Summary
- A trust is a legal arrangement where a trustee holds and manages assets for the benefit of beneficiaries, offering advantages including asset protection, tax efficiency through income distribution to beneficiaries at varying marginal tax rates, and flexible estate planning.
- Individual trustees offer a simpler, lower-cost setup but carry personal liability risks, potential difficulty separating personal and trust assets, and require asset transfers upon the trustee’s death.
- Corporate trustees provide limited liability, clearer asset separation, greater asset protection, and simpler succession arrangements, though they involve higher setup costs and ongoing record-keeping obligations for the company.
- This article is a guide to trust structures and trustee types for individuals and business owners in Australia, explaining the differences between individual and corporate trustees.
- LegalVision is a commercial law firm that specialises in advising clients on trust structures, asset protection, and estate planning.
Tips for Businesses
Consider your asset protection needs, succession plans, and budget before choosing between an individual or corporate trustee. If establishing a corporate trustee, register a new company solely for that purpose to avoid complications from prior business activities. Ensure your trust deed clearly outlines trustee powers, beneficiary entitlements, and distribution rules.
A trust lets a trustee hold and manage assets on behalf of beneficiaries, offering a practical way to protect assets and manage taxes. Choosing the right trustee, whether an individual or a company, is one of the most important decisions you will make when setting up a trust. This article will explain:
- what a trust is and why you would use it;
- the key differences between an individual trustee and a corporate trustee;
- the benefits and disadvantages of 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 where a trustee 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. The beneficiaries, in turn, will have to pay tax on those distributions at their personal tax rates.
Additionally, there are multiple types of trusts, including:
Why Would I Use a Trust?
Trusts are commonly used in both personal and business settings. Trusts can be a valuable tool for the following reasons:
- managing and protecting assets;
- operating businesses;
- providing for loved ones; and
- achieving a variety of other financial, business succession and estate planning goals.
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How Does a Trust Work?
The trustee is entrusted with the responsibility of administering the trust’s assets. This involves not only safeguarding the property but also investing it judiciously to benefit the designated beneficiaries. The beneficiary, on the other hand, is the party entitled to receive benefits from the trust as outlined in its terms.
The foundation of any trust is typically laid out in a legal document known as a trust deed or, in some cases, a will. This document serves as the blueprint for the trust’s operation, detailing:
- the appointment of trustees;
- the identification of beneficiaries;
- the rules governing benefit distribution;
- factors the trustee must consider in decision-making;
- the scope of the trustee’s powers and duties.
What is a Trustee?
The trustee is the person or company that legally holds the trust’s assets and who administers the trust. 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.
Importantly, the trustee has additional duties. For example, the trustee must:
- 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 where the trustee is a person. The 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.
What are the Benefits of Using an Individual Trustee?
The main benefits of having an individual trustee are the following:
- 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 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.
What are the Disadvantages of Using an Individual Trustee?
However, there are some disadvantages to 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.
What is a Corporate Trustee?
A corporate trustee is a company that acts as the trustee of a trust. The company is a registered company, much like any other company. However, it is often incorporated with the sole purpose of acting as a trustee, meaning that the company will not conduct its own 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.
Benefits of Using a Corporate Trustee
There are many benefits of having a corporate trustee. The table below details some of these advantages.
| Advantage | Explanation |
| Limited liability for individuals | Since the company is a separate legal entity, individuals gain the advantage of limited liability. This means that if there are any legal issues with the trust, the company is legally responsible, not the directors that are controlling it. |
| Easier separation of trust assets | With a corporate trustee, there can be an easier separation of trust assets and personal assets, given 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 | Since asset separation is more clearly defined, there is greater asset protection. If, for example, a person gets sued, assets held in a separate trust with a corporate trustee are the company’s assets. Consequently, their personal assets will not be at risk. |
| Simpler succession | Through a corporate trustee, there is 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, 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 the death of a director. |
Disadvantages of Using 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 to act as trustee; and
- there have been no activities undertaken to date that 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.
Does a Trust Pay Tax?
A trust has its own tax file number and is required to lodge tax returns annually. However, the trust generally is not subject to tax if all its annual income is distributed to beneficiaries, who pay the tax based on their marginal rate of tax. Where the trust conducts a business enterprise, it can register for both an ABN and GST. If a trust does not distribute all of its annual income, those portions of the income will be taxed at the highest marginal tax rate.
Key Terms in Understanding a Trust
| Term | Definition |
| Trust | A trust is a legal arrangement. Under a trust, a trustee holds and manages assets for the benefit of one or more beneficiaries. |
| Trustee | A trustee is an individual or entity who is appointed to manage and administer a trust on behalf of the beneficiaries. |
| Trust Deed | A trust deed is a document that sets out the terms and conditions of a trust and manages the operation and assets within the trust. |
| Beneficiary | An individual who obtains a benefit from the trust as set out in the trust deed. |
| Individual Trustee | An individual trustee is simply a person who manages a trust. |
| Corporate Trustee | A corporate trustee is a company that acts as trustee of a trust. |
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Key Takeaways
It is important to understand that a trust is not a legal entity; rather, it is a legal arrangement where a trustee holds and manages assets and income on behalf of beneficiaries. A trustee is responsible for managing the trust according to the terms of the deed and for distributing the income and assets to the beneficiaries.
If you decide to set up a trust, you must 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 setting up a trust, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced business lawyers help businesses across industries manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.
Frequently Asked Questions
A trust is a legal arrangement. Under a trust, a trustee holds and manages assets for the benefit of one or more beneficiaries.
An individual trustee is simply a person who manages a trust.
Yes, a trust holds its own tax file number and must lodge annual tax returns. If undistributed income remains, the trust pays tax at the highest marginal rate.
Whilst possible, using an already registered company is not recommended. Registering a new company ensures its sole purpose is acting as trustee, with no prior activities affecting it.
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