Choosing a trustee is one of the most important decisions when establishing or reviewing a family trust, discretionary trust or business trust. The trustee holds legal title to trust assets, enters into contracts and is responsible for administering the trust, so the choice can affect how well personal and business risks are separated.
For many Australians, the practical question is straightforward: should the trustee be an individual, such as you and your spouse, or a company created solely to act as trustee? A corporate trustee will often provide stronger structural separation, but it is not an automatic asset-protection solution. The trust deed, the way the trust operates and the risks you take on all matter.
## Start with what a trustee actually does
A trust is not the same as a company or an individual. It is a legal relationship in which the trustee holds and manages assets for beneficiaries under the terms of a trust deed.
The trustee may be:
– one individual;
– two or more individuals; or
– a company acting in its capacity as trustee.
The trustee is the legal owner of trust assets. For example, a property, shares, business assets or investment account may be held in the name of the trustee for the relevant trust. Beneficiaries may have rights to income or capital under the trust deed, but they do not usually manage the trust assets themselves.
This distinction is important for asset protection. A trustee can incur liabilities while operating the trust, such as supplier debts, lease commitments, legal claims or borrowing obligations. The trustee may generally have a right to be indemnified from trust property for liabilities properly incurred in performing its role. However, that right can be affected by the trust deed, the trustee’s conduct and whether the trustee has acted within its powers.
In other words, a trust does not create a complete barrier between assets and claims. It is a structure that must be designed and administered carefully.
## Individual trustees: simple to establish, but personal exposure can be broader
An individual trustee structure involves one or more people holding trust property and acting as trustee. It is often chosen because it can be less expensive and simpler to establish than incorporating a separate company.
For a low-risk passive investment trust, this approach may be appropriate. However, the main issue is that the trustee and the individual are legally the same person.
If you are an individual trustee, your personal name appears on trust assets and legal documents. You also carry the trustee’s personal liability for obligations incurred in that role. While you may have a right to use trust assets to meet properly incurred trust liabilities, a claim does not necessarily stop at the trust’s bank account.
This can create practical concerns where the individual trustee also owns personal assets, such as:
– the family home;
– investments held outside the trust;
– vehicles and personal savings;
– interests in other businesses;
– assets jointly owned with a spouse or other family members.
The nature of the risk depends on the claim, the trust deed, the available trust assets, insurance arrangements, guarantees and the trustee’s conduct. Still, an individual trustee structure can make it harder to maintain a clean separation between personal affairs and trust responsibilities.
There can also be administrative difficulties. If trustees change because of death, incapacity, relationship breakdown or retirement, legal title to every trust asset may need to be updated. This can mean dealing with banks, share registries, land titles offices, counterparties and insurers.
That does not automatically make an individual trustee unsuitable. It does mean the structure should be selected with a realistic view of the trust’s assets, intended activities and likely future changes.
## Corporate trustees: why they often offer better structural protection
A corporate trustee is a company that acts as trustee for the trust. The company is a separate legal entity from its directors and shareholders.
When properly structured, a corporate trustee is usually established solely to act as trustee of one trust. It generally has limited assets of its own and does not trade in its own capacity. Instead, it enters into transactions clearly identified as being undertaken as trustee for the trust.
This can create a more useful separation between:
– the trust’s assets and liabilities;
– the company’s own assets and liabilities;
– the directors’ and shareholders’ personal assets.
The key advantage is that the company, rather than an individual, is the trustee facing counterparties. If the trust incurs a liability, the company is generally the entity that has entered into the obligation in its trustee capacity.
Where the company has been used only as trustee and has no substantial assets in its own right, its exposure outside the trust is usually more limited than that of an individual trustee with a personal balance sheet. The company’s right to be indemnified from trust assets remains important, because trust creditors may be able to look to trust assets through that right.
A corporate trustee can also make succession and administration easier. The company continues to exist even if its directors or shareholders change. Rather than changing title to every trust asset when a person leaves the structure, it may be possible to appoint or remove company directors, subject to the trust deed, company constitution and any other legal requirements.
This continuity can be particularly valuable for trusts that hold long-term investments, commercial property or an operating business.
## A corporate trustee is not a guarantee against personal liability
A company trustee can improve risk separation, but it does not make directors, shareholders or beneficiaries immune from liability. Asset protection can fail when the structure is poorly documented, poorly administered or used for the wrong purpose.
Directors of a corporate trustee still have duties under company law. They need to understand the company’s financial position, act with appropriate care and diligence, and ensure the company can meet its obligations as they fall due. A director cannot simply rely on the words “Pty Ltd” as a shield from every consequence.
Personal exposure can arise in a range of situations, including where a person:
– gives a personal guarantee to a lender, landlord, supplier or other creditor;
– acts dishonestly, negligently or outside their authority;
– breaches duties owed as director or trustee;
– causes the corporate trustee to act outside the terms of the trust deed;
– fails to keep adequate records or distinguish trust transactions from personal transactions;
– enters contracts without making it clear that the company is acting as trustee;
– uses trust assets for personal purposes without proper authority or documentation.
There is also a specific risk where a corporate trustee loses, or is denied, its right to be fully indemnified from trust assets because of a breach of trust, acting beyond its powers or restrictive terms in the trust deed. In those circumstances, directors may face greater exposure.
For this reason, a corporate trustee should not be treated as a substitute for sound governance. It is one part of a broader risk-management strategy that may also include appropriate insurance, carefully considered borrowing arrangements, business contracts and estate planning.
## Keep the trustee company separate from other activities
The benefit of a corporate trustee is strongest when the company’s role is clear and limited.
A common approach is to establish a company whose sole role is to act as trustee for a particular trust. It should not also run a separate business, own personal investments in its own name or act as trustee for multiple unrelated trusts without careful legal and accounting advice.
Using the same company for several roles can blur the separation the structure was intended to create. For example, if a trustee company also trades in its own capacity, its business creditors may have claims against the company’s assets and rights. This can create unnecessary complexity for the trust and the people behind it.
Good administration should include:
– holding bank accounts in the correct trustee capacity;
– ensuring asset titles name the correct trustee for the correct trust;
– signing contracts in the company’s trustee capacity;
– keeping trust income and expenses separate from personal and company transactions;
– maintaining up-to-date accounting records;
– reviewing trustee resolutions and distribution decisions each year;
– checking that the trust deed supports the actions being taken;
– keeping company details, registers and annual obligations up to date.
A company acting as trustee has ongoing obligations with ASIC, including annual review requirements, record keeping and director responsibilities. There is a cost to establishing and maintaining the company, but that cost should be weighed against the value of stronger separation and administrative continuity.
## Tax outcomes usually depend on the trust, not whether the trustee is a company
A corporate trustee is often selected for asset protection and succession reasons rather than because it automatically produces a better tax result.
For income tax purposes, the trust deed, the nature of the trust income, beneficiary entitlements and trustee resolutions are usually central to determining how trust income is assessed. A trustee is responsible for administering the trust’s tax affairs, including registrations, record keeping and lodgement obligations.
This means an individual trustee and a corporate trustee can operate the same discretionary trust from a tax perspective if the underlying trust arrangements are otherwise the same.
However, trustee choice can still have practical tax consequences. Poorly documented trustee decisions, incorrect beneficiary records or informal movement of funds can create problems, regardless of the trustee structure.
It is also important to distinguish a corporate trustee from a corporate beneficiary. They are different roles. A company may act as trustee of a trust, be a beneficiary of a trust, or potentially both in different capacities. Where a trust distributes income to a company beneficiary or leaves amounts unpaid, specialised tax rules, including Division 7A considerations, may be relevant. These issues need to be reviewed separately and should not be assumed to arise simply because the trustee is a company.
If you are considering changing from individual trustees to a corporate trustee, the change should be managed properly. Federal tax law recognises that a mere change of trustee does not, by itself, necessarily amount to a disposal of trust assets for capital gains tax purposes. Even so, the legal documents, asset registrations, trust deed powers and any state or territory duty implications need to be checked before making changes.
State and territory rules can differ significantly, particularly for landholding trusts. A change that appears straightforward may still require forms, evidence or revenue authority approval in the relevant jurisdiction.
## A practical example: a growing family business
Consider a couple operating a service business through a discretionary trust. They are the individual trustees and the trust owns business equipment, holds the business contracts and receives the business income.
As the business grows, the couple begins leasing larger premises, employing staff and taking on more substantial supplier commitments. They also acquire investment assets outside the trust and want to improve the separation between their personal affairs and the business trust.
A review may identify that a corporate trustee could be more suitable. A new company may be appointed as trustee, provided the trust deed allows for this and the change is properly documented. The company could then act solely as trustee for the business trust, with business contracts, accounts and records updated to reflect the new trustee.
The corporate trustee would not remove the couple’s personal risk if they guarantee a business loan or act improperly. However, it could create a clearer distinction between the trust’s commercial obligations and their personal assets, while also making future succession easier to manage.
## How to decide which trustee structure suits you
A corporate trustee is often worth considering where a trust will hold valuable assets, conduct business activities, borrow money, employ staff or operate over the long term. It may also suit families who want clearer succession planning and less disruption when trustees change.
An individual trustee may still be appropriate where the trust is simple, low risk, holds modest passive investments and the cost and administration of a company are not justified.
Before deciding, consider:
– What assets will the trust hold now and in the future?
– Will the trust operate a business, employ people or enter significant contracts?
– Will the trust borrow money or provide security?
– Are you likely to give personal guarantees?
– Does the trust deed permit the intended trustee structure?
– Does the company act only as trustee, or does it have other activities?
– What happens if a trustee dies, loses capacity, retires or separates from a spouse?
– Are your accounting records, resolutions and asset registrations in order?
– Could state or territory duty or land tax rules be relevant to a trustee change?
## The key takeaway
For many Australian family and business trusts, a company acting solely as trustee provides stronger practical separation between trust activities and the personal affairs of the people involved. It can also make succession and administration more manageable.
However, the protection is only as good as the structure’s implementation. Personal guarantees, breaches of duty, inadequate records and incorrectly held assets can undermine the intended benefits. The trust deed, the company’s role and the way transactions are documented all deserve close attention.
This article is general information only and is not personal financial, legal or tax advice. Before establishing or changing a trust trustee, speak with a registered tax agent or accountant, such as, about your specific circumstances.