More than ever, we are seeing a decrease in sole individual trustees of a trust and an increase in the corporate alternative.
Having a company acting as trustee for your trust is recommended for a number of reasons, including:
Death of sole trustee
Upon the death of an individual sole trustee, all trust assets will vest in the Public Trustee. However, somebody (usually the deceased’s executor) can notify the Public Trustee in writing that they want to become the trustee of the trust. That person must then take steps to ensure that they are validly appointed as the new trustee under the trust deed. In addition to those administrative requirements, all trust assets must be transferred to the new trustee. This can be an inconvenient and difficult task at the time of grieving for families.
Alternatively, if a trust has a corporate trustee appointed, the company will remain as trustee even if the directors die. Upon the death of the directors, a new director can easily be appointed, and the company can continue managing the trust without any issues.
This is particularly beneficial for beneficiaries of the trust who are relying on distributions of income or capital, as it will substantially reduce delays in resuming management of the trust to make these distributions.
incapacity of trustee
.If a sole individual trustee loses capacity, it can cause issues for the management of the trust. If the trust deed allows, the trustee may be automatically removed when they lose capacity, or an appointor may be able to remove the trustee. However, many trust deeds do not provide for automatic removal of trustees upon incapacity or may not provide an appointor with the power to remove the trustee.
Alternatively, if a trust has a corporate trustee appointed, the company would remain as trustee of the trust. If a director loses capacity, the law and usually the company’s constitution gives the shareholders of the company the power to appoint a new director. If the person who lost capacity is the only director and shareholder, their personal representative (their attorney under an enduring power of attorney) can appoint a new director.
Although a new trustee or director of a corporate trustee can usually be appointed, the administrative steps required to replace the directors of corporate trustees are significantly less and have less of a direct impact on the trust because the trustee remains in place. Upon incapacity of a director, the director is simply removed, and a new director is appointed. The company remains the owner of all trust assets. Upon incapacity of an individual sole trustee, all trust assets must be transferred to the new trustee. If the trust holds real property, this can be a costly and burdensome process
protection of personal assets
Individual trustees are personally liable for all debts or liabilities of the trust. That means if the trust is unable to meet any liabilities, the individual trustees will have to pay the difference from their personal assets. This obligation can even continue once the individual trustee has retired as trustee unless a new trustee is appointed who is willing and able to take on the liabilities of the trust.
However, a company is a separate legal entity, so only the company will be liable for the liabilities of the trust. This provides a protection for the directors as only in some circumstances would the directors have to personally pay the liabilities of the company.
A corporate trustee is also beneficial to protect the trust assets against the bankruptcy of an individual director.
Recent cases have found that an individual trustee’s personal assets may be available to creditors if they become bankrupt and they have any interest in the trust assets. However, as corporate trustees typically do not receive any benefits under the trust, the trust assets are protected if the director becomes bankrupt.
Further, for an individual trustee, it can be difficult to distinguish between what assets are held on trust and what assets are held by the trustee personally. This confusion can lead to trust assets being used upon bankruptcy of the trustee. However, for corporate trustees, it is clear that all assets that are held by the company are held as trustee for the trust.
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