Trust Funds vs Personal Funds

A trust can be an effective structure for asset protection, succession planning, and managing family wealth. However, the benefits of a trust depend on it being properly administered.

One issue that can create problems for trustees and beneficiaries is the mixing of trust funds with personal funds. Trust assets should not be treated as if they are personally owned by the settlor, trustees, or beneficiaries.

In this article we outline the difference between trust funds and personal funds, why separation matters, and some practical steps trustees should keep in mind.

Understanding the difference between trust funds and personal funds

The main difference between trust funds and personal funds is ownership and control.

Personal funds are owned directly by an individual. This means the person has flexibility to use, spend, invest, or transfer those funds as they choose.

Trust funds are different. Trust assets are legally owned and managed by the trustees for the benefit of the beneficiaries. Trustees must act in accordance with the Trust Deed, the Trusts Act 2019, and their duties as trustees.

A person may be a settlor, trustee, and beneficiary of a trust, but this does not mean they personally own the trust assets. Trustees must make decisions collectively and for proper purposes.

This distinction is important. If trust assets are treated as personal assets, the trust may not provide the protection or outcomes that were intended when it was established.

Why separation matters

A trust should be administered as a separate structure. This means trust assets, income, expenses, and decisions should be kept distinct from personal assets and personal financial arrangements.

If personal funds and trust funds are mixed together, it may become difficult to show which assets belong to the trust and which belong to an individual. This can create issues with Inland Revenue, creditors, relationship property claims, and the courts.

It may also raise questions about whether the trustees are properly carrying out their duties. Trustees should be able to show that trust assets have been managed carefully, transparently, and in accordance with the Trust Deed.

Good record keeping is a key part of this. Clear records can help demonstrate that the trust has been actively managed and that decisions have been made appropriately.

Maintaining separate bank accounts

Trustees should ensure the trust has its own bank account.

Trust income, such as rent, dividends, or investment returns, should be paid into the trust bank account. Ideally, trust expenses should also be paid from that account.

Personal expenses should not be paid from the trust bank account. Likewise, trust expenses should not be paid from a personal account unless there is a clear record of why this has happened and how it is to be treated.

Keeping separate accounts helps maintain the distinction between the trust and the individuals connected with it. It also makes accounting, tax compliance, and trustee reporting much easier.

Keeping proper records and trustee minutes

Trustees should keep written records of important decisions.

This may include decisions about buying or selling trust assets, making distributions to beneficiaries, entering into agreements, lending money, or meeting trust expenses.

Minutes and resolutions provide evidence that trustees considered the relevant issues and made decisions in their capacity as trustees. This can be important if a decision is later questioned by a beneficiary, creditor, Inland Revenue, or the court.

A lack of records can create uncertainty and may make it harder to show that the trust was administered properly.

Dealing with trust property carefully

Where a trust owns property, it should be managed formally.

For example, if the trust owns the family home and a beneficiary or settlor lives in it, the trustees should consider documenting the arrangement. This may include recording who is responsible for outgoings such as rates, insurance, maintenance, and other property-related costs.

If the trust owns a rental property, rent should be paid into the trust bank account and expenses should be paid by the trust. The trustees should also ensure tenancy arrangements, insurance, and tax obligations are properly managed.

Trust property should not be treated casually or as if it is personally owned by one individual. Formal arrangements help reinforce that the property belongs to the trust.

Tax and accounting obligations

Trusts and individuals are taxed differently in New Zealand.

Trustees are responsible for ensuring that the trust meets its tax and accounting obligations. This may include preparing financial statements and filing an annual income tax return for the trust.

Accurate records are important. Trustees should be able to identify trust income, expenses, assets, liabilities, distributions, and any advances or loans between the trust and individuals.

Where trust and personal transactions are mixed together, tax compliance can become more difficult and may increase the risk of errors or disputes.

Relationship property considerations

Mixing trust funds and personal funds can also create relationship property issues.

For example, if personal income or joint funds are used to reduce debt on a trust-owned property, this may create arguments later about whether there is a personal or relationship property claim connected to that asset.

Similarly, inherited funds or trust distributions that are paid into a joint personal account may lose some of their separation. This can create complications if a relationship ends.

Trustees and beneficiaries should obtain advice before using personal funds for trust assets, or before mixing trust distributions with relationship property.

 

Our experienced Trust Management team can support you to administer and maintain the effectiveness of your trust, ensuring it is robust and compliant. Reach out to us to arrange a review of your trust, or to discuss our Trust Management service.