Trusts are a bit like Swiss Army knives of the financial world: incredibly useful, but only if you are using the right blade for the job. In New Zealand, two of the most commonly discussed types of trusts are family trusts and investment trusts. They look similar on paper, but they are built for very different purposes – confusing the two can lead to unnecessary complexity, cost, and the occasional headache.
In this article we unpack the differences and explain why an investment trust can sometimes be the smarter, cleaner option.
The Family Trust: The Classic All-Rounder
A family trust is traditionally set up to protect and manage wealth for the benefit of family members. It’s goals often include asset protection, estate planning, and providing flexibility for future generations. Beneficiaries are usually wide-ranging – spouses, children, grandchildren, and sometimes a fairly broad circle of family members, both present and future.
Because of this breadth, family trusts tend to accumulate responsibilities over time. What starts as a tidy structure for the family home can evolve into a catch-all vehicle holding businesses, investments, loans, artwork, and possibly a jet ski. With that comes complexity: more compliance, more administration, and more decision-making for trustees, who must balance the interests of multiple beneficiaries.
Family trusts are powerful, but they can become a little… crowded.
The Investment Trust: Focused and Purpose-Built
An investment trust, by contrast, is designed with a much narrower mission: to hold and manage investments. That might include shares, managed funds, commercial property, or other investment assets. Beneficiaries are often limited, sometimes even mirroring the investors themselves.
Because the purpose is clear, investment trusts are typically simpler to run. Decision-making is faster, record-keeping is cleaner, and reporting tends to be more straightforward. Trustees can focus on the main goal of the trust, which is growing and managing investments, rather than juggling family dynamics and long-term succession planning at the same time.
Think of it as the difference between a family minivan and a well-tuned sports car. Both are useful, but they are not meant for the same drive.
Why an Investment Trust Can Be a Great Option
For many investors, an investment trust offers some compelling advantages:
- Clarity of purpose: Everyone involved understands why the trust exists and what it is meant to do.
- Governance discipline: A separate structure encourages more deliberate investment decisions and better documentation.
- Risk separation: Keeping investments out of a family trust can help ring-fence risk, particularly where business or higher-risk assets are involved.
- Tax planning flexibility: While trusts are subject to trustee tax rules (which have become more stringent in recent years), income can often still be distributed to beneficiaries where appropriate.
- Future flexibility: An investment trust can sit alongside a family trust, rather than inside it, keeping each structure clean and purposeful.
Choosing the Right Tool
The important thing to remember is that a trust should be designed around what you want it to achieve, not the other way around. Family trusts remain invaluable for protecting and transitioning family wealth. But if your primary goal is to build and manage investments efficiently, an investment trust can be a smarter, more elegant solution and in some situations, a standalone structure makes more sense.
If you would like to discuss your options in more detail, contact us and we can arrange a time to talk.