Why a Corporate Trustee is always a good idea

Why a Corporate Trustee is always a good idea

The trust is a commonly used asset protection mechanism allowing clients to quarantine assets from access by their creditors.  Whether to appoint a corporate trustee is often the subject of considerable contemplation by clients and in some circumstances clients’ determine that it will be more cost effective to act in their personal capacity as a trustee to avoid the yearly ASIC compliance costs and additional financial returns.

A trust, in its simplest expression, is a personal obligation binding on the legal owner of property to deal with that property for the benefit of the beneficiaries.  As the trust is not a separate legal entity and the trustee is the legal owner of the property held on trust for the beneficiaries, unless that trustee ensures that it incurs liabilities on the basis that only assets held on trust are available for payment of the debt, the trustee may be personally liable.

If there is no express agreement between the trustee and the other contracting party, whether the trustee is personally liable is determined by looking at the transaction as a whole and the terms of the documents.  The general position is that a trustee has the right to be indemnified/reimbursed from the assets of the trust (this right is not removed on resignation of the trustee as the right of indemnity arises on the date the trustee incurs the liability to the third party, so the date of the debt).

Example: where a trust is being used to operate a business, if the trustee is lax and does not ensure that contracts with suppliers are limited to enforcement against the trust assets only, those supplier creditors are able to look to the trustee personally for payment.  This means that if an individual decides to be a trustee of a trust their personal assets may be at risk to claims by creditors.

So, when looking at the above example:

the trustee would be entitled to utilise the trust assets to pay the debts (or if a former trustee, to apply to the new trustee for the debts to be paid from the assets of the trust);

if the assets of the trust were insufficient to cover the liability and the relevant contract limited the other party’s right of action as against the assets of the trust, the other party would be unable to claim the balance owing from the trustee;

if the relevant contract was silent, the other party could proceed to seek to hold the trustee personally liable for the balance owing after the assets of the trust were used and the trustee would need to argue that the facts and circumstances warranted restricting the liability to the assets of the trust.

It should be remembered that provided a trustee has acted in accordance with its obligations, it should be entitled to a form of reimbursement or indemnification from the assets held on trust pursuant to the terms of the trust deed or under applicable trust law statute.

But it also means that a trustee may be left personally liable for the debts if:

(a)           the terms of agreements entered into as trustee are not limited to enforcement as against the trust assets; or

(b)           there are insufficient assets held in trust for the trustee to satisfy the debts; or

(c)           there has been a change of trustees and the new trustee has divested the assets of the trust (the trust property will vest in the new trustee as at the date of appointment and the former   trustee will need to apply to the new trustee for reimbursement from the trust property.  Liabilities incurred in relation to the trust property do not transfer to the new trustee but remain  with the former trustee as at the date they were incurred).

This personal liability of the trustee extends so far as allowing a creditor to seek to have the trustee wound up (in the case of a company) or bankrupted (in the case of a natural person) if the trustee has insufficient assets to satisfy the debts.

This is where the use of a corporate trustee is of benefit particularly given the modern commercial approach adopted by financiers where finance is provided to trustees on terms that the trustee is bound personally and in its trustee capacity for the debt.

A corporate trustee can be removed and subsequently wound up without the personal assets of the operators of the business being affected (unless they have provided guarantees).  In the instance of a corporate trustee, it allows families and businesses to asset protect by using the shareholder and director liability safeguards in the Corporations Act 2001 (Cth) and allowing, for instance, one party to a marriage to be asset rich and removed from the business transactions while the other takes on the financial risks associated with a business.

Considering the above, the risks of deciding to act in your personal capacity as trustee must be carefully weighed against the financial costs of establishing and administering a corporate trustee, which, over the life of the trust may be minimal in comparison to the monetary value of your personal assets being placed at risk by you being a trustee and your personal assets being considered accessible by a Court.

If you would like to discuss the above further please contact JHK Legal on 07 3859 4500.

Author: Belinda Pinnow, Associate

Published: June 2016

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