Summary
- When setting up a trust, the trustee, whether an individual or a company, holds legal title to the trust’s assets and is responsible for managing them on behalf of the beneficiaries.
- A corporate trustee offers greater asset protection and administrative continuity than an individual trustee, though it involves higher set-up and ongoing costs.
- The appointor holds ultimate control over the trust by retaining the power to appoint and remove the trustee.
- This article is a plain-English guide to individual and corporate trustees in Australian trust structures, intended for business owners considering setting up a trust.
- The content is produced by LegalVision, a commercial law firm that specialises in advising clients on business structuring and trust arrangements.
Tips for Businesses
Register a new company solely for the purpose of acting as a corporate trustee; avoid using an existing trading entity. Keep clear records distinguishing trust assets from personal assets. Ensure the trustee understands their obligations under the trust deed before the trust commences operating.
When setting up a trust, appointing the right trustee is a critical decision. The trustee is responsible for managing the trust’s assets and holding those assets on behalf of the beneficiaries. Accordingly, the trustee takes on one of the most important roles in a trust relationship. When appointing a trustee to administer your trust’s affairs, you can elect to appoint an individual trustee or a corporate trustee company. In this article, we set out the key differences to be aware of when making this decision.
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Know the Players
If you are considering setting up a trust, it is important to be across the key players involved. There are four key players to a trust.
1. The Appointor
The appointor has the power to nominate and remove the trustee. Accordingly, the appointor has the ultimate power in a trust because they control who the trustee is. Where you are setting up a trust for yourself and your family, it makes sense for you to take on this role.
2. The Beneficiaries
These are the people who benefit from the assets in a trust. In a discretionary trust arrangement, the trustee can choose how to distribute the assets of the trust to the beneficiaries.
3. The Settlor
The settlor sets up the trust initially by paying a nominal settlement sum (usually $10) to the trustee. They are typically a lawyer or an accountant but can be anyone so long as they have no further involvement in the trust going forward. Importantly, the settlor cannot benefit from the trust assets, meaning they cannot be a beneficiary.
4. The Trustee
The trustee is the party responsible for managing the trust assets and administering the trust’s affairs. Where the trust is a discretionary trust, the trustee takes on the further responsibility of making distributions of the trust income and capital to the beneficiaries each financial year. The trustee can be either an individual or a company.
Individual Trustee
When setting up your trust, you may elect to appoint an individual to act as trustee. An individual trustee is simply a natural person or persons acting jointly who hold the legal title to the trust’s assets. Likewise, they hold these assets for the benefit of the beneficiaries. The trustee is responsible for carrying out their duties under the trust deed.
One drawback of appointing an individual trustee is the lack of separation between the individual’s personal assets and the trust’s assets. Where the trust incurs debt, the individual’s personal assets may be at risk if the trust assets are not sufficient to repay those debts. Indemnities in the trust deed may seek to limit the trustee’s personal liability for debts incurred by the trust, but it is important to be aware of the risks when consenting to act in this role.
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Corporate Trustee
In the alternative, you might seek to appoint a company to act as a trustee of your trust. This entity is commonly known as a corporate trustee company. While it is possible to use an existing company as your corporate trustee, best practice is to register a new entity which is incorporated with the sole purpose of acting as trustee and has no historical liabilities.
Much the same as an individual trustee, a corporate trustee is tasked with carrying out the trust powers and managing the trust’s affairs for the benefit of the beneficiaries. The company holds the trust assets on the beneficiaries’ behalf. It is common for the person setting up the trust to be appointed as a director and shareholder in the trustee company. Consequently, they retain control over the trustee and can make decisions about the trust assets.
A corporate trustee company is recommended due to the greater level of asset protection it provides. In contrast with an individual trustee, a corporate trustee allows for greater separation of trust’s assets and the personal assets of the directors and shareholders. This clear distinction of assets can be important where the trust incurs debts it is unable to repay.
You would register the corporate trustee in the same way as any other company, with shareholders and directors. Importantly, although the shareholders and directors may be behind the decisions of the corporate trustee, they are not the trustee. The company itself takes up this role.
What’s the Difference?
When choosing whether to have an individual or corporate trustee, you will need to weigh up which best suits your circumstances.
| Individual Trustee | Corporate Trustee | |
|---|---|---|
| Cost | Low set-up and management costs. | Associated fees for registering a company and paying ongoing annual ASIC fees. |
| Lifespan and Succession Planning | If the trustee changes, they must execute a deed of appointment and transfer trust assets to the new trustee. This can be administratively onus. | If directors or shareholders of the corporate trustee change, the corporate trustee remains the same legal entity. This means there is no need to transfer assets to another entity (unless the corporate trustee is no longer the trustee). |
| Liability |
The trustee is responsible for the trust’s affairs and debts. A trust is not its own separate entity. As a result, the trustee can be held personally responsible, and their personal assets are at risk to satisfy any of the trust’s debts/liabilities. |
A company is a separate legal entity. The directors and shareholders of the company have limited personal liability for the actions of the company. If the trustee company cannot pay its debts, the company may enter into liquidation, but the assets of directors and shareholders are better protected. |
| Asset Management | It may be difficult to distinguish between personal and trust assets — particularly if records around asset ownership are unclear as to whether the individual holds the asset in their personal capacity or as trustee of the trust. | Easier separation of trust assets and personal assets because they are held in different names. |
Key Takeaways
Selecting the right trustee is important because they exercise a significant amount of control over the trust’s affairs. You want to ensure that your trust is properly run and serves the purposes for which you set it up.
When selecting a trustee, you can choose to nominate either an individual or a company as the trustee. There are benefits to both, and you should make your decision based on your specific circumstances and your main areas of concern. Whether you have nominated an individual or a company as trustee, they should understand their duties and obligations under the trust deed.
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Frequently Asked Questions
What is a trust?
A trust is a type of legal structure that concerns the relationship between a person or company (known as the ‘trustee’) that holds legal title to property for the benefit of others (known as the ‘beneficiaries’).
What is a corporate trustee?
A corporate trustee is a company that manages the trust’s affairs for the benefit of the beneficiaries. While you can select an existing company to become a trustee, it is best practice to register a new entity and incorporate it with the sole purpose of being a corporate trustee.
Can the settlor also be a beneficiary?
No. The settlor cannot benefit from the trust assets and must have no further involvement in the trust after establishing it.
Who holds ultimate power in a trust?
The appointor does, as they control who acts as trustee.
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