Discretionary trusts help protect your assets and provide many tax benefits. This blog explores whether you should appoint a corporate or an individual trustee for your discretionary trust.
What is a Discretionary Trust?
A discretionary trust is a trust where the trustee has a discretion as to when any payment from the trust fund will be made, who, in a definite class of beneficiaries, will receive it, and the amount of such payment. A trustee is the person who distributes the trust’s assets to the beneficiaries. A trustee can be either a company, known as a “corporate trustee”, or a person, known as an “individual trustee”.
A corporate trustee is a company who is appointed the trustee of the trust. The company typically has minimal assets and is usually set up for the singular purpose of acting as the trustee of the trust. Like an individual trustee, a corporate trustee is a separate legal entity and manages the trust. Corporate trustees can have one or more directors and one or more shareholders.
An individual trustee is a person who is appointed the trustee of the trust. An individual trustee is a separate legal entity and manages the trust.
What are some Benefits of a Corporate Trustee?
Some benefits of having a corporate trustee for a discretionary trust include:
- Asset identification of the trust’s assets and personal assets is more straight forward. Assets of discretionary trusts are held in the name of trustee(s). If the trustee is a company, private assets of individual trustees usually cannot be confused as trust assets.
- Limited liability as the company is a legal entity separate to the shareholders. The director(s) of the trustee company are generally not personally liable for any reduction in the trust assets.
- Succession planning is more straight forward. As the corporate trustee is a company, it does not cease to act as a trustee if one of the company’s directors dies. Compared to an individual trustee, it is simpler to remove or add directors for a corporate trustee. The new director only needs to be appointed to the trustee company and the Australian Securities & Investments Commission (“ASIC”) notified.
What are some Drawbacks of a Corporate Trustee?
Some drawbacks of having a corporate trustee for a discretionary trust include:
- Greater set-up costs, as the company must be incorporated.
- Greater statutory administration costs. For example, annual ASIC fees and more rigorous record-keeping compared to an individual trustee.
What are some Benefits of an Individual Trustee?
Some benefits of having an individual trustee for a discretionary trust include:
- Fewer set-up costs. For example, there is no need to incorporate a company.
- Fewer statutory administration costs. For example, there are no annual ASIC fees.
What are some Drawbacks of an Individual Trustee?
Some drawbacks of having an individual trustee for a discretionary trust include:
- The individual trustee may be held personally liable for any legal issues concerning the trust and for any diminution in the trust assets.
- Possible issues with asset identification between the individual in their own personal capacity and the individual as trustee of the trust. For example, if the trustee is an individual, the trust assets may be exposed to a claim from creditors if the trustee becomes bankrupt, is sued, or gets divorced.
- Possible issues with succession planning. For example, after the death of an individual trustee, the trust’s assets must be transferred to another legal entity. A Deed of Appointment will need to be executed.
In weighing up the benefits and drawbacks of corporate trustees versus individual trustees, a lawyer can help you to consider both options in the context of your current circumstances, risks and estate planning.
To speak to a lawyer about setting up a discretionary trust specific to your needs, call Vault Legal today on 1300 002 212 or email us a.
Key words: discretionary trust, corporate trustee, individual trustee, asset protection, tax minimisation and beneficiary.