Who should be Trustees, Appointors, Shareholders and Directors?

14 February 2022

Discretionary trusts and companies are common vehicles used as business and family group structures. Both entities have advantages and disadvantages and where correctly structured they provide a layer of asset protection for the ultimate beneficiaries and shareholders of these entities. In order to achieve your asset protection and succession objectives consideration should be given as to whom is most appropriate to carry out the various roles in such structures.

Typical Asset Protection Structure

Whilst there are various other structures and asset ownership entities that can be used to suit particular circumstances and objectives the below illustrates a simple business structure commonly used;

• Passive investments and capital growth assets such as shares and property are owned by a discretionary trust together with a Corporate Trustee.
• A separate company is incorporated to undertake business operations. If claims arise in the trading company, the passive investment assets are held by the trust and should be protected where one has been diligent not to expose the trust.
• The discretionary trust owns the shares in the trading company. The dividends pass to the discretionary trust shareholder, from where they can be distributed to beneficiaries at the discretion of the Trustee.

Discretionary Trusts

Discretionary trusts provide a high level of protection in various circumstances which have made them an advantageous structure for asset protection purposes. However, to ensure they are managed with the right intentions the roles of both the trustee and appointor in particular should be given due consideration.

Generally speaking, a trust involves the legal ownership of the property by the trustee for the benefit of the trust’s beneficiaries. With a discretionary trust no individual person owns the benefit of the assets as it is up to the trustee to decide who receives income or capital distributions from the trust.

Roles in the trust

There are a number of very important roles in the trust and the people or entities that carry these roles, will have an impact on asset protection strategies. In particular. this article discusses the roles of the trustee and the appointor who control a trust.

Role of Trustee

The trustee holds the legal ownership of the assets of the trust. The trustee is responsible for the assets of the trust, and the operation of the trust itself.  The trustee has the powers to manage the assets of the trust and conduct the trust on a day-to-day basis in accordance with the trust deed and trust law. Importantly, the trustee can decide to whom to distribute the income and capital of the trust.

1. Individual v Corporate Trustee

One of the main questions that arise in relation the role of the trustee is – should the trustee be an individual or a company?

Generally, a trustee is personally liable for any debts or liabilities incurred in its role as trustee of a trust. This is so regardless of whether or not it has a right to be indemnified from the assets of the trust. Most trust deeds and common law permit the trustee to be indemnified out of the assets.

However, there are situations where this restriction may be lifted such as where the assets of the trust are not sufficient, the trustee has acted outside of the powers of the trust, and various provisions of the Income Tax Assessment Acts which make the trustee personally liable for the trust’s tax debts.

A trustee can contractually agree with a third party that their liability is limited to the assets of the trust and that the trustee will not be personally liable. Such a provision is commonly used by larger trusts, such as managed investment trusts but is rare for smaller private trusts.

It is for these reasons it is prudent to have a corporate trustee.

The main advantages of a corporate trustee from an asset protection viewpoint are:

• as a company is a separate legal entity, having a corporate trustee limits the liability of individual controllers of the trust;
• individual trustees can be personally liable for debts incurred in the trust – which exposes personal assets of the individuals to risk;
• the succession of a corporate trustee is much simpler; and
• a corporate trustee can exist indefinitely unlike an individual who will eventually pass on.

2. Directors and Shareholders of a Corporate Trustee

Where it is decided that the trustee is a company it is then necessary to review the identity of its directors and shareholders.

Whilst it is best practice to have a corporate trustee so that personal assets are generally not at risk, it must be understood that the directors are not totally immune from the debts of the corporate trustee. Directors are subject to various legislation where they may face personal liabilities such as under the Corporations Act and the Income Tax Assessment Acts.

For these reasons with regards to director positions, the typical approach is to appoint the designated ‘at risk’ spouse in this role.

Thus, the importance of this person to have no or limited assets under their ownership and the ‘non-risk’ spouse in controller positions like the shareholder and appointor where these two latter positions combined ultimately control a trust.

Role of Appointor

The role of appointor is one of the most, if not the most, important role in a family discretionary trust. The appointor is the party who has the ultimate control over the trust because the appointor can appoint and remove the trustee.

The appointor may also have other powers subject to the terms of the trust deed, which confer more control to the appointor. This may include:

• amending the trust deed;
• changing the vesting date of the trust; and
• changing the beneficiaries of the trust.

Based on this and because the appointor is the ultimate controller of the trust there are asset protection considerations to consider when deciding whom the appointor should be namely:

• who is desired to have ultimate control of the trust?;
• the succession of the appointor, not just upon death but importantly also upon incapacity;
• the ability of the appointor to voluntarily resign; and
• separate the control from the risk – the appointor should not be taking on any risk such as personal guarantees etc.

Due to control being invested into the appointer role, typically the ‘at-risk’ spouse would not be the appointor. Or if it is preferred due to individual family circumstances not to have someone solely act in this role, to have both spouses act jointly with appropriate succession clauses so that control passes to the continuing party such as;

• what is to occur in the event that the appointor dies;
• a mechanism for the appointor to resign and appoint another person or entity, instead of just automatic succession clauses. This is particularly important for relationship breakdowns.
• a mechanism to provide where the position is vacated in the event of incapacity, bankruptcy or family breakdown period.

Companies

Many businesses choose to use a company due to their capped tax rate, ability to retain and reinvest profits in the business without any undistributed profit issues and its suitability to facilitate with ease of entry and exit to the entity.

However, the most compelling advantage of a company from an asset protection point of view is the ability to separate business operations and assets from the personal assets of the individuals involved.

For this reason, companies are becoming the preferred entity to undertake trading business operations.

As was the case for the Corporate Trustee roles, asset protection consideration needs to be given when identifying shareholders and directors of the corporate trading entity.

1. Who should be the directors?

Directors of companies are generally protected from creditors through the corporate veil. However, there are many circumstances where a director can be held personally liable for breaches by the company and creditor claims when have provided personal guarantees.

For this reason, this role should be restricted to the designated ‘at-risk’ spouse where limited or no personal assets are held in their name.

A director is required to comply with the powers granted under the Constitution and legal obligations under the Corporations Act, and has a responsibility to understand their duties in this role, before they consent to act in this capacity.

2. Who should be the Shareholders?

Shareholder’s liability is generally limited to the value of the shares owned in the company. As such, from a practical perspective the shareholders of any company should ideally be a low- risk entity.

Typical structures involve a discretionary trust as the shareholder of a trading company. This is advantageous not only from a tax perspective but also an asset protection view. To not compromise this strategy, care needs to be taken to avoid exposing the shareholder’s other assets such as providing shareholder guarantees for the company’s business operations.

Key Takeaway

Asset protection is not about hiding your assets or acting unlawfully to avoid financial responsibility. Rather, its about using legally permissible techniques to ensure you are protecting your assets.

Due consideration needs to be given to the roles which control trusts and companies to ensure you are best placed in the event of an unfortunate circumstance.

The challenge is to get the right combination of persons as trustees, directors, shareholders, appointors and beneficiaries and where relevant customise the terms of the trust deed and the constitution of a corporate trustee so as to achieve your asset protection, business succession and estate planning objectives.

In the meantime, if you would like to understand the above asset protection measures or would like a health check review of your asset ownership structure, please contact the authors of this article.

Authors:
Michelle Saunders, Managing Director                   Jemma Sanderson, Director
Marissa Bechta, Director                                           Simeran Cheema, Manager

This newsletter is current as of 14 February 2022, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
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