Should you choose a corporate trustee or an individual trustee for your trust? In the last few years, Australia has seen an increase in people forming trusts for a variety of reasons. It may be to run a business, to manage a self-managed super fund or to establish a testamentary trust following your death. Whomever is chosen as a trustee takes control of the trust for the benefit of the beneficiaries (people listed within the trust). A trust provides many benefits for a variety of reasons, including asset protection and tax minimisation. However, whether you choose an individual or corporate trustee depends on what you’d like to achieve for succession planning and asset protection.
Requirements for a Trust
You can choose one of the following structures for your fund:
- up to four individual trustees
- a corporate trustee (essentially, a company acting as trustee).
For a self-managed super fund, if you choose an individual trustee, you can have a maximum of four members. Each member of the fund must be a trustee, and each trustee must be a member of the fund (with the exception of single-member funds). A corporate trustee has a maximum of four members, and each member of the fund must be a director of the company, and each director must be a member of the fund (except for single-member funds).
For a testamentary discretionary trust, beneficiaries who are those persons who may benefit under the trust. There is usually a definition of beneficiaries in a discretionary trust, and could be the person you wish to benefit together with their children, grandchildren and any other specified persons or entities.
For both individual and corporate trustees, under trust law, the trustees are liable for whatever debt the trust incurs. However, a trustee can discharge the trust debts if they have a right of indemnification. The right of indemnification is dependant on the courts, an indemnity clause and laws regarding trust funds. Generally the indemnity is limited to liabilities or expenses that have been properly incurred by the Trustee in the execution of the trust. If the Trustee’s action was unauthorised and exceeds his power, there is no right of indemnity.
What if the trust doesn’t have adequate assets to repay the debt? Where the trust has an individual trustee, if there is a shortfall in the assets of the trust fund then the individual trustee will be liable for the shortfall. This amount, if substantial to the individual trustee’s personal asset pool, may result in the individual trustee declaring bankruptcy.
Where the trust has a corporate trustee, the corporate trustee will probably go into liquidation or administration. As the corporate trustee usually has no or minimal assets, this may not be too detrimental to the parties who had established the trust in the first instance. Under company law the individual shareholders are not liable for the debts of the company; although there are exceptions.
When establishing a trust, a corporate trust must pay a fee and then be liable for a yearly fee. This yearly fee may change dependent on what other functions the company has, such as owning another business. For an individual trust, the costs are usually less than a corporate trust as they do not have to pay a registration fee. It is also important to note that members of the trusts cannot be paid for being a trustee.
If an individual trustee is removed or added, you must undergo a process to change the titles of the assets and is often a time-consuming process with costs involved. However, with a corporate trustee, you must only notify the Australian Taxation Office and other authorities of the change. If someone leaves, they no longer are listed as a member and director of the trust.
Particularly in the case of self-managed super funds, t is also important that personal assets be kept separate to the trust.
The fund’s assets must be kept separate from any assets members hold personally. Where there are individual trustees, there is a risk that fund assets may be intermingled with personal assets. With a corporate trustee, the risk of personal assets becoming intermingled with fund assets is reduced. Also, as companies have limited liability, a corporate trustee offers greater protection if the trustee is sued for damages.
No matter whether you choose a corporate trustee or individual trustees. there are expensive penalties if trust laws are breached. Things such as not holding the right paperwork or correct accounts and statements may result in a fine.
Penalties and Succession
Issues arise as to what happens to the trust should an individual Trustee die. The appointor of the trust, under most trust deeds, should be able to appoint a new trustee to continue in that position. However, it is possible that the appointor and the individual trustee are the same person – resulting in the trust being headless.
With a corporate trustee, the scenario will be easier to resolve as the company will continue to exist. The shareholders, if need be, can appoint a new director – should one director die. Again careful estate planning should be undertaken to contemplate this situation.
If you’re considering establishing a trust, it’s important to seek legal advice so you understand the rights and responsibilities to the trustee and the structure you have chosen. We can give expert advice on self-managed super funds and testamentary discretionary trusts. For your free, 10-minute phone consultation, please contact us today.