Articles > Small Business

Corporate Trustee or Individual Trustee: What is the Difference?

September 2, 2021   Kaitlyn OliverPhilip Evangelou

Trusts are generally used for asset protection reasons and to obtain tax benefits. When establishing a trust, you will need to decide whether to appoint a corporate trustee or individual trustee to manage the trust. It is important to understand which type of trustee is best suited to your specific circumstances.

What is a Trust?

A trust is a legal arrangement under which the trustee holds and manages assets for the benefit of one or more beneficiaries. The trustee holds title to your assets and can distribute income or other proceeds from those assets to the ‘beneficiaries’ of the trust. The trustee must act in the best interests of the beneficiaries and in accordance with the terms of the Trust Deed.

The Trust Deed is a document that formally governs the trust and sets out the trustee’s powers. It usually establishes the trustee’s role, including owning the trust’s assets and making distributions to the beneficiaries. It also outlines any additional duties of a trustee, such as to act in good faith and to exercise reasonable care in the administration of the trust.

Although trusts are not separate legal entities, they are treated as separate entities for taxation purposes. There are tax benefits because the trustee can make income distributions to beneficiaries who are within different tax brackets.

What is a Corporate Trustee?

A corporate trustee is a registered company, usually incorporated to act as trustee of a trust. It must have a shareholder or shareholders and appoint a director or directors to manage the trust and distribute the proceeds to beneficiaries.

A key advantage of this trust structure is limiting the trustee’s liability to corporate assets. This means the directors controlling the trust cannot be personally liable for any legal issue with the trust. Rather, the company will be legally responsible, and individuals’ assets cannot be pursued in legal disputes concerning the trust.

There is also a clear distinction between trust assets and personal assets because they are held under different names. Additionally, this structure affords simpler succession and control in the event of one or more of the directors passing away. The company continues to act as trustee even if one of the directors is no longer able to manage the trust and a new director can be appointed to the role.

The main downside with this structure is the additional costs associated with setting up a corporation to hold title to the trust’s assets and any ongoing directors’ fees. While it is possible to use an already registered company as a trustee, it is preferable to register a new company that solely acts as trustee and is unaffected by any of its past activities.

What is an Individual Trustee?

An individual trustee is a natural person or persons with title to trust assets and holding the assets for the benefit of the beneficiaries. This arrangement’s advantages include the low set-up and management expenses. There is no need to incorporate a company. Instead, the person or persons simply sign the trust deed and consent to act as trustee or trustees. Their role is the same as a corporate trustee and involves making distributions to beneficiaries under the trust.

However, an individual trustee is responsible for legal issues that arise with the trust. Also, it is harder to distinguish between the trustee’s personal assets and the trust’s assets. Difficulties also arise if the individual trustee dies as assets must be transferred to another trustee. This may cause major administrative challenges, especially if the trust’s assets include shares and real property such as land.

In Summary

Setting up a trust involves a decision as to whether an individual trustee (a person) or a corporate trustee (a registered company) should control it. A corporate trustee involves more expensive set-up fees and ongoing management costs, but it also offers greater asset protection and tax benefits.

For legal advice on the trust structure that is best suited to your circumstances, contact the team of commercial lawyers at OpenLegal on 1300 337 997 or by filling out the form on this page.

About Kaitlyn Oliver

Kaitlyn OliverKaitlyn is a paralegal with OpenLegal while she completes her law degree at UNSW. She has previously worked at Redfern Legal Centre, and the Australian Human Rights Institute.

About Philip Evangelou

phillipPhil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.