Corporate or Individual Trustee?

WHAT IS THE DIFFERENCE BETWEEN AN INDIVIDUAL –VS- CORPORATE TRUSTEE

As a general explanation, an individual trustee is an individual person who acts as the trustee of a trust or self managed superannuation fund (eg Frank Smith as trustee for the Frank Smith Trust).

A corporate trustee, is when a company acts to perform the role of trustee, and the individuals become directors of the company (eg Smith Pty Ltd as trustee for the Smith Superannuation Fund).

The requirement of a trustee often arises in discretionary trusts and self managed superannuation funds (SMSF).

SMSF INDIVIDUAL –VS- CORPORATE TRUSTEE

As a general rule of SMSF, each member must be an individual trustee and each individual trustee a member of the fund.  In the alternative if the trustee is a corporate trustee, each member must be a director and each director must be a member.

WHY CONSIDER A CORPORATE TRUSTEE?

The following are things to consider when choosing a trustee.

COSTS TO CONSIDER

Initially costs of individual trustees are cheaper as there is no set up or ongoing cost.  However, due to the above general rule, and exposure to liability, if a new member joins the SMSF, or a new trustee joins a discretionary trust, the composition of the trustee also must change, resulting in a cost to change the trustee and then time and money to change the names of any assets held in the Trust or SMSF’s name.

The costs to set up a corporate trustee are approximately $900 plus GST (ASIC registration fee, constitution of company, resolutions etc.) and also an ongoing annual ASIC registration fee. 

However, with a corporate trustee, there will be no need to change assets, as the trustee composition does not change if you bring on new directors, or as a new member is added as a director through a simple ASIC form often done by the SMSF accountant.

ASSET SEPARATION

The use of a corporate trustee significantly reduces the burden and risk of a trust or SMSF having to prove its assets are separate. 

Separate assets are an important requirement under the SIS Act. 

a separate entity is involved it reduces the risk of funds or assets being accidently intermingled with personal assets.

SINGLE MEMBERS (SMSF ONLY)

A single member fund can have a corporate trustee, but a single member fund cannot be a single individual trustee. 

So single member funds require another individual person, in addition to the member, to act as co-trustee.

ASSET PROTECTION

A trustee is liable for the debts of the trust, or superannuation fund. The trustee's indemnity or reimbursement of those debts, lies within the trust assets and the trust having the ability to indemnify the trustee for any debts. Further liabilities arise with a SMSF trustee (below).

Where that trustee is an individual, that means the debts of the individual are personally exposed to creditors, in the hope that there is sufficient funds to reimburse the trustee.

If the trustee was a corporate entity, those same debts are limited to the liability of the establishment of the company, meaning if there are insufficient assets in the trust to reimburse and indemnify the trustee, the liability is limited.

In the event the SMSF (or its trustee) is sued for damages (ie if someone is injured on SMSF property) a corporate trustee may limit the exposure of liability, whereas individual trustees may have their personal assets exposed.

SUCCESSION

When a member dies, a corporate trustee offers greater flexibility, including continuance of the trustee if the fund has become a sole member fund, as the trustee composition does not change.  Individual trustees give rise to considerable administrative problems including time-limits to rectify the trustee issues in an already difficult time, otherwise the fund may become non-compliant.

PENALTIES

Under the SIS Act certain breaches result in a penalty applied per trustee, meaning each individual trustee will be exposed and liable for the penalty. A corporate trustee is only one trustee and only incurs one penalty.

FURTHER INFORMATION

Practical Edge Legal can assist in the provision of advice and establishment of corporate trustees, SMSF Deeds, discretionary trust deeds, and provide legal advice in relation to you corporate trustee or individual trustee needs, along with succession of all your trusts and SMSF requirements.