As with most legal questions, whether it’s better for you to own equity in your company (shares) through a corporate trustee or an individual trustee (i.e. a natural person) depends on your situation. This article assumes you have already set up a discretionary trust and looks at the advantages of a corporate trustee as well as when you can be the trustee of your trust.

What is a Discretionary Trust?

A discretionary trust is a legal arrangement for one entity to hold assets on behalf of another entity. The key roles are settlor, appointee, trustee and beneficiary.

  • Settlor: The person who creates the trust by ‘settling’ a sum of money (usually a minimal amount, e.g. $10) or property for the beneficiaries.
  • Appointee: This is the person ‘appointed’ to hold the discretion to appoint or remove the trustee.
  • Trustee: The person or entity which holds trust assets/property in its own name and holds it for the benefit of the beneficiaries. A trustee can be a natural person or a company (e.g. a Pty Ltd company).
  • Beneficiary: Beneficiaries can be natural persons or companies. The trustee holds assets for the benefit of the beneficiaries, e.g. to pay dividends from an investment or rent from an investment property.

Corporate Trustees

Distinguishing Between Trust Assets and Personal Assets

Corporate trustees are advantageous for managing trust assets as it is easier to distinguish between trust assets and personal assets. For example, ‘Jane Smith’s Trust’ is on the title deeds for House 1 and ‘Jane Smith’ is on the title deed for House 2, so it’s easier to distinguish which entity owns which asset. Accountants can then more easily distinguish the income from the assets.

Limited Liability 

Trustees are personally liable for debts of the trust. If the trust takes out a loan and there are insufficient funds to repay the loan, the trustee must use its own funds to satisfy the debt. If the trustee has no assets or funds to satisfy the debt, a debtor cannot reach behind the trustee to access personal assets such as a person’s home or car.

Individual Trustees

Distinguishing Between Trust Assets and Personal Assets

If an individual trustee is used, it’s harder to tell the difference between assets of a trust and those owned by the individual. If Jane Smith is the trustee of a trust and she owns a house, then ‘Jane Smith’ is on the title deeds of House 1 (trust asset) and is on the title deeds for House 2 (her personal assets). This might be problematic for accounting and financial purposes, and if the trust cannot repay a debt, a debtor might argue that personal assets could be used to satisfy the debts of the trust.

Limited Liability

As already mentioned, trustees are personally liable to satisfy the debts of a trust. If the trust gets into debt and cannot repay, the trustee’s personal assets may need to be used to satisfy the debts. This can pose a significant risk to a trustee and advice should be sought.

Succession Planning

Corporate trustees have advantages over individual trustees for succession planning purposes. If an individual trustee dies, then assets the trustee held must be transferred to another entity. This can be messy, as the person’s estate will likely be being distributed at the same time. Alternatively, a corporate trustee does not die. If a director of the corporate trustee passes away, then they can be replaced easily, but there is no need to transfer assets from the trustee to another entity.

Key Takeaways

Whether it’s more appropriate for you to use a corporate trustee or an individual trustee for your discretionary trust depends entirely on your situation and personal and business circumstances. The key advantages and disadvantages described above are designed to provide a base for you to be able to conduct further research into whether you should set up a corporate trustee or go with the inherent simplicity of using an individual as the trustee. As there are tax consequences involved with trusts, you should also seek advice from your trusted financial professional.

***

Questions? Get in touch with our business structuring team on 1300 544 755.

Chloe Sevil

Next Steps

If you would like further information on any of the topics mentioned in this article, please get in touch using the form on this page.