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

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

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  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states 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.
     
  2. Clemens

    Clemens Member

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    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...
     
  3. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Could Tom not own the shares as trustee?
     
  4. Clemens

    Clemens Member

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    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?
     
  5. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    Not a change of trust but a change of trustee.

    You have to plan for the succession issues either way.
     
  6. Clemens

    Clemens Member

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    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)?
     
  7. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

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    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.