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

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.

 

Hi Terryw

But having another seperate disretionary trust with a trustee company holding the shares of the trustee company which holds the assets for the family trust would not really help either? Or am I totally wrong.

Taking your example Tom is the shareholder of the Tom2 Pty Ltd. The Tom2 Pty Ltd is the trustee company of the Tom Discretionary Trust and holds the shares of the Tom Pty Ltd. And the Tom Pty Ltd is the trustee company for the Family Trust.

Tom going bancrupt would give the creditor the control over the Tom2 Pty Ltd which controls the Tom Discretionary Trust. By controlling the Tom Discretionary Trust the Creditor gains control over the Tom Pty Ltd which holds the shares of the Familiy Trust and therewith over the assets.

Please correct where my thoughts are wrong...

 

Could Tom not own the shares as trustee?

 

But in this case you are facing succession issues as Tom is an individual trustee and replacing him (after passing away or whatever reason) incures a change in the trust?

Am I getting the tings right or am I entirely on the wrong path?

 

Not a change of trust but a change of trustee.

You have to plan for the succession issues either way.

 

But passing on the trustee company is fairly easy compared to an individual trustee.

The advantage of having Tom as an individual trustee is that the creditor cannot get hold of the assets Tom holds for the benefit of the beneficiaries of the Family Trust. However Tom could indemnify out of the assets of the Tom Discretionary Trust, which are the 2$ shares of the Tom Pty Ltd. This would mean Tom ideally sells the Tom Pty Ltd to his spouse (or better to the DT with his spouse as individual trustee)?

 

The main thing to pass on is the appointor role. Trustees can usually be changed by the appointor. In the case of Smith v Public trustee the public trustee became the next appointor(poor planning!) the first thing they did was to sack the existing trustee company and appoint themselves as trustee.

I don't understand you second paragraph.

 

Would it be possible please to clarify the examples provided in the earlier discussion, which I have set out below.

Scenario 1: Shares of Corporate Trustee Held By Individual

• Tom Pty Ltd is corporate trustee for Tom Family Trust 1
• Tom holds shares in Tom Pty Ltd

If Tom goes bankrupt, control of the shares in Tom Pty Ltd may pass to creditors and then creditors get control of Tom Family Trust 1.

Scenario 2: Shares of Corporate Trustee Held By Discretionary Trust

• Tom Pty Ltd is corporate trustee for Tom Family Trust 1 (same as Scenario 1)
• Tom 2 Pty Ltd as trustee for Tom Family Trust 2 holds shares in Tom Pty Ltd (that is, shares in corporate trustee held by trust instead of individual)
• Tom holds shares in Tom 2 Pty Ltd (individual owns shares in higher level corporate trustee)

If Tom goes bankrupt, control of the shares in Tom 2 Pty Ltd may pass to creditors and then creditors get control of Tom Family Trust 2.

As Tom 2 Pty Ltd as trustee for Tom Family Trust 2 owns the shares in Tom Pty Ltd, would the corporate trustee of the Tom Family Trust 1 then get control of Tom Family Trust 1 in any case (which I think is what Clemens appears to be suggesting)?

Terryw is it possible to please clarify this.

 

A. Yes
B. Yes
C. Yes

But consider the Appointor powers.

 

Thanks Terry.

So given the outcome in C, it sounds like it may not matter if the shares in the corporate trustee are held by an individual or by a discretionary trust and perhaps easier for the individual to just hold shares in the corporate trustee?

Therefore, rely on appointor powers to remove the trustee if such a situation arises?

 

It matters.

Thanks about the estate planning aspects too.

 

Would it be possible please to clarify what estate planning aspects. Is this to do with leaving the ownership of the shares in the corporate trustee in a will or something else? How does this assist with estate planning?

 

You would want to consider control of the trustee on
a) your death
b) your incapacity

Different owners of shares has different implications. If a trustee owns them that trustee's attorney couldn't be trustee and the shares couldn't be passed by the trustee's will.

Also although an appointor could always sack the trustee and put a new one in, often this doesn't happen because the new appointor either doesn't know they are the appointor or they don't get around to exercising their powers.

One real life example I came across is that the dad was appointor of a trust and then died. The adult son was the next appointor but he didn't know this for over 10 years.

Another hyperthetical - you might be the shareholder of a trustee company and suddenly die, your spouse may be the inheritor of the shares of the trustee company which you owned, but it takes 3 months for probate to be granted. Meanwhile the public trustee, as executor of your estate becomes your legal personal rep and the wording of the trust deed makes the LPR the next executor. The public trustee would immediately remove the existing trustee and replace it with one they control. This happened in Public Trustee v Smith NSWSC.

 

Some trusts also have guardian provisions which limit some changes. ie the trustee, appointor or other parties may need consent of the guardian. Only as effective as the trust terms and the person being alive and understanding their role to safeguard the trust.

 

Thanks Terry.

So holding the corporate trustee through a discretionary trust may help with succession issues if you die or are incapacitated as it is the higher level trust / trustee as owner of the shares in the lower level corporate trustee that can replace the director of the trustee of the lower level trust, rather than the creditor of the individual taking control of the lower level trust.

You mentioned that a trustee’s attorney couldn’t be trustee. Is this the trustee’s attorney of the higher level trust? When would the attorney of the higher level trustee get involved? Is this saying the trustee’s attorney of the higher level trust couldn’t be trustee of the lower level trust?

What happens if the shareholder of the corporate trustee of the trust at the higher level is an individual? Would these same issues continue to arise in any case as you can’t keep putting trusts on top of trusts forever?

Is the benefit that if you have multiple trusts and one head trust, you consolidate the ownership through one head trust and then need to only worry about the directors or trustee at the top trust?

 

You will need specific legal advice on who should be the the shareholder of a company - only lawyers can advise on this.

But I wouldn't worry too much about it in most situations no evil shall result.

if you set up a new trust to own shares in corporate trustees then you need to consider who will own the shares in that corporate trustee!

If I am attorney for Paul and Paul is a trustee and loses capacity, I could not step in his shoes and act as trustee. The next trustee would be appointed as per the trust deed for that trust. But if Paul was an appointor of that trust I could potentially exercise his powers of appointment and appoint myself trustee.

You also have to tie all of this in with the constitution of any company.

There are many ways to set up or structure ownership of a trustee company
a) all shares owned by one person who is director
b) all shares owned by one person who is not director
c) equal shareholders x 2 with a provision for casting votes
d) 3 equal shareholders so 2 can vote for a new director if one of them dies
e) constitution of company allows for each shareholder to appoint a director
f) different classes of shares
g) substitute directors
h) alternate directors
i) etc


But you also have to tie all of ths into borrowing ability - you may not want two directors as additonal guarantees needed and effects on borrowing cap etc.

Good to use a solicitor who is also licenced to provide credit advice.

 

So think this means that there is benefit to lower level trusts if the shares of the corporate trustees for the lower level trusts are held by a higher level trust as these shares (and therefore control of those trusts) will not be affected by an individual’s death or incapacity.

However, someone needs to own the shares of the corporate trustee of the upper level trust and if this is the same person that would otherwise have held the shares in the corporate trustee for the lower level trusts (instead of the shares being held by an upper level trust) then you are in a similar situation to having that individual hold the shares of the corporate trustee for the lower level trusts in any case.

Please correct me if this thinking is wrong.

 

Yes, i think you are missing something.

 

Could you please advise what I am missing?

I keep getting back to the situation where it isn't clear to me what the distinct benefit is of a discretionary trust holding the shares in the corporate trustee. Sorry I am not quite following this!

 

Changing control of the trust.