Trusts have become very common in Australia – family trusts, unit trusts and even hybrid trusts (which are a combination of a family trust and a unit trust). Self-managed super funds are also a form of trust. Trust law requires a trustee for the trust relationship to exist.
Accountants and lawyers usually recommend using a company as the trustee, for various reasons, including limited liability protection. However, companies have set up costs and ongoing annual costs.
As trusts have become more popular, it can be very common for people to have a family trust (or more than one family trust) and a self-managed superfund. Or for their family trust or self-managed superfund to invest in their unit trust.
Due to the set up and ongoing annual costs it can be very tempting to use a single company to act as the corporate trustee for all of those trusts.
For many people their investment circumstances may allow this, however for trading trusts it can lead to possible problems:
- Trading between trusts: difficulties can arise when multiple trusts with the same corporate trustee wish to enter into legally binding agreements with each other eg. A lease for a property, as the corporate trustee is essentially required to make a contract with themselves.
- Control of the trusts: trusts are controlled by the trustee, not by the beneficiaries. In the event of a family breakdown, one family member may control the trustee, while a different family member is the beneficiary.
- Assets of one trust to satisfy the debts of another trust: the situation can arise where a trading trust has insufficient assets to meet the trusts debts. In this instance the trustee is liable for any debts which the trust cannot cover. However, the corporate trustee may only have assets that it holds for another trust. The creditors will often try to gain access to those assets. Generally this is not possible, but the creditors will still try and it is then up to the corporate trustee to prove those other assets are held for another trust.
If you are concerned about having used the same corporate trustee for numerous trusts, please contact us, as a change of trustee could be a simple solution if documented properly.