There are many reasons to set up a trust. Trusts can help you to protect your assets and manage your taxes more efficiently. Under a trust structure, the trust owns your assets and you can then distribute the benefit of those assets to yourself or others, known as ‘beneficiaries’. There are several parties that make up a trust structure, each serving a different role. The ‘trustee’ is the person who distributes the trust’s assets to the beneficiaries. A trustee can be either a real person, known as an ‘individual trustee’, or a company, known as a ‘corporate trustee’. This article will explain:

  • the key differences between an individual trustee and a corporate trustee; and
  • when each might be appropriate for your trust.

What is a Trust?

A trust is a legal arrangement. Under a trust, a trustee holds and manages assets for the benefit of one or more beneficiaries. The beneficiaries may receive the benefit of the trust’s assets through income and other proceeds that the trustee distributes to them. This means that the trustee has a great deal of control over the trust. A trust can have one or more trustees.  

Unlike companies, trusts are not separate legal entities. However, they are treated as a separate entity for taxation purposes. They are generally used to hold assets for asset-protection purposes and can also provide tax benefits. The tax benefits arise because the trustee can make income distributions to beneficiaries who sit in different tax brackets. 

For example, if certain family members are in a lower tax bracket, the trustee may decide to distribute income to those individuals.

What is a Trustee?

The trustee is the person or company who legally holds the trust’s assets. The trustee holds those assets as trustee for the trust, for the benefit of the beneficiaries. Typically, the trust deed will outline the trustee’s powers. The trust deed is the formal governing document of the trust. It will usually state that the trustee: 

  • owns the trust’s assets; and
  • makes distributions to the beneficiaries.

Some of the additional duties of a trustee include to:

  • act in good faith (i.e. honestly, and without an intention to deceive);
  • exercise reasonable care in the administration of the trust;
  • keep proper books and records;
  • avoid a conflict of interest;
  • carry out the trust’s terms; and
  • not benefit from its position as trustee (except where provided under the trust terms or at law).

What is an Individual Trustee?

An individual trustee is simply a person who manages a trust. Title to the trust assets will sit with the person as trustee for the trust. Though the person legally owns the assets, they must hold the assets for the benefit of the beneficiaries. Where a trust has multiple trustees, each trustee must play an active role in managing the trust and comply with their duties as trustee. 

Advantages of an Individual Trustee

The main advantages of having an individual trustee are the: 

  • low set-up and management costs; and 
  • relatively simple set up. 

Since an individual trustee is a person, there is no need to incorporate a company. The individual simply:

  • signs the trust deed and a consent to act as trustee; and 
  • takes responsibility for managing the trust. 

They will then perform the role of trustee by making distributions under the trust.

Disadvantages of an Individual Trustee

However, there are some disadvantages of having an individual trustee, including that:

  • the individual trustee could be responsible for any legal issues with the trust;
  • it may be difficult to distinguish between the trustee’s personal assets and the trust’s assets; and
  • the trust’s assets will need to be transferred to another entity if the individual trustee dies.

Transferring assets to another trustee entity requires executing a number of documents and, in most cases, transferring the trust’s assets into the new trustee’s name. This can result in significant administrative challenges, particularly if the trust’s assets include shares and real property (e.g. land). 

What is a Corporate Trustee?

A corporate trustee is a company that acts as trustee of a trust. The company is a registered company, much like any other company, but it is often incorporated with the sole purpose of acting as trustee. This means that the company will not conduct business. Like any other company, the corporate trustee has shareholders and directors. Ultimately, it is the directors of the corporate trustee who control the trustee (the company) and consequently control the distributions of the trust. 

Advantages of a Corporate Trustee

There are many benefits of having a corporate trustee. Some of these advantages include:

  • limited liability for individuals, as the company is a separate legal entity. This means that if there are any legal issues with the trust, the company is legally responsible and not the directors that are controlling it;
  • easier separation of trust assets and personal assets as they are held in different names. As a result, it is relatively straightforward to distinguish which of a person’s assets are part of the trust; 
  • greater asset protection. If a person gets sued, for example, assets held in a separate trust with a corporate trustee are the company’s assets and not the person’s; and
  • simpler succession and control of the trust in the event of death. Since a company cannot ‘die’, the company continues to act as trustee if something happens to one of its directors and the corporate trustee must simply replace its director. The title to the assets would not change, so the trust’s assets do not need to be transferred in the case of death of a director.

Disadvantages of a Corporate Trustee

The main disadvantages of having a corporate trustee include:

  • additional set-up costs; and 
  • maintaining records for the entity. 

Although it is possible to use an already registered company as a trustee, this is generally not recommended. It is best to register a new company to act as trustee, so that: 

  • its sole purpose is acting as trustee; and 
  • there have been no activities undertaken to-date which may affect the company. 

Though there are some additional costs and challenges associated with setting up a trust with a corporate trustee, the benefits of doing so often outweigh the disadvantages.

Key Takeaways

If you decide to set up a trust, you will need to appoint a trustee to control the trust. A trustee can be either: 

  • an individual trustee (a person); or 
  • a corporate trustee (a registered company). 

Setting up a trust with a corporate trustee may require more time and additional cost, as you will need to register a company, but there are many benefits associated with doing so. These benefits include greater asset protection and limited liability. In many cases, a corporate trustee is the best option despite the higher setup costs. If you need further assistance with setting up a trust, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

What is a trust?

A trust is a legal arrangement. Under a trust, a trustee holds and manages assets for the benefit of one or more beneficiaries.

What is an individual trustee?

An individual trustee is simply a person who manages a trust.

What is a corporate trustee?

A corporate trustee is a company that acts as trustee of a trust.

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