Trusts, Trustees, Directors, Shareholders, Ownership of Assets

[Kevmeister]

Whew! This trusts stuff takes some effort to understand. I feel like I'm about, oh, 10% there.

I apologise in advance because this is a long series of questions. I think I'm missing something.

A trust can have an individual or corporate trustee. If it's an individual, it seems to usually be one of the beneficiaries of the trust.

Does that create an asset protection problem if the individual trustee is sued? Would the trust sack the individual and put a corporate trustee in place, for example. This begs the question of whether an individual trustee is sufficient protection for "starting out"?

If an individual or trustee is holding assets in trust for the trust and that trustee is sacked, presumably the assets must be transferred to the new trustee? In the case of stamp duty, are there any concessions for a change of trustee for assets held in trust, or will you simply have to pay the full amount *again*? Wouldn't be a problem if the "trust" owned the assets, but from what I can tell it doesn't physically own anything - the trustee does.

If you have to repay stamp duty on transfer of trustee then, if you hold the assets in trust and your trustee is sued, your intent to sack them will already incur a substantial penalty upon you, won't it? For example, stamp duty on a $400K property is around $20K (Vic), so just changing trustees (not to mention the $2K or so to create the new trustee), would cost you $22K. Still better than $400K I guess, but a fair whack at any rate?

With a corporate trustee, one or more of the trust's beneficiaries is usually a director of the trustee. But are they also a shareholder of the trustee? Does being a shareholder of the trustee confer any additional rights to the trusts assets? In other words, if I hold the only share of Company X which is trustee to trust T's assets, should I take it that the Trustee X "owns" the Trust T's assets, and since I own the [only] share to the Trustee X, I therefore own the Trust T's assets?

If there is no ownership, either Trustee X doesn't own the Trust T's assets (therefore I can't own them either), or I'm not entitled to own the trust's assets, even though the Trustee might own them.

If I don't own them or the Trustee doesn't own them, why is there a need to sack one trustee and replace with another - this suggests the assets held in trust are considered "assets" of the trustee itself. Otherwise why would you need to sack the trustee and presumably transfer the assets to another?

If I do own them and I am the director of the trustee (which is usually the case) what stops the litigation being directed at both the director and the trustee. If I am the director, by this time I've also established another trustee, sacked the old one, but I am still a common link between the two. If I as the director own shares in the new trustee, doesn't that mean that despite changing trustees if they can prosecute the director they still get access to the trust's assets?

 

[Sim]

Originally posted by Kevmeister
A trust can have an individual or corporate trustee. If it's an individual, it seems to usually be one of the beneficiaries of the trust.

Does that create an asset protection problem if the individual trustee is sued? Would the trust sack the individual and put a corporate trustee in place, for example. This begs the question of whether an individual trustee is sufficient protection for "starting out"?

You are absolutely right. The advice I have been given is that if asset protection is your goal (as it should be) - then an individual trustee is definitely NOT the way to go. You should use a corporate trustee.

I don't know the correct answer to a lot of your other questions there - so I'll skip them.

Originally posted by Kevmeister
With a corporate trustee, one or more of the trust's beneficiaries is usually a director of the trustee. But are they also a shareholder of the trustee? Does being a shareholder of the trustee confer any additional rights to the trusts assets? In other words, if I hold the only share of Company X which is trustee to trust T's assets, should I take it that the Trustee X "owns" the Trust T's assets, and since I own the [only] share to the Trustee X, I therefore own the Trust T's assets?

If there is no ownership, either Trustee X doesn't own the Trust T's assets (therefore I can't own them either), or I'm not entitled to own the trust's assets, even though the Trustee might own them.

If I don't own them or the Trustee doesn't own them, why is there a need to sack one trustee and replace with another - this suggests the assets held in trust are considered "assets" of the trustee itself. Otherwise why would you need to sack the trustee and presumably transfer the assets to another?

If I do own them and I am the director of the trustee (which is usually the case) what stops the litigation being directed at both the director and the trustee. If I am the director, by this time I've also established another trustee, sacked the old one, but I am still a common link between the two. If I as the director own shares in the new trustee, doesn't that mean that despite changing trustees if they can prosecute the director they still get access to the trust's assets?

Okay... couple of things.

1. The trustee does not "own" the assets. The trustee "holds them in trust" for the beneficiaries of the trust.

2. Owning the trustee (via shares or whatever) does not give you rights to the assets of the trust - but it does give you control over them and over who benefits from them.

3. The whole sacking the trustee thing arises because when someone sues the owner of the asset, they are actually sueing the trustee as "effective owner" (ie. controller) of the asset. Now what that actually means from the assets point of view and what they can do with the assets as a result of successfully sueing - I'm not sure - I'll leave that for someone else to fill us in on...

 

[DaleGG]

Hi

Can I ask a favour? Whilst I am happy to answer questions as long as you keep asking them, it makes it awkward when you ask so many within the one post - not to mention poteially frustrating and confusing for everyone.

So, can we have little bites instead please?

Anyway, I'll see what I can do to answer your questions . . .


>Whew! This trusts stuff takes some effort to understand. I feel >like I'm about, oh, 10% there.

Believe it or not, you probably already know more than many accountants and quite a few solicitors. Well done and keep going.

>A trust can have an individual or corporate trustee. If it's an >individual, it seems to usually be one of the beneficiaries of the >trust.

This is right. So long as the trust deed allows for this, there can be no problem.

>Does that create an asset protection problem if the individual >trustee is sued? Would the trust sack the individual and put a >corporate trustee in place, for example. This begs the question >of whether an individual trustee is sufficient protection >for "starting out"?

If the individual trustee is sued, then his/her personal assets MAY be threatened or compromised. If this is an issue, the rule of thumb to work with is to not go there.

Having said this, it is not uncommon for people to try to save a few dollars and have an individual as trsutee when they start out. As long as they understand the potential risks in doing so, that is fine.

>If an individual or trustee is holding assets in trust for the trust >and that trustee is sacked, presumably the assets must be >transferred to the new trustee? In the case of stamp duty, are >there any concessions for a change of trustee for assets held in >trust, or will you simply have to pay the full amount *again*? >Wouldn't be a problem if the "trust" owned the assets, but from >what I can tell it doesn't physically own anything - the trustee >does.

I'm at home and so I don't have all my resources with me (so don't quote me on this!) but Section 64A of the Stamp Duties ACt in Victoria allows for trustees to be replaced without incurring stamp duty again. You merely lodge a notice with the Commissioner to the effect that the trustee has changed. I understand that each State has similar rules, however, you should check this with the Office of State Revenue in your own State before taking this as gospel.

>If you have to repay stamp duty on transfer of trustee then, if >you hold the assets in trust and your trustee is sued, your >intent to sack them will already incur a substantial penalty upon >you, won't it? For example, stamp duty on a $400K property is >around $20K (Vic), so just changing trustees (not to mention >the $2K or so to create the new trustee), would cost you $22K. >Still better than $400K I guess, but a fair whack at any rate?

Not applicable, see above.

>With a corporate trustee, one or more of the trust's >beneficiaries is usually a director of the trustee. But are they >also a shareholder of the trustee? Does being a shareholder of >the trustee confer any additional rights to the trusts assets? In >other words, if I hold the only share of Company X which is >trustee to trust T's assets, should I take it that the Trustee >X "owns" the Trust T's assets, and since I own the [only] share >to the Trustee X, I therefore own the Trust T's assets?

No additional rights, or problems either.

>If there is no ownership, either Trustee X doesn't own the Trust >T's assets (therefore I can't own them either), or I'm not >entitled to own the trust's assets, even though the Trustee >might own them.

The trustee holds the assets "on trust" for the benefit of the beneficiaries specified in the deed of trust when the trust was created.


>If I don't own them or the Trustee doesn't own them, why is >there a need to sack one trustee and replace with another - >this suggests the assets held in trust are considered "assets" >of the trustee itself. Otherwise why would you need to sack the >trustee and presumably transfer the assets to another?

See above.

>If I do own them and I am the director of the trustee (which is >usually the case) what stops the litigation being directed at >both the director and the trustee. If I am the director, by this >time I've also established another trustee, sacked the old one, >but I am still a common link between the two. If I as the director >own shares in the new trustee, doesn't that mean that despite >changing trustees if they can prosecute the director they still >get access to the trust's assets?

Unless you act fraudulently, or negligently, as a director you are beyond attack. This could change in the future though . . .

I hope that this helps

Dale

 

[Kevmeister]

Hi Dale,

I will try be more judicious in my questioning next time. I felt however, that by asking the questions in a [hopefully] somewhat logical manner, it would actually be clearer "where I was coming from". To ask these questions individually would probably have mean a lot of repetition. I will, however, take this on board for next time.

The trustee holds the assets "on trust" for the benefit of the beneficiaries specified in the deed of trust when the trust was created.

OK. I guess this is the crux of the matter. I cannot reconcile a concept where the trustee "controls" the assets of the trusts, but does not "own" the assets of the trust, versus the fact that the trustee can get sued and therefore lose the assets of the trust. This is the critical point that I do not understand.

The word Control seems to be used because it is not ownership. But if it is not ownership, how can the trustee lose something that isn't it's to lose?

 

[Jas]

This was something I was stuck on too when I first looked at the issue. My understanding of how it works is that the trustee promises to look after the assets for the benefit of the trust.

At the same time, the trust promises to pay for any expenses incurred by the trustee as part of their duties. The crux is that the trust only promises to do so while they are the trustee.

So when the trustee gets sued, the trust sacks the trustee. It therefore disolves the agreement to pay the trustee's expenses.

If the trust doesn't get rid of the trustee, the agreement to pay the trustee's expenses is still in place and so the trust will have to cover the litigation expenses as well (ie, it'll have to sell the assetts to pay the millions in compenstation to the suer).

Cleared up?

Jas

 

[Kevmeister]

Unless you act fraudulently, or negligently, as a director you are beyond attack. This could change in the future though . . .

Ignoring the future...

Certainly people are placing their assets into trusts for asset protection. Negligence is a very subjective thing. A thread a while back illustrated how an apartment built X years ago which used to comply with the building code had a handrail of say 850 mm high, and the new building regs now required it to be 900 mm high. Tenant falls down stairs and sues.

Can the director of the trustee be considered negligent in that regard? It's a pretty fuzzy line.

I'm just wondering how big the gap is between where public liability insurance ends and director negligence begins? In other words, if *not* being covered by public liability is likely to mean the director must then have been negligent, trusts don't help nearly as much in that regard.

And since the most likely litigation against a property investor will be from the tenants themselves, this is a key consideration?

 

[wbthom]

Kevmeister,

I note your worry about the possibility of a director of a trustee company being sued personally for negligence, versus the whole trustee company being sued for negligence.

Imagine the company you are a director of is being sued for say "negligence". Unless you as a director have personally done something stupid such as directly contributing to that negligence, you are unlikely to be held personally liable. That is; they can't attack your personal assets for costs, only the assets the company actually owns. If you have done something to be personally liable you are always at risk.

All of the above means trusts are even more important than you think - It actually doesn't matter who is sued!! If all your assets are in the trust and somebody tries to sue you or the trust, this is when the appointor of the trust sacks the old trustee company, and replaces with a new trustee. As you or the old trustee company do not now "own anything", even if a case is proven against you - you have no assets to actually seize for payment. As lawsuits are generally about gaining financial compensation; they usually don't happen if you can demonstrate that you have no money if they win.

Hope this helped and didn't add to your confusion.

Bill

 

[Kevmeister]

Good point, Bill.

It would make that line-of-action (putting everything we own in a trust) a no-brainer if the government granted a CGT exemption on a property in a trust if that property was used as a PPOR for one of the beneficiaries, wouldn't it?

(Or, a pity that PPOR's often stay in our name because a. We bought them in our name to begin with, or b. We want to retain the CGT-exempt nature of our PPOR).