
The risks and responsibilities of being a trustee
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Being a trustee carries significant responsibilities, regardless of whether the trust is a family trust or a charitable trust.
Trustees are legally responsible for the prudent management of trust assets and are directly accountable to the beneficiaries. It is critical to understand these duties and approach the role with diligence and care.
Accountability and legal risks
Trustees have fiduciary obligations under New Zealand’s Trusts Act 2019, requiring them to act honestly, in good faith and in the best interests of the beneficiaries. This means managing trust assets prudently, adhering to the trust deed and ensuring transparency.
Beneficiaries have the right to hold trustees accountable for breaches of duty and can take legal action if trustees fail in their responsibilities. Disputes in family trusts may not always stem from the beneficiaries themselves but could involve outside influences, such as a beneficiary’s spouse. These scenarios underline the importance of clear communication and robust decision-making processes.
Trustees also have obligations to Inland Revenue. Until you formally resign as a trustee and notify Inland Revenue, you remain personally liable for any tax obligations of the trust, including filing tax returns and ensuring taxes are paid. Always follow the proper procedures to resign as a trustee, as outlined in the trust deed.
Tax treatment and financial considerations
From a tax perspective, it’s essential to understand that trust losses cannot be passed on to beneficiaries. These losses must be carried forward within the trust until it generates profits. If a trust owns a loss-making asset, such as a property expected to incur ongoing losses, it might be more tax-efficient for the asset to be owned by an individual or entity that can offset those losses against their taxable income.
Later when the asset starts generating profits, it can be transferred to the trust for asset protection purposes. However, this transfer may involve additional costs, such as legal fees, transfer duty and depreciation recovery. Always seek professional advice before making such decisions to ensure compliance with tax regulations and optimal outcomes.
Trustees must be proactive
There is no such thing as a passive trustee under New Zealand law. Trustees must actively participate in the management of the trust and demonstrate diligence in their decision-making. Holding regular trustee meetings and documenting decisions through proper minutes is critical for accountability. These records not only reflect prudent management but also provide evidence of compliance with fiduciary duties.
For example, consider trustees who decided during a quarterly meeting to obtain insurance on a trust-owned factory for loss of rent due to fire or accidents. When the factory was destroyed two years later, the foresight of these trustees saved the trust from significant financial hardship. This example highlights why trustees must take an active role and assess potential risks regularly.
Handling settlor interference
While a settlor (the person who establishes the trust) may express opinions, trustees must remain independent and prioritise the beneficiaries’ best interests. If a settlor attempts to interfere with the trustees' decisions - such as discouraging the purchase of insurance - the trustees must stand firm. As a trustee, your role is to steer the ship and you are responsible for making decisions based on the trust's objectives and the beneficiaries' needs. If undue pressure becomes untenable resigning may be necessary, but only after ensuring all responsibilities are properly discharged.
Key takeaways for trustees
- Understand your legal duties: Familiarise yourself with the obligations under the Trusts Act 2019 and the trust deed.
- Actively manage the trust: Regular meetings, documented decisions and risk assessments are essential practices.
- Plan for tax efficiency: Carefully consider the ownership of assets and their tax implications. Seek professional advice when needed.
- Be independent: Make decisions in the best interests of the beneficiaries, free from undue influence even from the settlor.
- Notify Inland Revenue: If you step down as a trustee, ensure proper notification is given to avoid personal liability.
By embracing these principles, you can mitigate risks and fulfill your role as a trustee with confidence and integrity. Above all, never be a passive trustee.

Craig McCallum
AssociateCraig is an expert in reviewing and analysing client’s financial statements and tax returns and provides specialist taxation advice, you can always expect Craig to have his finger on the taxation pulse.