October 01 - Business Advice - Tax Accounting

The Difference Between Corporate and Individual Trustees

Many of our clients have a trust – they hold many benefits and it’s a structure that can work for a variety of reasons. Did you know there are both corporate and individual trustees? It’s a point of confusion for many, and we wanted to clear up the difference between the two. We think someone said knowledge is power? Read on 😉

Differences in Corporate and Individual Trustees

What is a trust? 

It’s actually a legal arrangement. Trusts are not separate legal entities; they are however treated as a separate entity for taxation purposes. Generally, trusts are used for asset protection purposes and can provide tax benefits. The tax benefits are due to the distributions of the income distribution which allows money to be allocated to those in different marginal tax brackets, allowing lower average rate of tax across a family group.

What is a trustee? 

Trusts can have one or more Trustees.  A Trustee manages and holds assets for the benefit of one or more beneficiaries under the trust. The benefits of the trust’s assets may be received by the beneficiaries through income or any other proceeds the trust distributes to them. The Trustee has a lot of control over the trust. How many times can we say trustee or trust…

The Trust deed outlines the trustees’ authorities in the trust. They deed usually states the following for the trustee: 

  • Owns the assets for the trust 
  • Makes distributions to the beneficiaries 
  • They must keep proper records and books 
  • Avoid conflicts of interest 
  • Not benefit from its position as a trustee 
  • Exercise reasonable care in the administration of the trust
  • Act in good faith 

Advantages of individual trustees: 

  • Low management and setup costs 
  • Easy to setup generally 

The individual signs the trust deed and a consent to act as the trustee and take responsibilities for managing the trust. They also perform the role of trustee by making distributions through the trust. 

Disadvantages of individual trustees:

  • The individual trustee may be responsible for legal issues with the trust
  • Difficulties in distinguishing between trusts and the trustees’ assets 
  • In the event of a death the trust’s assets will need to be allocated to another entity 

Transferring assets is a lengthy process that requires many documents and if switching entities and shares and property lots of administrative challenges may arise. 

Corporate Trustees 

advantages and disadvantages individual trustees

Corporate Trustees are companies that act as the trustee of a trust. Corporate Trusts are often incorporated having a sole purpose of acting as trustee, which means that the company won’t conduct business. Corporate Trustees have shareholders and directors. The directors of the corporate trustee control the trust and therefore control the distributions. 

Advantages of a Corporate Trustee 

  • Limited liability for individuals 

If there are any legal responsibilities it means that the company is legally responsible instead of the directors. 

  • Easier to separate the assets of the trust 

As the assets are generally held in different names it means it can be easier to distinguish between the individuals’ assets. 

  • Greater asset protection 

Since asset separation is more clearly defined, there is greater asset protection. If, for example, a person gets sued, assets held in a separate trust with a corporate trustee are the company’s assets. Consequently, their personal assets will not be at risk.

  • Simpler succession 

Through a corporate trustee, there is simpler succession and control of the trust in the event of death. Since a company cannot ‘die’, the company continues to act as trustee. If something happens to one of its directors, the corporate trustee must simply replace its director. The title to the assets would not change, so the trust’s assets do not need to be transferred in the case of the death of a director.

Disadvantages of a Corporate Trustee

The main disadvantages of having a corporate trustee include:

  • additional set-up costs; and 
  • maintaining records for the entity. 

Although it is possible to use an already registered company as a trustee, this is generally not recommended. It is best to register a new company to act as trustee, so that: 

  • its sole purpose is acting as trustee; and 
  • there have been no activities undertaken to-date which may affect the company. 

Though there are some additional costs and challenges associated with setting up a trust with a corporate trustee, the benefits of doing so often outweigh the disadvantages.

We know this is a dense topic, but it’s important to understand your options properly (and why we may or may not recommend certain structures). The key takeaway here is: if you decide to set up a trust, you will need to appoint a trustee to control the trust. A trustee can be either: 

  • an individual trustee (a person); or 
  • a corporate trustee (a registered company). 

Setting up a trust with a corporate trustee may require more time and additional cost as you will need to register a company, but there are many benefits associated with doing so. These benefits include greater asset protection and limited liability. In many cases, a corporate trustee is the best option despite the higher setup costs. 

We hope that answered some of your trust related questions… but if you’ve still got some for us, get in touch! We’re happy to help.