Why it's best for a Family Trust to Start Out with a Corporate Trustee

8 September 2016

As advisers we are well aware that it is best for a client’s private trust (be it a family trust or a self managed superannuation fund) to have a corporate trustee, for a whole host of reasons.

But what about those times where the client may be a bit cash-strapped (especially when they are just starting out with their own business), and even though they recognise from your advice that they need to have a family trust for their new business or investment structure, as well as a new SMSF, it can be extremely difficult to get them to extend themselves further for a new corporate trustee for each structure!

After all, the important thing is to get the structures up and running in the first place, isn’t it? So can’t the client just start off with individual trustees, and when things get easier cash-wise later on they can then change to a corporate trustee?

Sounds good in principle, doesn’t it? And, by and large, it is certainly better to get the structure going than to not have it in place at all when that crucial purchase contract needs to be exchanged, or that critical business deal goes through, or that contribution deadline comes around.

However, as they say, “the road to hell is paved with good intentions” (Henry G. Bohn's A Hand-book of Proverbs, 1855). Here’s a list of just some of the issues that can arise from starting out with individual trustees for a family trust (don’t worry, we’ll cover SMSFs separately in another newsletter issue):

1.    The client may never get around to changing to a corporate trustee –
       and then it’s too late!

When asked to review or update a family trust deed, we still see so many old (or even new) trust deeds with individual trustees (or even with just one individual as trustee). Clearly the client just never got around to changing the trustee to a corporate trustee. But at least, we have the opportunity at this time to firmly remind the client to change the trustee NOW at the same time as the deed is reviewed or updated – because if not, then one of the other things on the list might just happen first!

2.    The sole individual trustee dies or loses capacity

Obviously we all know that is a bad situation!

If the sole individual trustee loses capacity suddenly (eg, due to an accident or a stroke), they are no longer able to act as trustee, and the trust is then in limbo until a new trustee is appointed in their place. Who this will be and how this happens will usually be dictated by the terms of the trust deed, or failing that then under the relevant State or Territory Trustee Act. In the meantime, the assets of the trust are frozen, meaning that investment or divestment opportunities may be lost, and if there is any dispute about who the new trustee should be then perhaps for a longer period of time.

On the other hand, if there was a corporate trustee in place, it does not die and does not lose capacity. If a director dies or loses capacity, the shareholders can simply appoint a replacement.

3.    Expense and time consumed in transferring assets to the new trustee

Once a new trustee is appointed, then all the assets of the trust will need to be transferred from the old trustee to the new trustee as the legal owner on behalf of the trust. Depending on the assets of the trust, this can be an expensive and time-consuming exercise, and may require legal assistance especially where real estate is involved.

Note that, even if there are more than one individual trustees (e.g. a husband and wife who are the trustees), if one of them dies or loses capacity there is still a need to transfer the trust assets from the “old trustee” (which was the two of them) to the “new trustee” (which is the remaining survivor of them).

Since one (or more) of the individual trustees will at the very least die one day, this issue cannot be avoided (unless all trustees outlive the trust, which might be up to 80 years in most States and Territories). Okinawa diet, anyone??

On the other hand, if there was a corporate trustee in place, it does not die and therefore no expensive and time-consuming asset transfers need to take place.

4.    Stamp duty traps

Whilst a change of trustee and subsequent transfer of trust assets to the new trustee generally does not present any issue from a capital gains tax point of view (paragraph 104-60(1) and s 960-100(2) of the Income Tax Assessment Act 1997), the same cannot always be said in terms of stamp duty consequences.

In particular, in NSW there is s 54(3) of the Duties Act 1997, which says that, in respect of a transfer of dutiable property to a person other than a licensed trustee company, a special trustee, a trustee of a self managed superannuation fund or a trustee of a special disability trust as a consequence of the retirement of a trustee or the appointment of a new trustee, unless the Chief Commissioner is satisfied that (amongst other things) none of the continuing trustees remaining after the retirement of a trustee is or can become a beneficiary under the trust, and none of the trustees of the trust after the appointment of a new trustee is or can become a beneficiary under the trust, then the transfer is chargeable with the same duty as a transfer to a beneficiary under and in conformity with the trusts subject to which the property is held.

In other words, if the new or continuing trustee is or can become a beneficiary under the trust, then full ad valorem stamp duty will apply!!!

This section has caught out many unwary lawyers and their clients (although possibly their clients may not have even known about the problem, other than their lawyer simply telling them that that’s what the stamp duties office charged them and that’s it!).

By the way, this trap would also apply in the situation of a husband and wife who are the trustees and just one of them dies. Typically, they will both be potential discretionary beneficiaries under the trust, so that when one of them dies and you have to transfer the assets to the survivor of them, the stamp duty problem arises.

Yes, there is a way around the problem – but ONLY if you catch it BEFORE lodging any transfers of assets with the stamp duties office (because once it’s in, too late - it’s in and it’s dutiable!). It requires more time and expense in terms of amending the trust deed for the trust – and probably having to also set up and appoint a new corporate trustee at that time.

Of course, if there was a corporate trustee already in place, it does not die and therefore no expensive and time-consuming asset transfers need to take place, and the stamp duty trap never arises.

So perhaps it’s just better all-round if you can convince your clients to start out their family trust with a corporate trustee in the first place. Maybe the above list of issues will help!

For further information please contact us on 02 8296 6266 or email - info@supercentral.com.au.

 

----------------------------------------------------------------------------------------------------------------------------

EPAdvantage = Smart Growth

EPAdvantage is our estate planning partner program open to Advisors who are using our Testamentary Manual system. A complimentary, value-added program, it offers registered members professional support, PD training and the resources needed in growing a successful estate planning practice.

Program benefits include:

  • step by step instructions and training in using the Testamentary Manual system
  • professional estate planning skills development webinars and PD training sessions
  • online training resources including whitepapers, case studies and check lists
  • marketing toolkit to assist you with external communications
  • access to Townsends estate planning lawyers for general enquiries
  • bi-monthly EPAdvantage™ newsletter – to keep you abreast of current developments and important topics in estate planning

If you wish to talk to us about how we can assist you with any specific estate planning initiative you might be planning, please call on 02 8296 6266 or via email – info@supercentral.com.au.

----------------------------------------------------------------------------------------------------------------------------

Back Enquiry