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Winding up a trust

A trust is wound up (brought to an end) when all of the trust’s assets are distributed to the beneficiaries or to another trust, either directly or by way of resettlement.  Whether the trust is wound up early or because the trust has come to the end of its permissbile life (a maximum of 80 years for a non-charitable trust) certain formalities are required to record the end of the trust.

Care is also requried to establish whether any tax liability arises due to the transfer of assets when a trust is wound up. 

Gift duty

Although gift duty was abolished with effect from 1 October 2011, any gifty duty liability incurred prior to that date will survive the end of a trust.

Loss of continuity

The continuity rules for shareholdings do not contain any exceptions that address a loss of continuity because a trust is wound up. 

Capital distributions  

Distributions of capital made on winding up the trust are treated as any other capital distribution and will be tax-free to the same extent as would have been the case for an earlier capital distribution.  See classificaiton of trusts for tax purposes. 

Any losses are lost when a trust is wound up

Any losses retained on winding up will be lost.   There are no provisions that allow tax losses to be distributed to the beneficiaries when a trust is wound up.

Winding up the trust will cause the cessation of a taxable activity for GST purposes

If the trust is GST registered there will be a cessation of the taxable activity on or before the winding of the trust. A final GST return will be required and the trustees will need to de-register the trust from GST.  

There are practical matters for a trustee to attend to when winding up a trust

The act of winding up the trust itself is normally the the result of a trustee resolution and may or may not also require a deed to effect the winding up. 

Although there are limited if any legal formalities there are practical matters to attend to.  These include: 

  • notifying the trust’s bankers that the trust has been wound up and that the trust’s bank accounts should be closed
  • preparing accounts so that the trustees can make final accounts to the beneficiaries
  • notifying the IRD  that the trust is no longer trading if the trust has an IRD number
  • filing the final tax return and obtaingin confirmation from the IRD that there are no outstanding tax matters
  • deregistering from GST if relevant, and
  • confirming the registration of any property transfers.

Winding up a trust does not remove any liability a trustee has for tax  

The trustee will remain liable for the trust’s tax liabilities following the winding up of a trust.  Once the trust’s assets are fully distributed the trustee’s right to indemnity from the trust’s assets is practically limited.  For this reason a trustee may wish to seek personal indemnification from the final beneficiaries for any shortfalls or liabilities in respect of any tax obligations, prior to making the final distribution of the trust’s assets.  Where a beneficiary will not provide a satisfactory indemnity the trustee can apply to the Court for directions in this matter.

References:

Discussion

20 thoughts on “Winding up a trust

  1. What if I don’t have any beneficiary any more how can I wind up the estate?. Since I’m a sole beneficiary can I transfer the left over assets to my name?

    Quintus

    Posted by Quintus | September 6, 2014, 6:25 am
  2. PL GIVE DRAFT OF REQUISITE DEED OF WINDING UP TRUST AND GIVING AWAY ALL FUNDS ETC TO ANOTHER TRUST HAVING SIMILAR OBJECTS.

    Posted by HARIHARAN PN | September 19, 2014, 10:20 pm
    • Before a trust can be wound up it is important to confirm that the trustees have the power to do so and whether the trust is being wound up earlier eg the vesting date is being brought forward or because the final vesting date has arrived. Each situation needs to be considered on its own facts and appropriate documents drafted. Legal advice should be sought.

      Posted by vickiammundsen | September 21, 2014, 2:57 pm
  3. Hello, I am a Settlor and Trustee of a Family Trust with six members being Settlors and Trustees. For a Trust to be wound up, does it require a unanimous decision and all 6 signatures on the final Wind up. If there is only four members who agree to wind up the Trust and the other two refuse to sign, and the other four still go ahead and wind it up without the other two’s consent and signatures? Thanks appreciate your reply.

    Posted by quincy | April 20, 2015, 11:44 pm
  4. Where there is no winding up clause in a trust, can the trust ever be wound up?

    Posted by Rosie Purchas | May 19, 2015, 5:46 pm
  5. If a Trust is being wound up because it is insolvent do the debts then fall on the trustee or all beneficiaries?

    Posted by Meagan | July 22, 2015, 1:37 pm
    • Beneficiaries are not generally responsible for trust debts (unless indemnities have been given). While trustees as the legal owner of trust property are generally liable in the first instance for trust losses, each case turns on its own facts.

      Posted by vickiammundsen | January 2, 2017, 7:30 pm
  6. When winding up a trust, do the beneficiaries have to sign their approval as well as the trustees?

    Posted by Karen | May 30, 2016, 4:20 pm
    • The trustees may seek the consent of the beneficiaries. However, if the trustees are exercising a discretion the consent of the beneficiaries will not generally be required unless the terms of the trust provide otherwise. That said, it may be prudent of the trustees to obtain consent.

      Posted by vickiammundsen | January 2, 2017, 5:43 pm
  7. How long does the winding up process usually take? e.g from time of death to assets received by beneficaries

    Posted by smo | January 23, 2017, 12:01 pm
  8. Can you confirm I am understanding this correctly. I have a trust that I am transferring to another trustee. For tax purposes, I record the trust as being in its final year and formally wind it up, because from a paperwork perspective “my” trust is winding up, even though the funds are remaining in trust under a different trustee?

    Posted by Amanda Stokes | February 1, 2017, 6:46 am
  9. If I wish to wind up a trust that the family home is in, is the home assessed on the amount it was originally gifted for, or does it have to be market value – i.e. would I have to use savings to make up the difference?How does that work? I have become aware that, when our gifting over the few years was set at the $27k for me, and the same for my husband ($54k in total) that if my husband and I were to need resthome care, Work & Income will only include gifting of $27 per annum, not $54k. That would mean the $27k per annum would be taken as assets and would mean that we would not get a subsidy. Which would certainly mean we’d have to sell our home.I wonder if others who have their family home in a trust to protect assets are aware of this?

    Posted by Di Trower | May 15, 2017, 11:59 am
    • If the trust’s sole asset is the family home (and the trust has not earned any income and is a complying New Zealand trust) and residential care subsidies are your only concern, a “trust reversal” may be a consideration. We recommend legal advice as you need to appreciate how gifting would apply to your circumstances. From your question, you appear to have some misunderstanding regarding how gifting would apply. This comment cannot be considered advice.

      Posted by vickiammundsen | May 16, 2017, 1:35 am
  10. We have my mothers home money in a trust and want to close the trust to put towards building a house for mum to live in will this be straight foward to do or how do we do this.

    Posted by Lisa | May 18, 2017, 8:52 am
    • The starting point is to review the terms of the trust to see what is permissible. It would also be sensible to consider why the trust was settled and what risks the funds might be subject to if owned by your mother. Legal advice is recommended.

      Posted by vickiammundsen | May 25, 2017, 12:21 am

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