by John Wojtowicz (Director - Law Central Legal)

The last 3 decades have seen a substantial growth in the number of people in Australia establishing a family trust. The benefits of such an arrangement have been largely touted by professionals around 2 areas - asset protection and tax benefits.

The issue of whether a corporate trustee is best suited as opposed to an individual trustee for a family/discretionary trust is relevant on the area of asset protection and succession planning.

Trustee Liable for Trust Debts

Under trust law, a Trustee is personally liable for trust debts.

To discharge the trust debts the Trustee normally has a right of indemnification against the trust assets. This right of indemnity is established from 3 sources:

1. Equitable principle as set out by the Courts;

2. An indemnity clause which is contained in most trust deeds; and

3. State Statute law – the Trustees Act (or in Queensland, the Trusts Act).

The Trustees Acts in each State are by and large identical in the setting out of the Trustee’s right to be indemnified for debts incurred whilst administering the trust. However, the Trustees Acts for each State have differences. For instance in Victoria and Western Australia, the statutory right is subject to the terms of the trust. In Queensland the Trusts Act states that the Trustee’s indemnity cannot be excluded.

What Liabilities are Covered by the Trustee’s Right of Indemnity?

The cases generally state that the indemnity is limited to liabilities or expenses that have been properly incurred by the Trustee in the execution of the trust. If the Trustee’s action was unauthorised and exceeds his power, there is no right of indemnity. An exception to this principle being where the act was done in good faith and it benefited the trust estate (the case of: RWG Management Ltd v Corporate Affairs, Commissioner of & National Companies & Securities Commission (1985) VR 385).

What Happens if The Trust has Insufficient Assets to Cover the Trust Debts?

Individual Trustee - if there is a shortfall in the assets of the trust fund then the individual Trustee will be liable for the shortfall. This amount, if substantial to the individual Trustee’s personal asset pool, may result in the individual Trustee declaring bankruptcy or entering into a Part X arrangement. If this course of events took place, then this would defeat one of the potential benefits of establishing a discretionary trust in the first place.

Corporate Trustee – In this scenario the corporate Trustee will probably go into liquidation or administration. As the corporate Trustee usually has no or minimal assets, this may not be too detrimental to the parties who had established the trust in the first instance. Under company law the individual shareholders are not liable for the debts of the company. There are exceptions. One example is where the shareholders have signed a guarantee/indemnity in favour of a creditor.

The directors of the Trustee company will normally be immune from the debts of the Trustee company. There are numerous exceptions here- these will be outlined in our platinum content section of this newsletter.

Can the Appointor of the Trust Sack the Trustee to Allow the Trustee to Avoid Personal Liability?

In short, the answer is no. Once the debt or cause of action is established then the Trustee is liable for the debt. Simply removing the Trustee does not extinguish his liability.

Other Problems Associated with an Individual Trustee - Asset Identification

Should the Trustee be in the unfortunate position of having assets seized by way of court order or by a person exercising rights under a security arrangement, then the situation may arise where there is a dispute as to which assets belong to the trust or the Trustee in his own right. This situation is more likely to occur where the Trustee is an individual as opposed to a company. Inadequate record keeping may simply record assets in the name of the Trustee without reference to the trust, leaving open the issue as to who owns the asset.

Succession Planning

Issues arise as to what happens to the trust should an individual Trustee die. The appointor of the family trust, under most trust deeds, should be able to appoint a new trustee to continue in that position. However, it is possible that the appointor and the individual Trustee are the same person – resulting in the trust being headless.

Under trust law the trust does not fail for want of a Trustee. The above circumstances can be avoided by careful estate planning and having the appropriate backup appointors in place in the trust deed or the appointor’s will.

With a corporate Trustee, the scenario will be easier to resolve as the company will continue to exist. The shareholders, if need be, can appoint a new director - should one director die. Again careful estate planning should be undertaken to contemplate this situation.

Summary of Benefits of a Corporate Trustee

1. Limited liability

2. Asset identification

3. Succession Planning

Summary of Benefits of Individual Trustee

As an individual (non corporate) Trustee various state and federal awards relating to employment conditions may or may not apply, which may result in more favourable employment conditions for the individual Trustee, should the individual Trustee be an employer.

There is also a small annual cost savings insofar as the individual Trustee will not have to pay annual ASIC fees.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.