Corporate Trustee - Shareholder Structure

[WilliamB]

Hi all,

I am going through the process currently of changing the Trustee of one of my Discretionary Trusts from personal (me) to Corporate. I have been advised this is the best way to structure to best mitigate land tax and also protect ourselves, and assist in "planning" as we age.

One of the considerations is the best way to structure the shareholder of the corporate trustee. My accountant has previously suggested we have another DFT as sole shareholder of the corporate trustee, but I'm not convinced this is necessary.

If we are both equal shareholders, then we can't elect the directors of the company without a joint decision, meaning if the marriage breaks down one can't just remove the other as director of the trustee, and essentially banish them as beneficiary. Similarly, as our wills both leave everything to each other if we cark it, so if death occurs, then the wills dictate we get the others shares.

I have read some similar queries on this forum, but I haven't really seen a
definitive answer on this particular query.

As I said, I am waiting for solicitor meeting, and I am not planning on setting this up myself, however I am just thoroughly interested in the structure here, and want to be armed with enough knowledge to have a good conversation with solicitor.

Thanks in advance,

 

[alexlee]

Who is the appointor?

What does the will state if you both die?

Having a DFT as the shareholder of the trustee unnecessarily complicates things, since you then have to consider the trust details of THAT DFT.

 

[WilliamB]

Sorry, I didn't supply details of DFT, as I was hoping/expecting personal shareholding would be the best solution. I am the principal/appointor on my other trusts though, wills both give everything to each other, if we both die, our folks get shares of our assets.

 

[coastymike]

How is a corporate trustee going to mitigate land tax ?

 

[Paul@PFI]

Fair questions -

Firstly the trust "appointor" generally has the power to appoint, replace and remove a trustee (usually in that order I must add). Read the deed look for clauses headed "Amend...or Change Trustee". Who is the appointor/s ?? Thats the person who ultimately is the controller of the trust. Thats the key issue. They can remove the trustee company later if a concern arises SUBJECT to trust law. Your solicitor should be able to address those issues.

Trust law doesnt allow a "trustee" in any form (co or human) to affect beneficiary entitlements unfairly. That said if its a Disc Trust they only have entitlements when property is vested, a unpaid entitlement etc. Just cause a asset is in the trust doesnt mean they can ask for it - Or a share of income.

Forget about "voting rights"...Thats an area where human trustees can be a good or a bad thing. For example two human trustees MUST unanimously vote or the decision is not necessarily a trustee decision. A valid company resoution is just that..But if it affects beneficiaries it can be challenged in court. Voting rights that allow one Director to outvote the other are also capable of action. You may end up with a bigger issue. Many lawyers agree and disagree with this view. Some lawyers suggest a SMSF can make decisions based on voting - Its a trust too. The ATO disagree. Your solicitor will advise.

A Disc Trust can be a shareholder all it wants. So what. Decisions of the company are made by Directors, not shareholders. Shareholders may need to approve some decisions such as changes to constitution but they cant alter a decision such as one made by trustee co directors affecting the trust. The accountant isnt a lawyer. The trustee co wont have income (it shouldnt receive trust income !!) so who cares who shareholders are. Also shareholders dont approve who directors appoint as new directors. Just unanimous resolution of directors...

The wills things is misunderstood. What happens when you die to the control of the trusts ?? The trusts continue they dont become estate assets ! Your solicitor should address estate planning for succession of trust control in two instances ...If one dies and if you both die at same time or inc lose proximity.

I'm a big fan of controller clauses in DT deeds. These clauses force a third party to ratify major changes to the trust..ie you die and your wife is appointor and some lousy adviser suggests doing a "Diamond" (Michael Hutchence estate was legally appropriated!!). The controller (your brother?) says NO when the adviser suggests he should be appointor. Controller in this case can only approve or refuse. Its a good safety net.

 

[alexlee]

The wills things is misunderstood. What happens when you die to the control of the trusts ?? The trusts continue they dont become estate assets ! Your solicitor should address estate planning for succession of trust control in two instances ...If one dies and if you both die at same time or inc lose proximity.

While trust assets do not form part of the estate, if the deceased held the trustee company shares personally, those shares do form part of the deceased's estate. Where there is confusion over who the appointor powers pass onto, there may not be any immediate way to change trustees. This makes the person who gets the trustee company shares via the deceased's estate able to control the trust.

 

[Paul@PFI]

How is a corporate trustee going to mitigate land tax ?

Yep Michael. Esp in QLD..each trust has a distinct threshold. Changes to a QLD trust must also carefully consider indirect duties. Changing appointor on a trust that holds land can trigger stamp duty. Definately something a solictitor should be reviewing.

 

[WilliamB]

Paul, a fantastic response mate. Thank you.

My Trust are standard ACIS ones ordered through accountant. I will look through deed now to determine this.

Hi Coastymike, my apologies I should have been more clear. I have a situation where I have a couple of "cloned" trusts now, where trustee and beneficiaries are the same, meaning the OSR looks at the group holdings as one cumulative figure.

From what I have been told, if I transfer trustee from Personal to Corporate Trustee, this essentially "separates" the land holdings allowing me to keep multiple "separate" land holdings under the minimum threshold. The corporate trustee itself won't mitigate land tax, but the overall structure should.

This thread http://somersoft.com/forums/showthread.php?t=94914 outlines my plan.

 

[coastymike]

Yep agreed each trust. Maybe the corporate trustee is being used just to make it easy to distinguish each trust.

Ok cool thats what I thought thanks for that.

 

[Paul@PFI]

While trust assets do not form part of the estate, if the deceased held the trustee company shares personally, those shares do form part of the deceased's estate. Where there is confusion over who the appointor powers pass onto, there may not be any immediate way to change trustees. This makes the person who gets the trustee company shares via the deceased's estate able to control the trust.

What is $1 share in a $2 company worth ? OK ...Share in trustee co anrent trust property either. The shareholder can do squat with the trust unless they are a director AND have the support of other directors. (ie 4 Directors can still outvote the one)

Private company shares in a trustee company have no value. No assets ? Doesnt give them a Directorship either...Unless nobody else exists.

This same issue occurs with every SMSF with a trustee co. Shareholding in a SMSF can in theory be held by the Red Cross and nobody cares and doesnt make the SMSF non-compliant or give Red Cross access to member entitlements.

The appointor issue I agree...I mentioned that was critical. Not the will.A chain of events would be uncertain. A clear appointor and the problem does not exist. Rule #1 of estate planning.

 

[WilliamB]

CoastyMike, I made the mistake of thinking it was separated by trusts themselves (which is why I'm now having to go through this ordeal), but if the trust has the same beneficiary and trustees, it is actually accumulated in QLD.

From OSR "
Cloned trusts
Land held under different trusts will be assessed together for the purposes of land tax if the:

trustee is the same for all the trusts
beneficiaries are the same for 2 or more of the trusts
beneficiaries have the same interests in those trusts when land tax is calculated."

The one thing I am uncertain of here, is the third point, what actually determines the "same interests" in those trusts.

Given the beneficiaries are wife and folks, they are same, but I'm not sure about "Same Interests", whether a percentage or how its actually measured.

I think going with Company trustee will just be easier going forward. A little more exy to setup, but very few ongoing fees really.

So in summary, can I assume the best shareholder structure would be equal between wife and I?

Thanks,

 

[WilliamB]

The appointor issue I agree...I mentioned that was critical. Not the will.A chain of events would be uncertain. A clear appointor and the problem does not exist. Rule #1 of estate planning.

I am the clear appointor for all of my DFTs, but it has become clear to me I need to consider what happens if I die.

Thanks again,

 

[WilliamB]

Just looking through trust deed. We have me as "Principal" and space for an "alternative principal", which is currently "Blank".

It might be a good idea to set up wifey as alternative principal, as it states clearly, (though not verbatim obviously ) "if principal carks it, alternative principal becomes principal."

Then it's just a matter of stating perhaps "Alternative Principal 2" or something.

Interesting stuff.

 

[Paul@PFI]

Depends on your deed. What are the powers and duties of the principal ?
What is the role called for the person who has power to change trustee ?
Principal can mean beneficiary quite often. The literal meanings or conferred understanding of words arent important the deed can say the "apple" can do X and as long as an apple is defined with powers of appointment than an apple = appointor.

Careful with "Alternative 2"...Does deed allow such a process. If not you may have a monster. Seen many deeds that contain contradictory rules or terminal appointmnet problems. ie A named deceased appointor with the deed clearly only allowing that person to name a successor in writing for example. Final decision may end up needing court approval. Expensive. Ditto losing the damed deeds. Lose the deed and nobody will know.

Yes your will does need to address statement of wishes and other means so that the person YOU want will become in control of the trusts on your death and become the shareholder. Also strategies can include voting rights (ie alternative Director for your vote) in the company if constitution docs allow. Also consider issues of dispute. Who wins. I would argue wifey will and yours both need to address these issues. That said...What happens if wifey and you fall out. Your lawyer should address this.

The corp trustee per trust (or two) is an effective QLD strategy to avoid grouping for LT in cirumstances you describe.

Die ??? What about incapacity

 

[WilliamB]

Thanks Paul,

I have already scheduled another appointment with solicitor to review our succession planning. I'm only 33 and wife 30, but we have expanded the size and complexity of our asset base considerably in the last 12 months and it's a great time for a review.

We decided to just set us both up (Wife and I) as equal shareholders of the new company, as well as directors. Solicitor agreed and saw no need to over-complicate things with trust shareholder. Now back to accountant to set up company for me!

Thanks all,

 

[Terry_w]

Hi all,

I am going through the process currently of changing the Trustee of one of my Discretionary Trusts from personal (me) to Corporate. I have been advised this is the best way to structure to best mitigate land tax and also protect ourselves, and assist in "planning" as we age.

One of the considerations is the best way to structure the shareholder of the corporate trustee. My accountant has previously suggested we have another DFT as sole shareholder of the corporate trustee, but I'm not convinced this is necessary.

If we are both equal shareholders, then we can't elect the directors of the company without a joint decision, meaning if the marriage breaks down one can't just remove the other as director of the trustee, and essentially banish them as beneficiary. Similarly, as our wills both leave everything to each other if we cark it, so if death occurs, then the wills dictate we get the others shares.

I have read some similar queries on this forum, but I haven't really seen a
definitive answer on this particular query.

As I said, I am waiting for solicitor meeting, and I am not planning on setting this up myself, however I am just thoroughly interested in the structure here, and want to be armed with enough knowledge to have a good conversation with solicitor.

Thanks in advance,

It is very important who holds the shares of the trustee. Whoever controls the trustee company controls the trust. The appointor could remove the trustee, but I have seen cases where the new trustee/contoller of trustee has taken advantage before the appointor had exercised his power to remove the trustee.

Generally if 50/50 shareholders one could gain control of the directorship and thereby the trust. If the shareholder was a trust you would have the same problem - whoever would control the trustee would control the shareholder who would control the director of the trsutee and thereby the trust.

Consider also:
- death
- incapacity

 

[Terry_w]

CoastyMike, I made the mistake of thinking it was separated by trusts themselves (which is why I'm now having to go through this ordeal), but if the trust has the same beneficiary and trustees, it is actually accumulated in QLD.

From OSR "
Cloned trusts
Land held under different trusts will be assessed together for the purposes of land tax if the:

trustee is the same for all the trusts
beneficiaries are the same for 2 or more of the trusts
beneficiaries have the same interests in those trusts when land tax is calculated."

The one thing I am uncertain of here, is the third point, what actually determines the "same interests" in those trusts.

Given the beneficiaries are wife and folks, they are same, but I'm not sure about "Same Interests", whether a percentage or how its actually measured.

I think going with Company trustee will just be easier going forward. A little more exy to setup, but very few ongoing fees really.

So in summary, can I assume the best shareholder structure would be equal between wife and I?

Thanks,

Look at the legislation:
http://www.austlii.edu.au/au/legis/qld/consol_act/lta201090/s20.html

As long as the trusts are not identical.

20 Separate assessment of trust land

(1) The liability for land tax of a taxpayer who is a trustee of a trust must be separately assessed on the taxable land that is subject to the trust, as if that land were the only land owned by the taxpayer as a trustee.

(2) However, subsection (1) does not apply if?

(a) the taxpayer is trustee of more than 1 trust; and

(b) the interests of the beneficiaries of 2 or more of the trusts are, when the taxpayer's liability for land tax arises, the same.

(3) If subsection (1) does not apply, the taxpayer's liability for land tax as trustee of the trusts mentioned in subsection (2)(b) must be assessed on the total taxable value of all taxable land that is subject to those trusts.

 

[Terry_w]

Here is an example of why it is very important who owns the shares in the trustee company:

William owns 100% of the shares in Company A Pty Ltd. A Pty Ltd is trustee for the Will I am trust.

William dies. His will appoints John the brother as executor. John is the LPR, Legal Personal Representative of William. Under the Corporations Act (s197 from memory) John can become the director of the company. The Director of the company controls the trust. John vests the trust to himself. William's wife is too busy crying to think about the trust and although she is the next Appointor, but the time the funeral is over the trust has nothing left. John is also a beneficiary and under the terms of the trust John could exercise the power of trustee to benefit himself. All legal.

E.g. 2.
Will I Am Trust deed did not have a back up appointor listed. It says something like the LPR of William's estate will become the next Appointor. This is even worse because John is both Trustee and Appointor!

 

[WilliamB]

Thanks Terry,

In my case I believe they could be "Identical"/Cloned Trusts, as from my understanding, as I am the trustee and the beneficiaries are the same.

What I am not certain about is the "(b) the interests of the beneficiaries of 2 or more of the trusts are, when the taxpayer's liability for land tax arises, the same."

Is this saying, if the interests of beneficiaries are ever so slightly different in the two trusts (like 49%-51% and 45%-55%) does this make them "not identical"??

If this is the case, then I can avoid all this garbage. Still not sure how I'd convince the OSR they "different" though.

This is why I am going down the corporate trustee path, in that it will prevent these issues occurring.

Cheers,

 

[WilliamB]

So if we are both directors of Company, I am sole shareholder/or joint shareholders (wife and I) of Company, I am Principal (assuming Principal in this case is interchangeable with Appointor) of Trust, and wife is "Alternative Principal", then we should be pretty safe? The wording of the trust states if for any reason the "Office is Vacated"/Principal leaves, for a number of reasons such as death, unsound mind, insolvency etc the Alternative Principal will become Principal and "have all rights and obligations of the principal under the deed"

This is bloody interesting hey. Never thought I'd be spending my friday night thinking about this stuff

Here is an example of why it is very important who owns the shares in the trustee company:

William owns 100% of the shares in Company A Pty Ltd. A Pty Ltd is trustee for the Will I am trust.

William dies. His will appoints John the brother as executor. John is the LPR, Legal Personal Representative of William. Under the Corporations Act (s197 from memory) John can become the director of the company. The Director of the company controls the trust. John vests the trust to himself. William's wife is too busy crying to think about the trust and although she is the next Appointor, but the time the funeral is over the trust has nothing left. John is also a beneficiary and under the terms of the trust John could exercise the power of trustee to benefit himself. All legal.

E.g. 2.
Will I Am Trust deed did not have a back up appointor listed. It says something like the LPR of William's estate will become the next Appointor. This is even worse because John is both Trustee and Appointor!