There has been a significant increase in the number of Family Trusts established, primarily attributed to the advantages they offer in terms of asset protection and tax minimisation, which has led to a rising demand for accountants in Sydney who can assist with their creation and management.
Family Trusts must have a Trustee. But should the Trustee be a company or an individual? This question is essential 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?
Individual Trustee
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.
Corporate Trustee
If the company has insufficient assets (Trustee companies usually do as they are usually set up as a $2 or $1 company), it will be liquidated. Under company law, the individual shareholders are not liable for the company’s debts (unless they have signed a guarantee/indemnity in favour of a creditor).
Under Trust law, the appointer (the person appointed by the Trustee) can remove a Trustee. However, this will not protect the individual Trustee from personal liability, as once the debt is established, the Trustee is liable for the debt at that time. Removing the trustee does not extinguish the Trustee’s liability.
Other issues also exist for the individual Trustees, including:
Asset Identification
A dispute may arise as to which assets belong to the Trust or the Trustee in their own personal capacity. Inadequate record keeping may 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.
Succession planning
What happens to the Trust if the individual dies? The appointer of the Trust usually has the 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 get in touch with your Client Manager if you’d like to discuss this topic further.
Kreston Stanley Williamson Team
*Correct as of July 2016
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
