CORPORATE VS INDIVIDUAL TRUSTEE

Corporate vs Individual Trustee

Should i have a Corporate Trustee for my  family trust?  In order to answer this, lets look at what a trust is and how it operates. A trust is a relationship where a trustee (an individual or a company) carries on business for the benefit of other people (the beneficiaries). A trust may be discretionary, which is where the trustee decides how profit will be distributed among beneficiaries, or, alternatively, it may have fixed interests, meaning certain individuals/entities will benefit in predetermined proportions.

Who can be a party to a trust?

Parties to a trust are legal entities, such as:

• Settlor – this is the person who owns the assets and property;
• Trustee – this is the person who grows the assets and cares for the trust;
• Beneficiaries – They serve two functions:

1. Receive money from the trust and make necessary tax adjustments; and

2.   Make sure the trustee is doing his or her job by auditing the trust annually.

• Appointor – The appointor is an optional party to a trust. The appointor can change the trustee if it chooses and its consent is required prior to any changes being made to the trust.

One of the most common types of trusts is a discretionary trust, (often referred to as a family trust when the beneficiaries are linked via family relationships).  This type of trust holds properties on behalf of beneficiaries that have discretionary powers as to the distribution of income.

They are set up for the following reasons:

• Creditor asset protection for “risk” beneficiaries, e.g. trading company directors and professionals;
• Flexibility – each year the trustee can decide which beneficiaries are to benefit (the trustee’s choice will be more limited if they enter into a family trust);
• Accumulation of trust income – while taxed at 46.5% in the trust, the rate is only 30% for as long as the trust income is “parked” with a corporate beneficiary;
• Discounted flow of capital gains tax to beneficiaries;
• Protection of assets from the primary beneficiaries’ hostile family members;
• Charitable or religious giving;
• Tax on income from trust is paid by the beneficiaries at marginal rates; and
• Control of a family trust is shared between the Trustee and Appointor.

Why have a corporate trustee for a family trust?

It is a common practice to have corporate trustees for family trusts for tax benefits. This ensures the limitation of the trustees’ liability to the corporate asset. Generally, corporate trustees are shell corporations with no, or minimal, assets. The trustee is personally liable for the trust’s liabilities. It is common for trusts to have corporate trustees to limit the trustees’ liabilities to the assets of the corporation, and often this business structure is more tax effective.

The advantages of a corporate trustee are:

• The corporate trustee can exist indefinitely, unlike an individual trustee who will eventually die;
• Legal ownership of the trust’s assets does not have to be changed when the director(s) or shareholder(s) of the corporate trustee change(s), whereas legal ownership of the trust’s assets has to be changed when an individual trustee changes;
• If the trust has a corporate trustee, the shareholder(s) of the corporate trustee can effectively control the trust by appointing the director(s) of the corporate trustee;
• Asset Protection; and
• With a corporate trustee there is limited liability.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.