Buying Property Through a Family Trust: Key Considerations

Buying property through a family trust is a step many New Zealanders take for asset protection or estate planning purposes. While the structure can offer genuine benefits, it is not without complexity, and the mortgage and legal implications are often underestimated. At Chaperone, we want to make sure buyers who are considering a trust structure understand what is involved before they commit, particularly around how lenders assess trust applications and what obligations come with the arrangement.

What Is a Family Trust?

A family trust is a legal structure in which a trustee or trustees hold and manage assets for the benefit of beneficiaries. In New Zealand, family trusts are typically discretionary trusts, meaning the trustees have discretion over how and when income and capital are distributed to beneficiaries. The trust is a separate legal entity from the individuals involved, which is the feature that makes it attractive for asset protection purposes. Establishing a trust requires a trust deed and ongoing administration, and New Zealand trusts are governed by the Trusts Act 2019.

Why People Buy Property Through a Trust

The most common reasons for purchasing property through a family trust include protecting assets from potential creditors, managing wealth across generations, and facilitating estate planning. In some cases, a trust structure can provide a degree of separation between personal and business assets. It is worth noting that the asset protection benefits of a trust depend on how and when the trust was established and how it has been administered - a trust set up shortly before financial difficulty is unlikely to provide meaningful protection. Trust law is nuanced, and the suitability of a trust for your specific circumstances is something to discuss with a specialist solicitor or accountant, not just a mortgage adviser.

How Lenders Treat Trust Borrowing

Borrowing through a trust is more complex than borrowing in your personal name. Lenders will typically require personal guarantees from the trustees and often from the main beneficiaries as well. This means that even though the trust is the borrower on paper, the individuals behind the trust are still personally liable. Lenders will assess the financial position of the guarantors using much the same criteria they apply to personal borrowers - income, expenses, existing debts, and creditworthiness. Some lenders have specific policies around trust lending, and not all lenders are equally experienced in this area.

Trust Structures and First Home Buyer Entitlements

One important consideration for first-home buyers is that purchasing through a trust may affect eligibility for first home buyer schemes. The First Home Grant and First Home Loan are designed for individual buyers purchasing in their personal name, not for trusts. If you are considering a trust structure and also hoping to access these schemes, it is essential to clarify your eligibility before proceeding. Rushing into a trust structure without understanding the implications for your entitlements could mean missing out on assistance you would otherwise have qualified for.

Ongoing Administration and Costs

A family trust is not a set-and-forget arrangement. Trustees have legal obligations under the Trusts Act 2019, including duties to act in the interests of beneficiaries, maintain proper records, and keep trust property separate from personal property. Trusts typically require annual accounting and may require filing with Inland Revenue. These administration costs are ongoing and should be factored into your decision. A trust that is not properly administered may not achieve the protections it was intended to provide and can create legal and tax complications down the track.

Tax Implications

Trust property is subject to its own tax treatment, and income earned by the trust - including rental income - must be dealt with correctly. Depending on how distributions are made, income can be taxed at the trustee rate, the beneficiary's personal rate, or the trust's flat tax rate. New Zealand's tax rules around trusts have been updated in recent years, and it is essential to get specific advice from a qualified accountant before establishing a trust for property ownership purposes. The tax treatment of trust income is not the same as personal income, and assuming otherwise can lead to significant unexpected tax obligations.

Getting the Right Advice Before You Proceed

Buying property through a family trust involves legal, tax, and lending considerations that interact in ways that are not always intuitive. At Chaperone, we strongly encourage anyone considering this path to engage a specialist solicitor and accountant alongside a mortgage adviser who has experience with trust structures. A mortgage adviser can help you understand how your borrowing capacity and loan options might differ in a trust context, and can connect you with lenders who are set up to handle trust applications efficiently. Taking the time to get good advice upfront is far less costly than unpicking a structure that was not right for your situation.