One of the most critical decisions when establishing a trust is choosing the right trustee. Trustees undertake the vital task of managing trust assets for the beneficiaries benefit.
There are two main types of trustees to consider: individual and corporate. Each comes with its own set of advantages and disadvantages.
This article provides an overview of both types to help you understand their fundamental differences, benefits, and drawbacks.
What’s Covered:
Individual Trustees
An individual trustee is a person who holds the legal title to the trust’s assets on behalf of its beneficiaries. This trustee owns the trust’s assets for the beneficiaries benefit. They also actively manage the trust and must comply with all responsibilities stipulated in the trust deed.
Definition and Role
An individual trustee is responsible for acting in good faith, exercising care, maintaining records, avoiding conflicts of interest, carrying out the terms of the trust, and not benefiting from their position unless explicitly provided under the trust terms or law.
Benefits
- Low Setup and Management Costs
- Simplicity in Setting Up
Drawbacks
- Potential Confusion between Personal and Trust Assets
- Need for Asset Transfer If the Trustee Dies
Corporate Trustees
On the other hand, a corporate trustee is a company that acts as a trustee, often incorporated solely for this purpose. The trust’s assets are owned by the corporate trustee. Still, the directors who control the company manage the distributions to the beneficiaries.
Definition and Role
A corporate trustee is typically a newly registered entity. Its sole purpose is to act as a trustee, free from historical liabilities. They have the same responsibilities as individual trustees but offer a structure that allows for a clear separation of personal and trust assets, which can significantly reduce risks associated with asset management.
Benefits
- Easier Separation of Trust and Personal Assets
- Greater Asset Protection
- Simpler Succession
- Continuity
Drawbacks
- Higher Setup and Management Costs
- Increased Administrative Responsibilities
Considerations when Choosing Trustees
Risk Profile of Assets
The type of assets held in the trust can significantly influence the choice of trustee. For example, if the trust consists of a commercial property portfolio and one of these properties was found to have environmental contamination issues. The ensuing liabilities might be better managed by a corporate trustee.
This setup offers better asset protection and limits personal liability. On the other hand, an individual trustee could be sufficient if the trust assets are merely term deposits or low-risk bonds, given the simplicity and lower costs associated.
Setup and Management Costs
For a Corporate Trustee, the start-up costs for registering a company with the Australian Securities and Investments Commission (ASIC) is $576. Ongoing renewal costs are $310 each year. Individual trustees don’t have this extra cost.
The costs of setting up and managing a trust can vary significantly based on whether you choose an individual or a corporate trustee. You can refer to our guide How Much Does it Cost to Set Up a Trust?
Lifespan and Succession Planning
When planning the lifespan of your trust, consider that an individual trustee’s term is limited by their lifespan or until they decide to retire. If the trustee dies or becomes incapacitated, it may require a complex process to transfer the trust assets. However, a corporate trustee continues indefinitely, making succession planning simpler and more predictable.
Liability
In terms of liability, individual trustees are personally responsible for the trust’s debts, which could put their personal assets at risk. In contrast, a corporate trustee limits the liability to the company, providing a layer of protection for the directors’ personal assets.
A trustee bears legal responsibility for a trust’s debts and can be left personally liable under certain conditions. This risk is especially notable when the trust lacks enough assets to cover debts. This personal liability can go as far as bankruptcy or liquidation.
The use of a corporate trustee significantly mitigates these risks. A corporate trustee shields personal assets, especially in scenarios where finance is provided to trustees on terms that bind them both personally and as trustees. In the event of liquidation or replacement of the corporate trustee, the business operators’ personal assets are protected. This allows for strategic financial planning and asset protection, potentially saving significant personal wealth in the long run.
Separation of Trust and Personal Assets
An important consideration is how well each type of trustee separates personal and trust assets. In the case of individual trustees, trust assets are held in the trustee’s name, which can sometimes lead to confusion in distinguishing between personal and trust assets. This overlap can complicate matters in case of the trustee’s death or bankruptcy.
In contrast, a corporate trustee, as a separate legal entity, creates a clear division between personal and trust assets, which reduces the potential for confusion or overlap.
Trust Management Issues
When an individual trustee dies, trust management can become complex. All trust assets must be transferred to a new trustee, which can be a lengthy and potentially costly process. Similarly, if the trustee becomes incapacitated, it could disrupt the trust management and require immediate attention and resolution.
In contrast, if a director of a corporate trustee dies or becomes incapacitated, another director can be easily appointed, ensuring the continuity of trust management. This feature of corporate trustees can provide a sense of security for long-term or perpetual trusts.
In Summary
Choosing between an individual or corporate trustee is an important decision that should be made carefully, considering factors such as setup and management costs, lifespan and succession planning, liability, and asset management. Each has its advantages and disadvantages, so weighing these against your trust’s specific circumstances is essential.
In light of these considerations, a corporate trustee structure often provides more advantages, particularly regarding asset protection and succession planning. This structure is generally preferred, especially when the trust’s assets are significant enough to outweigh a corporate trustee’s setup and management costs.
Errors in trustee choice can be corrected, but it is a process that can be avoided with thoughtful planning. Always seek professional advice to ensure you make the most appropriate decision for your trust.
