees a trust as a structure you graduate into rather than start with. McKnight describes the typical arc. We typically see investors start by investing through their own name. Then they might graduate to a look-through company. And then as their portfolio matures and is generating cash flow, they might transition to a trust. The trigger is usually their third or fourth investment property and a portfolio that is tipped into positive cash flow because that's the point, the income splitting benefit starts to outweigh the admin. A trust allows you to distribute income out to the different beneficiaries in varying amounts. If you have a partner who is not working and has a low tax rate, you can distribute more income out to them. Krishnan puts the same mechanic plainly. The benefit lies in being able to make distributions to beneficiaries at lower marginal tax rates than the 39% trustee rate. The flip side, covered in the wrong tool section below, is that if the trust isn't generating surplus income or everyone in the family is already on the top rate, the tax reason falls away and you're paying to run a structure that isn't doing anything. Reason 2, protection. The protection case is a different question, and it's the one the panel rates more highly in 2026. Here, a trust does something no tax structure can. It changes who legally owns the asset, putting it a step removed from personal risk, a creditor, a lawsuit, a relationship split, or a beneficiary who can't yet be trusted with the money. For Lighthouse, this is the main event. Asset protection should be the key focus when looking to set up a trust, says Krishnan. Primarily if you are keen on protecting assets for future generations of your family, or if you are concerned about your children wasting away an inheritance, his archetype, people with children that are in their late teens, early twenties, and they want to protect them from future relationship breakdowns. On the property side, the protection trigger is usually business ownership and the legal risk that rides with it. If an investor is a business owner, says McKnight, then they will gravitate towards a trust to protect their investment properties from the risk of legal action. And in that case, a trust might be appropriate from the start, even on a first property. Naked Finances Jamie frames the same instinct around the family home. A trust earns its place where you have personal guarantees or liabilities against a company and you want to protect your family's home. Protection also stretches across generations. Jamie's strongest yes is a trust built to hold and pass on family capital. One of the best uses of a trust is when you have a family trust that is set up for intergenerational wealth, where it pays distributions to beneficiaries over the years. You can have $10 million invested with a properly executed investment plan that provides an income to the beneficiaries that can be distributed on an annual basis without eating into the capital. That's protection and control of capital over time, a job a will alone can't do. And it's where the structure choice bites, and LTC Krishnan notes, is the most common vehicle for holding investment properties, but doesn't offer the succession planning flexibility of a trust. When it's the wrong tool, the panel is just as direct about who shouldn't bother. For most investors, they are not necessary and come with additional compliance costs, says McKnight. So setting up a trust is not the default option for most investors who earn a salary and are buying their first investment property. Jamie is blunter still. Outside genuine asset protection or intergenerational cases, for mum and dad investors, a trust really is just unnecessary complexity. And that complexity comes with costs. End of year reporting for taxation, accountants' fees, Krishnan's rule of thumb. If your estate is simple and your family dynamics are uncomplicated, you can often deal with a will only and not a trust. The test the panel would run before you book the lawyer. Drawn together, the three firms' pre-legal checklist looks like this. What are you actually trying to achieve and why? Krishnan. If the honest answer is asset protection or greater tax efficiency, a trust may fit. He'd then drill into specifics. Do they have children with financial immaturity or a disability? Do they have significant assets that they don't want forming part of their children's relationship property? Are they part of a blended family? Are they paying tax at a higher rate than their intended trust beneficiaries? If you can't point to something concrete, that's your answer. Do you really need it or are you adding complexity for its own sake? Jamie's four questions. Do you really need it? Why are you even considering it? What benefits do you assume you are going to get from it? Are you making things more complex than it needs to be, and just adding another bill at the end of the year? What does your portfolio and risk picture look like? McKnight? How many properties do you currently own? How much positive cash flow do your properties currently generate? Do you own a business or have other legal risks? Are simpler structures enough? A will, a contracting out, S21, prenup agreement, joint ownership, or KiwiSaver beneficiary nominations may do the job for a fraction of the ongoing cost. The biggest misconception clients arrive with. All three firms hear versions of the same myth that a trust is a magic shield and the assets are still really yours. They confuse ownership and control, says Krishnan. Once the assets are settled in the trust, they no longer own them and the control lies with the trustee. Clients often need to be educated that they can't simply shift the ownership to another entity and continue to treat it as if it's their own piggy bank. A trust can even be ruled a sham if the settler, trustees, and beneficiaries are one and the same, and it still needs to be paired with a robust will and potentially a S21 Hutch and cars contracting out agreement, because it won't defeat all relationship property claims. Jamie puts the same misconception simply. People think it offers ultimate protection, that their property is still theirs. But in reality, in a legal sense, it is owned by a separate entity. The we already have one question. If you set a trust up years ago for a reason that no longer applies, the business is sold, the kids are grown, the 39% rate has eaten the tax angle, it's worth revisiting. As Lighthouse's managing director Matthew Harris notes, trusts remain valuable structures if used properly. The operative words being if used properly. A dormant trust that no longer serves its original purpose is just an annual bill. Seeing the whole picture, sort me. Whether you hold property personally, in an LTC, in a company, or in a trust, the hard part is seeing it all in one place. Sort me's entity management feature tracks assets and liabilities across multiple structures, including trusts, so you can see what each entity actually holds without having to stitch together spreadsheets. Sort me also helps you with end-of-financial year accounting by pulling together all relevant information, including opening and closing balances, transactions, receipts and notes, all into one export file for your accountant. That tagging is what makes it pay off at tax time. Every transaction can be assigned to the entity it belongs to, even if you've paid from your personal credit card. Put a repair for the investment property on your own card, tag it to that property's entity, and attach the receipt. The deduction is captured rather than forgotten by 31's March. Done as you go, Sort Me turns end of year from days of reconstruction into a clean handover, and means far fewer deductible expenses slipping through the cracks. The bottom line. If one of those is you, talk to your financial advisor. Or we can match you with one. Sources, written responses from Lighthouse Financial, Vaishnukrishnan, Matthew Harris, OPIS Partners, Ed McKnight, and Naked Finance, Jamie, May June 2026. Trusts Act 2019, legislation.govnz. IRD guidance on the 39% trustee tax rate and trust disclosure rules.