Trusts can be useful for a variety of purposes, including managing assets, protecting property from creditors, and reducing tax liability. By placing assets in a trust, you can protect them from creditors and lawsuits.
Trusts can also help you to manage your taxes more efficiently, as income from trust assets can be distributed to the beneficiaries with lower tax brackets.
When creating a trust, it is important to choose a trustee who will be responsible for distributing the trust's assets to the beneficiaries. The trustee can be either an individual person or a corporate entity.
Choosing the right trustee is essential to ensuring that the trust is managed properly and that the beneficiaries receive their inheritance in accordance with the terms of the trust.
The article will explain the key differences between an individual and corporate trustee. There are many different circumstances when each might be appropriate for your trust, so read on!
What is an individual trustee?
The individual trustee is a person who manages the trusts. The title to assets will sit with them as they are responsible for managing those funds and complying with duties within their capacity as such, even if certain other people own part or all of it legally too!
Where there's more than one active co-trustee involved in holding onto things like stocks & bonds then each has specific tasks which must be carried out accordingly so everyone can enjoy what rightfully belongs only partly under various legal arrangements where relevant.
Advantages of an individual trustee:
- Low set up costs: The individual trustee is a popular choice for those who want to save on set up and management costs.
- Simple set up: Trusts with individual trustees are easy to set up and therefore it makes it an attractive option when compared with other types of trustees.
Disadvantages of an individual trustee:
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Incapacity: If a sole individual trustee loses capacity, it can cause issues for the management of your trust.
If you have set out in writing that they will be automatically removed when unable to fulfill their role as required by law or if there is no provision whatsoever then this could present problems going forward.
This is because now two people are managing things which might create confusion among beneficiaries about who should take control i.e., them being replaced with another person entirely!
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Unlimited Liability: Individual trustees are personally liable for the trust's debts and liabilities. This means that if they cannot afford any of its obligations, then those individuals will have to come up with enough money from their own assets.
This can continue even after retirement unless another individual volunteering or appointed willingly assume these responsibilities.
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No protection to personal assets: When an individual trustee becomes bankrupt, any interest in the trust assets will be enforceable.
It can be difficult for them to distinguish between what is theirs and how much was held on behalf of the trust with regards their own personal property. The confusion between personal assets and those held on trust can lead to a trustee’s bankruptcy.
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Death of an individual trustee: The death of a sole trustee results in all assets vesting with the Public Trustee. However, if someone desires to become an additional successor holder for this position, they must follow proper procedures and ensure that their appointment is valid under law.
A new trust deed needs to be executed and all trust assets must be transferred to the new trustee. This can become challenging and time taking.
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What is a corporate trustee?
A corporate trustee is a company that is appointed to manage a trust. The corporate trustee has a fiduciary duty to the beneficiaries of the trust, which means that it must act in their best interests. The corporate trustee is responsible for administering the trust, investing its assets, and distributing its income and principal as directed by the trust agreement.
Generally, the trustee company’s main objective is to run the operation of the trust and therefore the trustee company will not have its own ABN and TFN number. Also, no separate tax return for the trustee company needs to be lodged.
Advantages:
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Perpetual succession: When a director dies, the corporate trustee will continue to function and act in place of the missing member or members without having any additional legal obligations or costs associated with transferring assets.
The company only needs to appoint new directors, because the title of assets doesn’t change when someone dies-so everything stays where it belongs!
This is a great benefit for those who rely on distributions from the trust, as it will reduce delays in resuming management of their finances.
- Limited Liability protection: The company is a separate legal entity, so only the company will be liable for any unpaid bills or debts. The liability of a company is limited to what it's able to pay. This protects the individual directors from having to personally pay what's owed in cases where there are no funds available on hand! If something goes wrong, the individual trustees will not be held liable.
- Bankruptcy: Corporate trustees are put in charge of managing the funds for their companies' trusts, but they don't receive any benefits themselves. If a director becomes bankrupt, the trust assets remain protected since there is a clear distinction between trust assets and individual assets.
- Greater Asset Protection: The trust assets and personal finances are held in different names, which makes it easier to distinguish them. As a result, there is greater asset protection for the latter since they don't get involved with any of that messy business!
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Incapacity/Inability of director: If a director loses capacity or becomes incapable, the shareholders of a company have the power to appoint new directors.
If there is only one director and they're also its shareholder, then their personal representative can do so on behalf them as well! They can simply be replaced with an appointed new individual.
The trustee will still retain control over all assets in the trust and there is no need for any major administrative changes which means that your company's involvement could actually help reduce costs!
- Flexibility: It can provide greater flexibility as corporate trustees can change over time without affecting the legal status of the trust.
Disadvantages:
- High set up cost: The disadvantage of having a corporate trustee is the increased setup and management costs associated with incorporating your company.
- Regulatory requirements: Corporate trustees are subject to greater administration and regulation which can add another layer of complexity to managing the trust.
Conclusion:
Based on the above, we can conclude that each option has their own advantages and disadvantages. However, this blog is for informational purposes only and does not constitute legal, tax or accounting advice.
When choosing between a corporate and individual trustee, it is important to carefully assess all relevant circumstances. We recommend you seek professional advice before making any decisions about structures or processes for your specific situation because there may be other options which would better suit what YOU want from this decision!
FAQs
A trustee is a natural person or a corporate entity that is responsible for managing the assets of a trust. The trustee is appointed by the grantor, who is the person who creates the trust. The grantor typically appoints a trusted family member, friend, or a corporate entity to serve as trustee.
The trustee is given legal title to the trust property, but he or she holds that title on behalf of the beneficiaries and is required to manage the trust property per the terms of the trust agreement.
The trustee has a legal duty to act in the best interests of the beneficiaries and in good faith and with loyalty to the beneficiaries. If a trustee breaches their fiduciary duty, they may be held liable and be removed from office by a court.
Deciding on whether to appoint a corporate or an individual trustee for your trust is a key decision that will have lasting implications. There are pros and cons to both types of trustees, and the best choice will depend on your specific circumstances.
The setting up cost for a corporate trustee might be higher than an individual trustee but it has its own benefits like
- Greater Asset Protection
- Perpetual Succession
- Limited Liability
You may go through the below link to get a detailed overview on this.
Read moreA discretionary trust is a type of trust in which the trustee has discretion over how to distribute the trust assets.
Discretionary Trusts can serve an important purpose for those looking to protect their assets or save on taxes by sharing income among family members.
The trustee has the flexibility and authority to change proportions that are distributed; determine who receives money, when they receive it or how much is given out at any one time. This ensures stability during difficult economic times as well!
For example:
A and B decide to form a discretionary trust. The trust earns an income of $60,000 at the end of the year. This income will be divided between A & B as per the discretion of the trustees. This could be done in a way to minimize the tax consequences for individual beneficiaries.
In a unit trust, the trust property's income is split into several fixed units. The split of a trust's ownership into fixed units is what determines how the income from that part will be distributed.
The value of the units is based on the value of the assets in the fund. The unit holder's rights will be proportionate based on how many units they own.
Unit trusts are a popular way to invest because they offer diversification and professional management. This structure is a great way to invest in something that has growth potential while still maintaining some degree of control.
For example:
J and K are two friends forming a unit trust. The ownership is split into 2000 units for J and 4000 units for K. The trust earns an income of $60,000 at the end of the year. The share of J and K will be based upon the number of units held. Share of income for J will be $20,000 and $40,000 for K.
The short answer is yes; a trustee can also be a beneficiary of a trust. However, they are not allowed sole ownership because this would create an illegal situation from both legal perspectives - for themself as well as those under the law's protection (i e., beneficiaries).
There are also some important considerations that need to be considered:
- First, the trustee will need to ensure that they are acting in the best interests of all the beneficiaries.
- Second, the trustee will need to be very careful to avoid any conflicts of interest.
- Third, the trustee will need to disclose their status as a beneficiary to all other beneficiaries.
