Trust vs Personal Ownership at 39%: Is a Family Trust Still Worth It?

For years, New Zealand family trusts were a popular tax planning tool. By distributing income to lower-rate beneficiaries, trust income could be taxed at 17.5% or 33% rather than at the top personal rate. Then the Government introduced a 39% trustee tax rate in April 2024, fundamentally changing the maths.

The Current Trustee Tax Rate

Before 1 April 2024, trustee income was taxed at 33%. From 1 April 2024, the rate increased to 39% to align with the top personal income tax rate and prevent high-income earners from using trusts to avoid the 39% bracket.

Wait — is it 33% or 39%? The answer depends on the trust’s income year:

• 2023-24 and earlier: 33%
• 2024-25 onwards: 39%

This means trust income retained in the trust (rather than distributed to beneficiaries) is now taxed at the highest rate available — the same rate a person earning over $180,000 would pay.

The $10,000 de minimis: small trusts are protected from the full rate rise. If a trust’s trustee income is $10,000 or less for the year, it’s taxed at 33% instead of 39%. This is a cliff-edge, not a marginal band — trustee income of $10,001 is taxed in full at 39%, not just the dollar over the threshold. Minor beneficiary income and corporate-beneficiary distributions don’t count toward the $10,000 test.

Allocating income to beneficiaries doesn’t have to happen by 31 March. Under s HC 6 of the Income Tax Act 2007, trustees have until the earlier of six months after balance date (30 September for a standard 31 March balance date) or the trust’s tax return filing due date to formally allocate income as beneficiary income for that year. Miss both deadlines and the income defaults to trustee income taxed at 39%.

Why Trusts Were Attractive Before

When the top personal rate was 33%, trusts offered limited tax advantage — the trustee rate matched the top personal rate. But trusts were still useful for:

• Asset protection (keeping assets outside a business in case of creditor claims)
• Estate planning (distributing assets across family members)
• Distributing income to lower-income beneficiaries (students, retired parents)

The key tax play was distributing income to beneficiaries in lower brackets. If trust income could be distributed to a spouse earning $30,000, that income would be taxed at 17.5% rather than 33%.

The 39% Problem

With the trustee rate now at 39%, retaining income in the trust is the worst of all options for most situations. At 39%, retained trust income is taxed higher than:

• A sole trader or employee earning up to $180,000 (max 33%)
• Company income retained in a company (28%)
• PIE fund returns (max 28%)

The only scenarios where retaining income at 39% in the trust makes sense are narrow: when the beneficiaries all have high personal income (39% marginal rate), and distributions wouldn’t help anyway.

Distributing to Beneficiaries: The Strategy Now

The main tax-efficient use of trusts post-2024 is to distribute income to beneficiaries who face lower marginal rates:

Example: Trust earns $30,000 rental income. Trustee retains it.

• Tax: $30,000 × 39% = $11,700

Alternative: Distribute $15,000 each to a spouse who already earns $50,000 and a student who already earns $10,000

A beneficiary’s tax on the distributed income depends on their existing income pushing them up the bracket ladder — not a single flat rate applied to the whole $15,000. A $15,000 slice often straddles two brackets:

• Spouse (income rises from $50,000 to $65,000 with the distribution): $3,500 of it falls in the 17.5% bracket (up to $53,500) = $612.50, and $11,500 falls in the 30% bracket = $3,450. Tax on the distribution: $4,062.50.
• Student (income rises from $10,000 to $25,000): $5,600 falls in the 10.5% bracket (up to $15,600) = $588, and $9,400 falls in the 17.5% bracket = $1,645. Tax on the distribution: $2,233.
• Total tax: $6,295.50 — saving $5,404.50 compared with retaining the income in the trust at 39%.

This requires genuine distributions, proper trustee resolutions, and the beneficiaries actually receiving and having use of the money. IRD scrutinises distributions that look like “paper distributions” with no real transfer.

The Minor Beneficiary Rule

A word of caution: distributions to minors (under 16) are taxed at the trustee rate (39%), not the minor’s personal rate. This rule prevents parents from using trusts to shift income to their children at low rates. Distributions to adult children (16+) are taxed at the child’s personal rate.

PIE Funds as an Alternative

Given the 39% trustee rate, trusts holding investments should consider whether PIE funds offer a better outcome. If trust assets are invested in a PIE fund:

• PIE income is taxed at the investor’s PIR — but for a trust, the PIR is determined based on the trust’s income profile, generally landing at 28%
• 28% < 39% on retained income
• This is a meaningful saving without changing the ownership structure

Restructuring trust investments into PIE funds is one of the most practical adjustments trustees have made since the trustee rate rose to 39% in April 2024.

Winding Up a Trust

With the 39% rate, many New Zealanders are asking whether to wind up their family trusts. The considerations:

Reasons to wind up:

• High compliance cost (annual trustee minutes, separate tax return, accountant fees — often $1,500–$3,000/year)
• 39% trustee rate eliminates most tax advantages
• Beneficiaries no longer need income-splitting

Reasons to keep:

• Asset protection (trust assets may be shielded from personal creditors)
• Estate planning goals remain valid
• Property or other assets in the trust may have significant transfer costs (legal fees, potential bright-line implications on residential property)

Winding up can itself trigger tax complications if the trust holds assets that haven’t changed ownership for years. Get legal and tax advice before proceeding.

Complying Trusts vs Non-Complying Trusts

Since 2022, IRD also requires trusts to file detailed financial disclosures. Complying trusts that meet the criteria (including distributing income to beneficiaries) are taxed as above. Non-complying trusts (those that are non-resident or have not filed on time) face higher tax rates and penalties.

The Verdict

For most New Zealanders, the 39% trustee rate has significantly reduced the tax advantage of retaining income in a family trust. The key responses are:

1. Distribute more income to lower-rate beneficiaries where possible and genuine
2. Move investments to PIE funds held within the trust for 28% PIR treatment
3. Review compliance costs versus benefits each year
4. Consider winding up if asset protection goals can be achieved another way

The trust structure still has legitimate non-tax uses — but as a pure tax minimisation tool, it is far less powerful than it was before April 2024.

Sources

• Trusts and tax — IRD
• Trustee income — IRD
• Minor beneficiary rule — IRD
• Special Report: 39% trustee tax rate — IRD Tax Policy ($10,000 de minimis mechanics)
• Timing of allocation of beneficiary income — IRD Tax Technical