Rights of discretionary beneficiaries in a Trust upon wind-up …

Sam is a beneficiary of her parent’s Trust, and her parents are Trustees of the Trust.

She was made aware that the family Trust was to be wound up and the Trust’s assets distributed, and was told she will not be receiving a share of the Trust fund.  

Under the Trusts Act 2019 beneficiaries are entitled to receive ‘basic Trust information’.

In accordance with this right, Sam requested a copy of the Trust Deed and found out that she was listed as a “discretionary beneficiary” of the Trust. 

She was unsure about her rights upon wind-up, but had always thought she would receive an equal share of the Trust’s assets.  She took legal advice to find out her rights.

The two most common types of family Trusts in New Zealand are Fixed Trusts and Discretionary Trusts.

The beneficiaries of a Fixed Trust are generally entitled to a fixed share of the Trust assets upon wind-up of the Trust, in accordance with the terms of the Trust Deed.

The Trustees of a Fixed Trust do not have the discretion to distribute the Trust’s assets in any way other than the fixed arrangement in the Trust Deed.

However, in a Discretionary Trust, the Trustees have the flexibility to decide how the Trust’s assets are distributed upon wind-up.

While the Trustees have to consider the interests of the discretionary beneficiaries, the discretionary beneficiaries are not entitled to any fixed share of the Trust property. Often discretionary beneficiaries will not end up receiving any share of the Trust property upon wind-up, or will each receive differing shares.

In the scenario above Sam cannot prevent the distribution to any other beneficiary of the Discretionary Family Trust, nor can she force the Trustees to provide a distribution to herself.

Sam may have recourse through the Courts if she believes that Trustees have breached their obligations, for example failing to consider the needs of all beneficiaries or otherwise not following the terms of the Trust.

Generally, to come before the Courts, the breach of the Trustees’ obligations has to be substantial and there obviously needs to be proof of the breach. However, even if the Court was to determine a breach of a duty occurred, this would not lead to the Court directing how the Trust fund would be administered or distributed on wind-up.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Rachel Collins / Hanifa Kodirova

Associate / Law Clerk
Wellington