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Legal Tip 52: Who should be the shareholders of a trustee company?

Discussion in 'Legal Issues' started by Terry_w, 8th Aug, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Legal Tip 52 Who should be the shareholders of a trustee company?


    Shares of a trustee company are generally worth little - $2 perhaps. There will be no dividends payable to shareholders in most cases as the company itself will not have any income. So does it matter who owns the shares?


    It can matter if the shareholder becomes bankrupt. Say Tom owned 60% of Tom Pty Ltd which was trustee of the family trust which contained millions of dollars in assets. Tom himself owned no other assets and was the risk taker of the family group. If Tom where to go bankrupt his shares would fall into the banks of his trustee in bankruptcy (creditors).


    A company is generally controlled by the shareholders. So once the creditors own the majority of the shares the director of the company would be sacked by a shareholder vote and a new director put in place - someone controlled by the creditors.


    The creditors would immediately control the company. The company controls the trust. The company would immediately make a trustee declaration that it is paying Tom $XX. Once the declaration is made the money is Tom's, even before it is transferred. Once that happens the trustee in bankruptcy will take that money and pay for his own hefty fees before paying out the creditors what they are owed in full (if enough).


    Often is are powers of the trust to prevent this happening by the Appointor removing the trustee. But many people do not get advice and/or do not realise what could possibly happen and this would open the trust up for an easy attack.


    Changing trustee is also a difficult process and it can be very costly and time consuming.


    Therefore ideally shares of a trustee company should be owned by the trustee of a separate discretionary trust. Another option is the spouse least at risk. Or 3 people in 1/3s each as it is unlikely any 2 will become bankrupt at the same time.


    Transferring shares prior to the shareholder becoming bankrupt is also an option, but these shares will be subject to the clawback provisions of the bankruptcy act and the state conveyancing acts.

    Where shares are owned by individuals consider the succession aspects. Shares will change ownership on death.