Family trusts are a common vehicle for families to hold assets and/or conduct business.
There a number of things to consider when establishing a family trust but one of the threshold questions is whether a company should be set up to be the trustee?
The answer to this question will vary depending upon the circumstances, but there are certainly some benefits in using a company as trustee rather than individuals. Some of these benefits are:
- Protection of personal assets – Trustees may be liable for losses as a result of a breach of trust and therefore in those instances individual trustees potentially place their own personal assets at risk. This risk can, and generally will, be mitigated by a right of indemnity that the trustee has out of the trust assets, but such right does not always afford absolute protection and there may be a shortfall that needs to be met by the trustee out of their own assets. Companies when used as trustees are generally ‘shell companies’ with no assets.
- Asset identification – Where an individual is acting as trustee of a trust they will be holding assets both in their individual capacity (i.e. their personal assets) and also in their capacity as trustee (i.e. their trust assets). When creditors come knocking and issues arise it is not uncommon for there to be some degree of scrutiny and uncertainty around whether assets are held in trust or are in fact the assets of the trustee in their own right. This uncertainty can be removed where a company is set up to act as trustee and that company’s only purpose is to be the trustee.
- Succession planning – Where an individual is acting as trustee and that individual dies (or becomes mentally incapacitated) then the ownership of the trust assets will need to be transferred to a new trustee. Whereas with a corporate trustee, in the event that one of the directors or shareholders was to die, the trustee company will continue to exist and legal ownership of the trust’s assets does not have to be changed.
Family trusts have always been a popular form of entity for assets to be held, and with the recent watering down of superannuation tax concessions announced in the Federal budget (and the ongoing threat of future legislative attacks on superannuation from both sides of politics), family trusts shall continue to be an attractive option, but it is important to ensure that the family trust is set up correctly at the outset.