Legal Tip 205: Can a trustee be a beneficiary of the trust it is trustee for?

Yes, a trustee can be a beneficiary of a trust, but it can’t be the only beneficiary. The definition of a trust is someone holding some property for someone else, so if there were no other parties it would not meet the definition.


Example

Homer sets up a unit trust with himself as the trustee and the sole unit holder. This trust will fail because Homer is the sole trustee and sole beneficiary. The trustee cannot hold both legal and beneficial interests of an asset and be a trustee.


Lisa sets up a discretionary trust with herself as trustee and only named beneficiary. This will work if there were other beneficiaries – either named, or unnamed such as a class of people related to the named beneficiaries.


But should a trustee also be a beneficiary is a different story.

If the trustee will hold real property there could be stamp duty issues on the changing of the trustee, so make sure you seek legal advice on how to structure the trust deed to avoid this.

 

Is there any situation where an individual trustee is better than a corporate trustee, other than cost?

 

Yes.
One example is administration. An individual is not subject to the corporations act, but a company is, so lots more complexity.

 

A disc trust with a human trustee can be a concern for a range of factors that include:

• Personal liability for breaches, offences and penalties and breach of trust
• Legal liability (but may have recourse to use trust assets to meet any action)
• Death and issues concerning succession
• Lack of capacity may expose trust to external harm ie hospitalised, mental illness, stroke etc and other issues may sever control easier than a company where new Directors may be appointed under legal authority
• Risks that the NSW ( or relevant state) Trustee & Guardian may control trust property
• Complexity with changes if an additional trustee or change of trustee is needed. The deed may need to be amended and in some cases where the rules in the deed are simple other parties like lenders will require a deed to be evident anyway
• Confusion regarding legal ownership. Title to trust property is in the trustee name. eg Bart. Bart or creditors etc may confuse trust property with personal property. Indicating the trust interest may require supporting legal evidence. On death how will others know assets are trust or personal ? eg Land tax thresholds. I have seen a human trustee for a unit trust. Two thresholds or one ?
• Ease of creating a merger issue in future. eg A fixed unit trust with one human trustee + two unitholders. Lack of diligence and remembering about having trustee same as sole unitholder may be forgotten and mishap can occur. I call this the accountants mistake. Often a issue accountants dont know about.
• Insurances eg workers comp
• Professional issues. A failed business / insolvency etc for example may affect professional standing or lead to being stuck-off etc for some positions
• Land tax in NSW. Not for the lack of threshold issue but for the family tree requirement to exclude non-resident beneficiaries. This may lead to a trust merger if there is a single resident beneficiary. A corporate beneficiary may assist but it seems illogical to do that and at the same time have a human trustee based on cost.
• Family Law. While a company trustee doesnt remove this concern personal actions become more a concern.
• Bankruptcy. (But a company trustee fares little better BUT may allow a trusted third party to assume control while under administration)
• Direct guarantees rather than a Directors guarantee (perhaps not greatly different ?)

 

Actually another example came to mind.

Where the trust is a fixed unit trust and the trustee is a natural person if the beneficiary lives in the property it can qualify for the PPOR land tax exemption.
But if the trustee is a company there is no exemption.

 

What about a testamentary trust? For example Homer's Will would establish a testamentary trust for Bart and Lisa, and that there could be either one trust for both or one for each child. Then there comes the concept of primary beneficiary, income beneficiary and capital beneficiary. Bart's trust (if there was one for each child) would have Bart as the primary beneficiary, a whole class of people as income beneficiaries (spouse, children, siblings etc), and then only Bart and Bart's blodline as capital beneficiaries. Could or should Bart be the sole trustee of Bart's trust? Could Bart also be the Appointor and/or Protector?

 

That depends.
Ideally the appointor would appoint a company as trustee as soon as the trust is established and before transmission.

 

@Terry_w could a personal trustee hold the property for the purpose of obtaining finance? For example Mr Smith ATF Smith Unit Trust - obtain loan from lender that prefers individual as trustee as opposed to corporate trustee. Then once settlement occurs, one can switch the individual trustee to a corporate trustee for asset protection benefits.

 

Yes
No - the last sentence.

Changing title means discharging mortgages is necessary and that means new loans with the new legal owner.