Family Trusts After the 39% Rate: Keep, Restructure or Wind Up

The de minimis, and why it is a cliff

Not every trust pays 39%. Where trustee income for the income year is $10,000 or less, after deductible expenses, the 33% rate is retained. This is the de minimis trust rule, and it exists so that small trusts holding a modest amount of income are not dragged into the top rate.

The critical feature is that it is a threshold, not a tax-free band. Cross it and the 39% rate applies to all of the trustee income, not just the part above $10,000. That makes the step at the threshold unusually sharp.

That last figure is worth explaining, because it is the practically useful one. Above the threshold the trust keeps 61 cents in the dollar. To get back to $6,700.00 of after-tax income it needs $6,700.00 divided by 0.61, which is about $10,983. Between $10,001 and roughly $10,983 the trust is worse off than it would have been stopping at $10,000.

Estates are treated differently

Where an estate continues to earn income while it is being wound up, that income is taxed at 33%. An estate in administration is not in the same position as a long-running family trust, and the rules recognise that.

The one lever left: distributing to beneficiaries

If trustee income is taxed at 39% and beneficiary income is taxed at the beneficiary's own rate, the arithmetic points in an obvious direction. A beneficiary on 17.5% receiving $10,000 of allocated income pays $1,750 on it. The same $10,000 retained in the trust pays $3,900.

This is legitimate and it is how trusts are designed to work. But three constraints stop it being a free lunch, and each of them catches people out.

There is also a timing rule to be aware of. Income has to be allocated as beneficiary income within a set period after the end of the income year, and leaving the decision too late means it is trustee income by default. This is the single most common way a trust ends up paying 39% when it did not need to.

The compliance cost side

Since the trust disclosure rules came in, trusts have to report far more than they once did: financial statements, settlements, distributions, and details of settlors, beneficiaries and people with powers of appointment. That reporting has a cost, usually an accountant's fee, and for a trust that no longer saves any tax it can be the deciding factor.

The trust compliance cost break-even calculator puts a number on that: what the trust has to be saving or protecting to justify what it costs to run. The trust, company and personal tax calculator compares the three structures on the same income, and investing through a trust models the longer-run effect on an investment portfolio.

Keep, restructure or wind up

There is no general answer, but there is a usable way to sort trusts into three groups.

Trustee duties have changed as well

The Trusts Act 2019 codified trustee duties and strengthened beneficiaries' rights to information. Trustees have mandatory duties they cannot contract out of, and there is a presumption that basic trust information is given to beneficiaries. If you are a trustee of a family trust and have never read the deed or held a trustee meeting, the tax rate is not the most pressing thing on your list.

What this guide does not cover

Foreign trusts, complying and non-complying trust distinctions, corporate trustees, charitable trusts and the taxation of distributions of capital are all separate subjects with their own rules. This guide covers ordinary New Zealand family trusts and is general information rather than tax or legal advice.

Test Your Knowledge

Ten questions on the trustee rate and what to do about it.

Sources: Inland Revenue on trustee income tax rates and the de minimis trust rule, the Inland Revenue special report on the 39% trustee tax rate, and the Trusts Act 2019. Rates and thresholds change; check the current position with Inland Revenue and take advice specific to your trust deed.