Family Trusts can provide significant benefits for asset protection and tax minimisation, and as a result there has been significant growth in the number of Family Trusts.
Family Trusts must have a Trustee. But should the Trustee be a company or an individual? This question is important for asset protection and succession planning.
Under Trust law, a Trustee is personally liable for the Trust’s debts. The Trustee usually has a right of indemnification against the Trust’s assets, but what happens if the Trust has insufficient assets to cover the Trust’s debts?
If there is a shortfall in the assets of the Trust the individual Trustee will be liable for the shortfall. If the shortfall is significant, this ends up defeating the asset protection benefit of establishing the Trust in the first place.
If the company has insufficient assets (Trustee companies usually do as they are usually set up as a $2 or $1 company) it will go into liquidation. Under company law the individual shareholders are not liable for the debts of the company (unless they have signed a guarantee/indemnity in favour of a creditor).
Under Trust law, the appointer (the person who has appointed the Trustee) has the power to remove a Trustee. However, this will not protect the individual Trustee from the personal liability as once the debt is established, the Trustee at that time is liable for the debt. Removing the trustee does not extinguish the Trustee’s liability.
Other issues also exist for the individual Trustees including:
A dispute may arise as to which assets belong to the Trust or the Trustee in their own personal capacity. Inadequate record keeping may simply record assets in the name of the Trustee without reference to the Trust, leaving open the issue of who owns the asset. In NSW, the land titles office will only register land in the name of the Trustee (no reference to the Trust), so other documents are required (Declaration of Trust or Acknowledgement of Trust) to prove the land is held on behalf of a Trust.
What happens to the Trust if the individual dies? The appointer of the Trust usually has a power to appoint a new Trustee, but what if the appointer is the individual Trustee? This problem can be avoided with careful planning or a corporate Trustee.
In almost all circumstances we believe the benefits of a corporate Trustee (limited liability, asset identification and succession planning) outweigh the additional costs of a corporate Trustee (establishment approx. $800 & ASIC annual fees approx. $250 p.a.).
Please feel free to get in touch with your Client Manager if you’d like to discuss this topic further.