The discretionary trust has traditionally been a popular entity to form in New Zealand for a variety of reasons, including asset protection and estate planning.

A discretionary trust provides the trustees of the trust with discretionary powers to make decisions that are in the best interests of the beneficiaries. Powers extend to full discretion over distributions to beneficiaries of income and expenses, gains and losses, accumulated funds and trust corpus.

A discretionary trust may be deemed to be a grantor trust under any one of sections 671-679 of the Internal Revenue Code, by way of which the transferor of property to said trust is deemed to be the owner, in direct proportion to the percentage of assets transferred.

Accordingly, a grantor is taxed on income, expenses, gains and losses arising directly out of the assets held in the trust as though the trust did not exist.

The United States presumption rules deem that unless a person satisfies the Internal Revenue Service that no portion of the income or corpus of the trust may ever be paid to or accumulated for the benefit of a U.S. person then the transfer comes under the grantor trust rules.

By their very nature, New Zealand’s discretionary family trusts are always deemed to be grantor trusts. That is, from a United States federal income tax perspective, a foreign trust formed by a United States person. This is due to the typical discretionary family trust listing named and un-named individuals as beneficiaries. Normally the beneficiaries include the settlor(s), sometimes the trustees, the settlor’s issue and descendants.

Unless the trust deed expressly prohibits any United States person from ever being able to benefit from the trust as a beneficiary, under Code 679 the trust is deemed to be a grantor trust.

The absence of United States persons being listed as beneficiaries goes some, but not all the way, towards satisfying the Internal Revenue Service that the trust is not a grantor trust, in situations where a United States person has transferred property to a foreign trust.


A United States person for the purposes of applying the grantor trust rules includes:
  • A citizen or resident alien of the United States.
  • A domestic partnership.
  • A domestic corporation.
  • Any estate (other than a foreign estate, within the meaning of section 7701(a)(31)(A)), and;
  • Any domestic trust.