The Corporate Trustee Model

The use of Family Trusts has been around for a very long time; hundreds of years in fact. The use of a Corporate Trustee is more recent, but I have been a big fan of the Corporate Trustee model for many years.

The concept of a Family Trust is relatively simple. You transfer assets to Trustees to hold for the benefit of the beneficiaries. The Trustees become the legal owners of the trust assets, but they hold those assets subject to the terms of the Trust Deed and for the benefit of the beneficiaries.

The important point is that a Trust is not a person or a company. A Family Trust is not a separate legal entity in the same way that a company is. The Trustees are the legal owners of the trust assets and are responsible for administering the Trust.

This distinction is important and is sometimes misunderstood.

The importance of separation

A Family Trust needs to be properly established and properly administered. It should not simply be treated as another name for the person who established the Trust.

The Trustees have responsibilities of their own. They must understand the Trust Deed, consider the interests of the beneficiaries and make decisions in their capacity as Trustees.

This is one of the reasons I have traditionally been a strong supporter of having an independent Trustee involved in a Family Trust.

An independent Trustee can provide an important degree of separation between the people who established the Trust and the people responsible for administering it.

However, having an independent Trustee is not, by itself, what makes a Trust valid. The important thing is that the Trust is genuinely administered as a Trust and that the Trustees properly exercise their responsibilities.

In other words, the paperwork is only part of the story. The way the Trust is actually operated matters.

What is a Corporate Trustee?

A Corporate Trustee is simply a company that has been appointed as the Trustee of the Family Trust.

The company acts as Trustee, rather than having a number of individuals named as the Trustees.

For example, rather than having three individuals personally named as Trustees, a company might be appointed as the Trustee of the Smith Family Trust.

The company then holds the trust assets in its capacity as Trustee.

The directors of the Corporate Trustee are responsible for managing the company and, importantly, for ensuring that the company properly carries out its role as Trustee.

The Corporate Trustee does not change the fundamental nature of the Trust. It simply provides a different way of appointing and managing the Trustees.

Why do I like the Corporate Trustee model?

The main reason is continuity.

Traditionally, a Family Trust might have three individual Trustees. If one Trustee retires, dies or otherwise needs to be replaced, the change of Trustee needs to be properly documented and the ownership of trust assets may need to be dealt with.

This can become particularly cumbersome where the Trust owns property, investments or other significant assets.

With a Corporate Trustee, the company remains the Trustee even though the directors of that company may change.

That provides a much cleaner structure.

If a director retires, the company does not cease to be the Trustee. The directors of the Corporate Trustee can change while the Corporate Trustee itself remains in place.

This is particularly useful when a Trust is intended to be a long-term structure.

It is about governance

I also like the Corporate Trustee model because it encourages better governance.

The Corporate Trustee has directors. The directors have responsibilities. Decisions can be recorded formally and the company provides a clear structure around the administration of the Trust.

The Trusts Act 2019 sets out a number of mandatory and default duties for Trustees. These include duties to know and act in accordance with the terms of the Trust, to act honestly and in good faith, and to act for the benefit of the beneficiaries or for the permitted purpose of the Trust.

There are also obligations around record keeping and the retention of important Trust documents.

In my view, this reinforces an important point: being a Trustee is not simply a name on a property title. It is a responsibility.

The role of the directors

Where a company acts as Corporate Trustee, the directors are the people who make the decisions on behalf of that company.

They need to understand the Trust and the company’s role as Trustee.

They need to be familiar with the Trust Deed, understand who the beneficiaries are, understand the assets and liabilities of the Trust and ensure that proper records of Trustee decisions are maintained.

The directors also need to understand that they are acting in a particular capacity.

They are not simply managing their own assets. They are making decisions for a company which is acting as Trustee and which holds assets for the benefit of the beneficiaries.

That distinction is important.

The role of the Appointor

Another important part of the structure is the person who has the power to appoint and remove Trustees. This person is often referred to as the Appointor, although the terminology can vary between Trust Deeds.

This role can carry significant practical power.

The Appointor may have the ability to remove an existing Trustee and appoint a replacement Trustee, subject to the terms of the Trust Deed and the law.

It is therefore important to understand exactly what the Trust Deed says about this role.

People sometimes establish a Trust without fully appreciating where the ultimate power to change the Trustees sits.

That can become particularly important when relationships change, when a family member dies or when control of the Trust is intended to pass to the next generation.

The Trust Deed should be read carefully rather than assuming that every Family Trust operates in the same way.

The Trustee’s responsibilities

The responsibilities of a Trustee are significant.

Among other things, Trustees need to:

1. Act honestly and in good faith.
2. Act in accordance with the terms of the Trust.
3. Act for the benefit of the beneficiaries, or for the permitted purpose of the Trust.
4. Know and understand the Trust Deed.
5. Properly consider the exercise of their powers.
6. Act impartially between beneficiaries where the circumstances require it.
7. Avoid conflicts of interest and not use their position improperly for their own benefit.
8. Take appropriate care in managing the Trust’s assets.
9. Keep proper records of the Trust and Trustee decisions.
10. Properly administer the Trust in accordance with the Trust Deed and applicable law.

These are not responsibilities that should be taken lightly.

The Trusts Act 2019 has brought much greater clarity to the duties and information obligations of Trustees. It also requires Trustees to retain important documents, including the Trust Deed, records of trust property, Trustee decisions and accounting records.

What happens to the Trust assets?

One of the areas that continues to cause confusion is the ownership of Trust assets.

The Trustee is the legal owner of the assets.

Where the Trustee is a company, the company is the legal owner in its capacity as Trustee.

For example, if Pryde Trustees Limited was the Corporate Trustee of the ABC Family Trust, the legal ownership of a property would ordinarily be recorded in the name of Pryde Trustees Limited as Trustee of the ABC Family Trust.

The Family Trust itself is not a company and does not own the property in its own right.

The Trustees hold the property on the terms of the Trust and for the benefit of the beneficiaries.

This distinction can sometimes cause confusion with banks and other organisations because they often use the name of the Family Trust as the customer or account name for practical reasons.

The important thing is to understand the legal capacity in which the Trustee is acting.

Is a Corporate Trustee right for everyone?

No.

I am a big fan of the Corporate Trustee model, but it is not automatically the right answer for every Trust.

There are additional costs involved in establishing and maintaining a company. There are also additional governance and administrative requirements.

The Trust Deed itself is important, and the circumstances of the family, the assets being held and the intended succession of control all need to be considered.

The structure should therefore be designed around the particular circumstances of the Trust rather than simply adopting a Corporate Trustee because someone else has done so.

Why I prefer the model

For me, the biggest advantages are continuity, governance and clarity.

A Corporate Trustee provides a stable legal entity that can continue as Trustee even when the people involved in the Trust change.

It also provides a framework within which Trustee decisions can be made and recorded.

Most importantly, it reinforces the concept that the Trust is something that needs to be properly administered rather than simply being a name attached to a collection of assets.

Family Trusts can be very useful structures, but they need to be treated seriously.

The Corporate Trustee model is, in my view, a practical and robust way of doing that.

It provides continuity where individual Trustees may change, creates a clear governance structure and can make the administration of a long-term Family Trust considerably more straightforward.

I have been a supporter of the Corporate Trustee model for many years.

I still am.

The important thing is not simply having a Trust. It is having a structure that is properly established, properly governed and properly administered.

This article is intended as general information only. The appropriate structure for a Family Trust will depend on the circumstances of the Trust, its assets, beneficiaries and Trust Deed. Specific legal, tax and accounting advice should be obtained before establishing or changing a Trust structure.