August 4

Family/Discretionary Trust – Corporate Trustee versus Individual Trustee

The last 3 decades have seen a substantial growth in the number of people in Australia establishing a family/discretionary trust. The benefits of such an arrangement have been largely touted by professionals around 2 areas – asset protection and tax benefits.

The issue of whether a corporate trustee is best suited as opposed to an individual trustee for a family/discretionary trust is relevant on the area of asset protection and succession planning.

Trustee Liable for Trust Debts

Under trust law, a Trustee is personally liable for trust debts.

To discharge the trust debts the Trustee normally has a right of indemnification against the trust assets. This right of indemnity is established from 3 sources:

  1. Equitable principle as set out by the Courts;
  2. An indemnity clause which is contained in most trust deeds; and
  3. State Statute law – the Trustees Act.

What Liabilities are Covered by the Trustee’s Right of Indemnity?

The cases generally state that the indemnity is limited to liabilities or expenses that have been properly incurred by the Trustee in the execution of the trust. If the Trustee’s action was unauthorised and exceeds his power, there is no right of indemnity.

What Happens if The Trust has Insufficient Assets to Cover the Trust Debts?

Individual Trustee – if there is a shortfall in the assets of the trust fund then the individual Trustee will be liable for the shortfall. This amount, if substantial to the individual Trustee’s personal asset pool, may result in the individual Trustee declaring bankruptcy or entering into a Part X arrangement. If this course of events took place, then this would defeat one of the potential benefits of establishing a discretionary trust in the first place.

Corporate Trustee – In this scenario the corporate Trustee will probably go into liquidation or administration. As the corporate Trustee usually has no or minimal assets, this may not be too detrimental to the parties who had established the trust in the first instance. Under corporation law the individual shareholders are not liable for the debts of the company. There are exceptions. One example is where the shareholders have signed a guarantee/indemnity in favour of a creditor.

The directors of the Trustee company will normally be immune from the debts of the Trustee company.

Can the Appointor of the Trust Sack the Trustee to Allow the Trustee to Avoid Personal Liability?

In short, the answer is no. Once the debt or cause of action is established then the Trustee is liable for the debt. Simply removing the Trustee does not extinguish his liability.

Other Problems Associated with an Individual Trustee – Asset Identification

Should the Trustee be in the unfortunate position of having assets seized by way of court order or by a person exercising rights under a security arrangement, then the situation may arise where there is a dispute as to which assets belong to the trust or the Trustee in his own right. This situation is more likely to occur where the Trustee is an individual as opposed to a company. Inadequate record keeping may simply record assets in the name of the Trustee without reference to the trust, leaving open the issue as to who owns the asset.

Succession Planning

Issues arise as to what happens to the trust should an individual Trustee die. The appointor of the family trust, under most trust deeds, should be able to appoint a new trustee to continue in that position. However, it is possible that the appointor and the individual Trustee are the same person – resulting in the trust being headless.

Under trust law the trust does not fail for want of a Trustee. The above circumstances can be avoided by careful estate planning and having the appropriate backup appointors in place in the trust deed or the appointor’s will.

With a corporate Trustee, the scenario will be easier to resolve as the company will continue to exist. The shareholders, if need be, can appoint a new director – should one director die. Again careful estate planning should be undertaken to contemplate this situation.

July 7

Who can draw up a Will?

There is no formal requirement that a lawyer must draw up the will, but if the will-maker is in doubt as to any proposed provision, either a solicitor, the State Trustees, or any private trustee company should be consulted as to the wording of the proposed will.

A will is an important document as it should deal with every asset the testator owns, and should therefore be kept in a safe place (e.g. in a bank, with a solicitor, or in a private safe). At Kelly and Chapman we keep wills and any other important legal documents such as certificates of title free of charge. The executor(s) or a relative should be told of the will’s whereabouts so that it can be easily located when the will-maker dies. The executor could also be given a copy of the will in a sealed envelope.

It is a criminal offence to conceal a will or codicil. A person concealing or retaining a will may be liable to pay damages to any person defrauded or any persons claiming under them for any loss sustained through retention or concealment.

To view more information about our Wills service please click here

July 7

When an executor does not wish to act

There is no obligation that you must accept the role of executorship, even if you had agreed with the will-maker that you would. If you don’t want to act when the time comes, and you have not meddled into estate property, you can give up the right to do so. To do this you renounce the executorship, meaning you renounce your right to probate of the will.

If you were named as an executor, you have the right to apply for a grant of probate, because you were the specific choice of the will-maker in their will to be their executor. It also means you have the right to renounce it. Probate is approval from the court to deal with the estate. To renounce executorship or probate means you give up your right as executor appointed under the will to apply to the court for a grant of probate.

To view more information about our Wills and Probate service please click here

July 7

Two Types Of Co-Ownership

There are two ways of co-owning property – JOINT TENANTS AND TENANTS IN COMMON. The legal entitlements of these are different, with different outcomes for ownership interests on death.

Co-ownership of property in these ways is not restricted to real estate, but can apply to other forms of property, such as joint bank accounts and credit card accounts. So a question for co-owners is who will inherit their interest?

An important attribute of joint tenancy is A RIGHT OF SURVIVORSHIP. It means that when one co-owner dies, the survivor(s) automatically own the property by the operation of law. This occurs independently of a will (and hence the probate process).

When ultimately there is a sole survivor, that person will own the whole property, and they may deal with it as they wish. So it is important for a sole survivor to revise their will to take this change into account. If not the rules of intestacy apply, which may lead to an undesirable outcome.

With TENANTS IN COMMON there is no right of survivorship. Instead, each co-owner has a separate, undivided share in the property (although not in a physical sense), and may independently deal with it as they wish. Therefore, that share will form part of their estate and they may choose who will inherit it through their will.

To view more information about our Wills and Estates service please click here