A trust is a legal arrangement where a trustee holds and manages assets for the benefit of one or more beneficiaries. Unlike companies, trusts are not separate legal entities, although they are treated as a separate entity for taxation purposes.
The trustee is the legal entity who owns the assets, manages the trust and enters into contracts as trustee of the trust. A trustee can be either one or more individuals, or a company.
- Own the assets of the business;
- Operate the business;
- Distribute the income of the business; and
- Comply with the obligations of the trust deed.
Some of the additional duties of a trustee include to:
- Act in good faith;
- 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 as where provided under the trust terms or at law.
But what is the difference between an individual trustee and a corporate trustee? This article will run you through the differences.
What is an Individual Trustee?
Up to four individuals can be appointed as trustees of a self-managed super fund. Each trustee must play an active role in managing the trust and comply with their duties as trustee.
The main advantages of having an individual trustee include the low set-up and management costs, and the minimum complexity involved in setting it up (i.e. you do not need to incorporate a company). There are however some disadvantages of having an individual trustee including:
- The individual/s could be personally liable;
- It may be difficult to distinguish personal and trust assets; and
- If an individual trustee dies, the trust’s assets will need to be transferred to another entity. This requires executing a deed of appointment and, in most cases, transferring the trust’s assets into the new trustee’s name (or jointly with other trustees). This can result in significant administrative problems particularly if the trust’s assets include shares and real property.
What is a Corporate Trustee?
With a corporate trustee the company is a trustee, and the members of the trust are directors. It is a lot easier to add and remove directors with a corporate trustee. Corporate trustees also only need one director.
There are many benefits of having a corporate trustee and some of these benefits include:
- Limited liability as the company is a separate legal entity;
- Easier separation of trust’s assets and personal assets because they are held in different names;
- Simpler succession and control of the trust in the event of the death of one of its directors (a corporate trustee does not cease upon the death of one of its directors); and
- If a new member of the trust is introduced, then generally they must become a trustee of the fund. As a corporate trustee, the new director will just need to be appointed to the company, and ASIC notified accordingly.
Disadvantages of having a corporate trustee include the cost and complexity of setting up a company and keeping the records for the entity.
However, as with anything in business, it is a balancing act and the benefits of a corporate trustee certainly outweigh the disadvantages! Despite the higher start-up costs, we generally recommend a corporate trustee.
Questions about setting up a trust? Get in touch on 1300 544 755.