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

Yes but if the lower level trust is controlled by the upper level trust through ownership of the corporate trustee and the upper level trust is controlled by an individual, then isn’t control in the end at the upper level with the individual?

 

I can't follow your lower and upper trust phrasing but control will pass differently where a person owns shares and a trustee owns shares.

 

Sorry, I’ll try and explain what I’m saying through the following scenarios.

Scenario 1

• Trust A has a corporate trustee, Corporate Trustee A
• Shares in Corporate Trustee A are owned by an individual, Individual X

Scenario 2

• Trust A has a corporate trustee, Corporate Trustee A
• Shares in Corporate Trustee A are owned by Trust B (or Corporate Trustee B as trustee for Trust B)
• Trust B has a corporate trustee, Corporate Trustee B
• Shares in Corporate Trustee B are owned by an individual, Individual X

In Scenario 1, the individual controls Trust A and therefore there is a risk that a creditor could gain control of Trust A if Individual X becomes bankrupt.

In Scenario 2, shares of Corporate Trustee A are owned by Trust B and therefore a creditor cannot gain control of Trust A directly as Trust B controls Trust A. However, because Corporate Trustee B’s shares are owned by Individual X then a creditor could gain control of Trust B. The creditors control of Trust B allows the creditor to gain control of Trust A, bringing you back to a similar situation for both scenarios.

 

If you are only considering the bankruptcy side then yes.
But also have to think of
a) incapacity
b) death
from which there will be different consequences.

And bankruptcy doesn't happen over night, an individual has 6 to 12 months generally to prepare. During this period the appointor could replace the trustee.

 

Thanks Terry.

So to take those two scenarios further, if Individual X dies or is incapacitated, is it a similar result?

Scenario 1A

• Individual X dies and the shares in Corporate Trustee A are passed on under will to Individual Y
• Individual Y then controls Trust A

Scenario 1B

• Individual X suffers incapacity and say Individual Y has power of attorney from Individual X (are there other outcomes or scenarios following incapacity?)
• The appointor (if not Individual X) for Trust A could appoint a different corporate or individual trustee?
• If the appointor is Individual X, then Individual Y would then control Trust A?

Scenario 2A

• Individual X dies and the shares in Corporate Trustee A are passed on under will to Individual Y
• Individual Y then controls Trust A
• As Trust A controls Trust B, Individual Y would then also control Trust B

Scenario 2B

• Individual X suffers incapacity and say Individual Y has power of attorney from Individual X (are there other outcomes or scenarios following incapacity?)
• The appointor (if not Individual X) for Trust A could appoint a different corporate or individual trustee?
• If the appointor is Individual X, then Individual Y would then control Trust A?
• As Trust A controls Trust B, Individual Y would then also control Trust B

 

Would all depend on
- the structure of the trustee, terms of constitution, directors, shareholders
- powers of attorney
- terms of the trust deed.

A one man company could be out of control until probate granted - 6 months or more.

 

Hi Terry, is holding shares of a trustee company with an individual trustee for a trust giving greater asset protection than corporate trustee for a trustee? As the indiviual trustee would be removed as a trustee in case of bankruptcy but for the corporate trustee the shares can be taken by trustee in bankrupty.
And if another corporate trustee for a trust holds shares of a trustee company, the shares of the corporate trustee have to be held by a person utlimately, so holding the shares of the trustee company with the person acts as a trustee for a trust seems more secure if that person goes bankrupt?

 

If an individual is going bankrupt they would resign as trustee well before it happened. If they resign as trustee the appointor would need to appoint a new trustee.
Same thing would apply if they held shares in the trustee company. These would fall into the hands of the trustee in bankruptcy. But the appointor would remove that trustee well before this happened.

If a person was suddenly bankrupted or forgot to plan for their bankruptcy and woke up one morning bankrupt an individual as trustee would be safer because the shares held by them in this capacity would be protected - largely - from falling in the hands of creditors.

 

Do the clawback provisions apply when removing the trustee (individual or corporate trustee) due to bankruptcy?

Thank you.

 

Change of trustee in itself is not a 'transfer' so no connected to the clawback laws directly

 

Thank you for your clarification Terry!

 

give me an example of what you were thinking to make sure I understood it right

 

So Appointor powers of an individual are not affected by a bankruptcy against the individual?

Even if creditors received the shares of the trustee company as a result of some bankruptcy proceeding, the trust would still be governed by the trust deed. So legally the credits cannot use the assets of the trust to satisfy the debts of the bankrupt individual (other than UPEs)?

 

If the creditors get the shares in the trustee company they will appoint a director of the company who would then, as trustee, make a resolution to distribute all income and capital to the bankrupt, and they would get it to satisfy the debt owed to them.

But if the trustee is validly removed before this happens they will have $2 worth of shares in a company with no assets and is not acting as trustee.

Being appointor has been deemed as not being 'property' that can fall into the hands of creditors - Burton is the caselaw on this.

Legal Tip 112: Appointors, Bankruptcy and Asset Protection Legal Tip 112: Appointors, Bankruptcy and Asset Protection

 

Hi Terry, please see my examples as below:

Trustee company (Tom A Pty Ltd) owned by an individual trustee (Tom ATF Tom Holding Trust)
Tom ATF Tom Holding Trust owns 100% of Tom A Pty Ltd which is a trustee for Tom Family Trust. Tom is also the appintor of Tom Family Trust. Tom is being bankrupt and Tom as the appointor removed himself as the trustee for Tom Family Trust.

Trustee company (Tom A Pty Ltd) owned by a corporate trustee (Tom Holdings Pty Ltd ATF Tom Holding Trust)
Tom Holdings Pty Ltd ATF Tom Holding Trust owns 100% of Tom A Pty Ltd which is a trustee for Tom Family Trust, Tom is also the appointor of Tom Family Trust. Tom is being bankrupt and Tom as the appointor removed Tom Holdings Pty Ltd as the trustee for Tom Family Trust.

These are the examples I got in mind regarding if clawback provisions apply for removing a trustee by an appointor. And in case a trustee was not removed, is individual trustee more secure than corporate trustee since corporate trustee can be controlled by trustee in bankrupty.

Thank you!

 

If Tom is removed as trustee this would require transfer of title. But this wouldn't be subject to clawback as he was trustee.

 

Isnt the point here that a corporate trustee can easily be replaced by the appointor, and appointor powers are not affected by the bankruptcy of the individual who is the appointor?

also under more normal circumstances, a corporate trustee is more flexible in terms of transferring control, joint control, incapacity, death, etc?

 

Yep

 

And I got another question regarding holding company. I asked

If Tom ATF Tom Holding Trust owns nothing but Tom A Pty Ltd and all properties are owned by Tom A Pty Ltd ATF Tom Family Trust. Does it require transfer of title if removing Tom as trustee for Tom Holding Trust?

 

yes it will require title of the shares to be transferred. but if title isn't transferred Tom would hold the shares as bare trustee for the new trustee until the transfer happens