Emily Pritchard answers your burning questions relating to duty and the establishment of trusts. […]
Why use a Corporate Trustee
Emily Pritchard, current as of: 2 August 2022.
The primary concern around using a corporate trustee is one of asset protection. The overriding principle is to separate risk from assets.
As trusts are not considered to be legal entities, when trusts operate there must be a person or other legal entity that becomes primarily liable for the debts of the trust and who can act on behalf of the trust. This is the trustee, of course, but the problem with trustees is that they incur personal liability for the debts of the trust. The trustee is, however, entitled to be indemnified for any personal liability by recouping any such amount out of the assets of the trust.
But what happens if the trust does not have sufficient assets to pay that liability for the trustee? The fact is the trustee is responsible for those liabilities whether or not the trust has sufficient assets. Any trustee who cannot claim against the indemnity has his or her personal assets exposed to the claims of creditors of the trust.
Similarly, a number of cases (e.g. Richstar) have highlighted the need for separation of the “at-risk” person in a trust situation from trust assets.
The use of a company as the trustee of a trust can provide a greater level of asset protection than the appointment of an individual as trustee, because doing so separates risk from assets.
Self-Managed Superannuation Funds
While the same asset protection issues exist for SMSFs, there are additional reasons for using a corporate trustee in your SMSF:
- Where an SMSF has individual trustees, the ATO will impose any penalty on each individual trustee, meaning the penalty will be multiplied by the number of trustees. Corporate trustees, however, will incur only 1 penalty;
- Because all members must be trustees/directors of the corporate trustee, it can be costly and administratively difficult to change the trustee each time a member joins or leaves the fund. With a corporate trustee, it is a relatively simple matter to change the directors of the company;
- Where a fund has more than 2 members, it can also be costly and administratively difficult to have each trustee sign each document required to be signed by the trustee. With a corporate trustee, only 2 directors need sign;
- In single-member funds, it is possible to have a single-director company act as trustee – this avoids the need to appoint a second non-member trustee;
- If the corporate trustee acts solely in that capacity, the ASIC annual review fee is greatly reduced.
If you have any queries regarding the benefits of using a corporate trustee, please call us toll-free on 1800 773 477.