by John Wojtowicz (Director - Law Central Legal)

One of the biggest questions which arises when setting up a Trust is who should be the trustee. This question inevitably leads to a series of smaller questions. Whether the Trust should have a single trustee or multiple trustees? Should the trustee be an individual or a corporate trustee? It would be impossible to have one correct answer which applies to all Trusts. What is best for a certain Trust will depend on the individual circumstances of that Trust.

Corporate Trustees

Companies, including foreign companies, can act as a trustee in Australia. It is quite common for an organisation or business to be a Trust with a corporate trustee. This affords the organisation the flexibility of a discretionary Trust with the limited liability protection which is granted to companies. Unfortunately, this flexibility does have some limitations. A Trust is a more flexible structure for conducting business but the corporate trustee will still be limited by its company constitution. This means the Trust may permit the corporate trustee to undertake a certain action, but the corporate trustee will remain unable to carry out that action if the action is prohibited by its company constitution.

In practice the limited liability protection is also reduced. Generally if someone is to lend or grant credit to a corporate trustee, the lender will require personal guarantees from the director of the corporate trustee or from some other guarantor. Alternatively, the lender may require that security is given over non trust fund assets.

Why use a single corporate trustee for multiple Trusts?

In some circumstances, people will set up multiple Trusts and have a single company act as the corporate trustee for all of those Trusts. The dominant reason which is generally provided for using this structure is the lower cost. Setting up a company will incur an initial set up cost (You can register a new company with ASIC through Law Central for $607 here) and there will then be an ongoing annual cost to meet the ASIC reporting requirements (at the time of writing ASIC’s annual review fee is $263.00). It can therefore be tempting to set up a corporate trustee for the first Trust and then use that corporate trustee for all subsequent Trusts. As a general rule, lawyers and accountants will advise against doing this. There are several reasons for this.

Limitation on Trading between Trusts   

When two companies enter into an agreement they will do so in their own name. That is because a company is considered a legal person which is separate from its directors and shareholders. The company as a legal person accrues the obligation and the company as a legal person is responsible for carrying out that obligation.

This is not the case with a Trust. Though a Trust can hold property, it is not a separate legal entity which can accrue legal rights or obligations. From a conceptual point of view, a Trust is not its own entity but rather a relationship which exists between the person who has the legal title to property (the trustee) and the people who are entitled to benefit from the property (the beneficiaries).

Since the Trust has no legal personhood, the trustee will operate the Trust in their own name. If the Trust is to enter into a contract, the trustee will be the person who executes the contract on the behalf of the Trust. Difficulty arises when multiple Trusts with the same corporate trustee wish to enter into legally binding agreements with each other. This can often occur when different assets are distributed between different Trusts for asset protection, but the assets are then leased back to the main trading Trust.

If two Trusts with the same corporate trustee seek to have a legally binding contract, the corporate trustee is essentially required to make a contract with themselves. When a trustee is required to contract with themselves, it can lead to some practical and conceptual difficulties with the formation and enforcement of the contract.

A trustee may also be subject to allegations that they have breached their fiduciary duty of undivided loyalty to trust beneficiaries. It may be difficult for a trustee to establish that they have exercised undivided loyalty to both Trusts when they represented both of the Trusts in contract formation. This was recognised by the Full Court of the Federal Court in Commonwealth Bank of Australia v Smith (1991). The Court stated “Not only must the fiduciary avoid, without informed consent, placing himself in a position of conflict between duty and personal interest, but he must eschew conflicting engagements. The reason is that by reason of the multiple engagements, the fiduciary may be unable to discharge adequately the one without conflicting with his obligation in the other.”

Control of the Trust

The trustee of a Trust has a large amount of power, particularly if the Trust is a discretionary or family Trust. Under a discretionary Trust the beneficiaries have no enforceable legal right to any distributions from the Trust, they only have a mere expectancy. The trustee of a discretionary Trust can choose what distributions to make to the beneficiaries or alternatively choose to make no distributions at all.

As such, control of the trustee is vital if the beneficiary wishes to receive any benefits from the Trust. It has previously occurred that parents have set up a trust for each of their children but used the same corporate trustee for each child’s Trust. If there is a breakdown in family relationships then some of the children may not receive any distributions from their personal Trust because they do not have any control over the corporate trustee. It is even possible that a family with broken down relationships may be unable to govern the corporate trustee and therefore the corporate trustee may be unable to make any distributions at all. If this occurs, all of the children will struggle to receive any distributions without legal action.

Land Holder Duty:    

When you gain an interest in land you may become liable to pay landholder duty. This duty is applicable to units in a unit Trust which holds land and shares in a company which owns land. However this duty only has to be paid once the land value of the unit Trust or the company exceeds a certain amount. If a corporate trustee is the trustee for multiple Trusts, the combined land value of the multiple Trusts may exceed the value limit. This means any share transfers in the corporate trustee may require landholder duty to be paid. In certain cases the landholder duty can be avoided if each of the separate Trusts have a separate corporate trustee. This is because the land value will be shared between all of the corporate trustees. The specific law which covers landholder duty varies from state to state.

Can the funds of one Trust be used to satisfy the debts of another Trust?

As discussed above, the Trust has no legal personhood and the trustee is liable for the obligations which arise from a contract. If the Trust fails to make payments under a contract then the trustee will be the party which is subject to legal proceedings. If the creditors of the Trust are successful in legal action, it is the trustee who is personally liable to pay the debts of the Trust.

It is very common for the Trust to hold a substantial amount of assets while the corporate trustee only has nominal assets. This means the trustee’s personal assets may be insufficient to cover the Trust’s debt. For the creditors of the Trust, this will generally not be a problem. The trustee is usually permitted to use Trust property to satisfy debts which the trustee has properly incurred on the Trust’s behalf. This means the creditors will receive payment from the asset rich Trust as opposed to the asset poor trustee.

The trustee’s right to use Trust property to satisfy the Trust’s debt is known as the trustee’s right to exoneration. The trustee’s right to exoneration is one part of the trustee’s indemnity. A trustee’s indemnity will protect the trustee from any loss they personally incur while properly acting as a trustee. The exact protection and extent of indemnity will vary depending on the source of the indemnity. In the case of Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] Allsop CJ stated “The sources of the right of indemnity are threefold: equitable principle, the terms of the trust (here … the trust deed), and statute.” The extent of the indemnity can still be varied even if they come from the same source. Different trust deeds will contain different indemnity clauses. Each state also has its own legislation which addresses the trustee’s right to be indemnified under statute. Despite this, it is generally accepted that in most cases the trustee will be able to use Trust property to satisfy the debts of the Trust. See Law Central Bulletin Issue: 491 on trustee indemnity.

The situation can arise where the assets of a Trust are insufficient to meet the debts of the Trust. This is particularly common when the Trust operates as a trading entity. The trustee will remain personally liable for any debts which the trust fund cannot cover. However, the corporate trustee may only have assets and funds which constitute the trust fund of another Trust. The creditors will often try and gain access to these assets and funds in order to satisfy the debt. This is generally not possible.

The trustee is only able to use the trust fund to indemnify themselves from debts incurred while properly acting as a trustee of the Trust. If the debt is not incurred by the Trust which still has assets, then the trustee would be in breach of its duties to use those assets to satisfy a personal debt. This will often lead to the situation where a corporate trustee is unable to settle its debts despite holding assets and funds on trust for another Trust. The corporate trustee will then enter liquidation and the remaining Trusts will require a replacement trustee. 

In practice it can sometimes be difficult to distinguish the funds of one Trust from another. A corporate trustee would be required to prove that the assets are being held on Trust and are not the trustee’s personal assets. This can easily be done with thorough accounting and record keeping. But should the trustee’s record keeping be insufficient (as can sometimes occur) the trustee may be unable to prove which assets belong to another Trust. This may leave the assets exposed to creditors if the corporate trustee goes into liquidation. 

Gold and Platinum members read on for commentary on a case where creditors attempted to access the funds of a second trust to satisfy the debts of the first trust.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin

Related documents:

• Build a Company (ELodgement)
• Family Trust
• Unit Trust
• Change Trustee of Family Trust

Related webinars:

• Webinar Recording - Are Family Trusts “Done” As An Asset Protection Tool?
• Webinar Recording - Beneficiary Entitlements In Trusts
• Webinar Recording - Companies - Things You Should Know, But Probably Don’t!