Discretionary trusts, commonly referred to as family trusts, are an ever increasingly popular trust structure for your business and finances. The main benefits of establishing a family trust are asset protection and the ability to utilise family trusts to build and to protect family wealth.
There are two main types of trustees for family trusts: individual trustees and corporate trustees. Choosing the type of trustee that is best suited to your business is crucial, particularly on the issue of asset protection and succession planning.
Definition of trusts and trustees
The Australian Taxation Office (ATO) defines a trust as “an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries”. In legal terms, a trust is a relationship or arrangement but, unlike companies, trusts are not separate legal entities. However, trusts are treated as a separate entity for taxation purposes.
Although the trust itself is a separate legal entity, the trustee is the legal entity who owns the assets, is responsible for managing the trust’s tax affairs, and enters into contracts in its capacity as trustee of the trust. A trustee of a trust can be either one or more individuals, or a company.
An individual trustee is a natural person who is appointed the trustee of the trust. An individual trustee is a separate legal entity and manages the trust.
Some advantages of having an individual trustee are:
• Low set-up costs e.g. don’t need to incorporate a company
• Low statutory administration costs e.g. no annual ASIC fees
Some disadvantages of having an individual trustee are:
• The individual trustee may be held personally liable for any legal issues with the trust, any shortfall in the assets of the trust
• Possible issues with asset identification between the individual in their own personal capacity and the individual as trustee of the trust i.e. as the individual is a separate legal entity, the individual is able to be sued, become bankrupt, or get divorced. Inadequate record keeping such as assets only being recorded against the trustee’s name without any mention of the trust may mean the assets of the trust may be incorrectly realised or distributed in settlement of a personal debt or claim.
• Possible issues with succession planning i.e. after the death of an individual trustee, the trust’s assets must be transferred to another legal entity. A Deed of Appointment will need to be executed. Administrative and tax issues may arise, especially if real property is part of the trust’s assets.
A corporate trustee is a company who is appointed the trustee of the trust. The company typically has minimal assets and would usually be set up for the sole purpose of acting as the trustee of a trust.
As with an individual trustee, a corporate trustee is a separate legal entity and manages the trust. Corporate trustees can have one or more directors and one or more shareholders.
Some advantages of having a corporate trustee are:
• Limited liability as the company is a separate legal entity from the shareholders. The director(s) of the trustee company would not ordinarily be personally liable for any shortfall in the assets of the trust.
• Fewer issues with asset identification between the trust’s assets and personal assets i.e. the trust’s assets are held in the company’s name unlike for an individual trustee
• Fewer issues with succession planning i.e. as the corporate trustee is a company, the corporate trustee does not cease to act as trustee upon the death of one of the company’s directors. As a corporate trustee, it is easier to add or remove directors; the new director just needs to be appointed to the trustee company and ASIC notified.
Some disadvantages of having a corporate trustee are:
• Higher set-up costs as the company must be incorporated
• Higher statutory administration costs e.g. ongoing annual ASIC fees, more rigorous record-keeping for the corporate trustee.
Ultimately, as with any pragmatic approach in business, the advantages and disadvantages of individual trustees and corporate trustees must be weighed up and personal circumstances considered. In many cases, the benefits of a corporate trustee such as limited liability, better asset identification and succession planning outweigh the higher setup costs and additional statutory administration costs.