Trusts are everywhere in New Zealand. For decades, setting up a family trust was seen as the smart way to protect wealth, avoid taxes, or pass assets to the next generation. But are they really as protective as many people believe? Shenali Lewke-Bandara of Denham Bramwell Lawyers works with families across Auckland on trusts, relationship property, and estate planning. She says it’s common to meet people who have a trust but don’t fully understand how it works.

Why trusts became so popular

New Zealand has more trusts per capita than almost anywhere else in the world. In the 1990s and early 2000s, trusts were often created to reduce inheritance tax, avoid death duties, or protect assets from creditors. Families set them up almost by default, often without thinking through the long-term management. While some of those tax drivers have disappeared, the legacy of widespread trust use remains. Many households still hold homes or investments in trusts, even if the reasons aren’t clear.

What a trust can and can’t do

At their best, trusts can help shield assets for future generations. They can protect family property from business risks or make sure children and grandchildren benefit from wealth over time. They also allow flexibility in distributing income or assets. The misconception is that a trust is an impenetrable wall. In practice, protections only hold if the trust is properly managed. If the same person is the settlor, sole trustee, and main beneficiary, the lines blur. Courts can and do look through those structures, especially in relationship property disputes.

The risk of poor management

One of the biggest pitfalls is treating a trust like a personal bank account. If money flows in and out without clear separation, it weakens the trust’s legitimacy. Likewise, failing to keep proper trustee minutes or ignoring the formalities makes it easier for someone to challenge the trust later. In relationship property cases, people often argue that assets in a trust are untouchable. But if the trust has been poorly run, courts may decide otherwise. That can mean a house, once thought to be protected, is suddenly back in the pool of relationship property.

When trusts add complexity

Trusts don’t always simplify life. In blended families, inheritances, or business ownership, they can create extra layers of difficulty. For example, a spouse may be appointed as a beneficiary for tax purposes, only to later claim rights against the trust during a separation. Shenali explains that this is why trusts should never be set up in isolation. They need to be considered alongside contracting out agreements, Wills, and wider financial planning.

Getting it right

If you already have a trust, it’s worth reviewing it regularly. Check who the trustees are, how decisions are recorded, and whether the trust is still serving its purpose. If you’re setting up a new trust, be clear about your objectives. Is it for intergenerational wealth, creditor protection, or something else? The purpose shapes the structure. Above all, don’t assume a trust is a simple fix. The strongest trusts are those managed with care, separation, and professional guidance.

Disclaimer: This article is based on a podcast featuring insights from experienced professionals and is intended for general information and inspiration only. While we aim to share valuable guidance, please seek personalised advice from qualified professionals before making decisions about your property, finances, or renovation plans.