When you are setting up a trust, a key part of the process is deciding who you would like for your trustees. This depends on the purpose of your trust, and how you want it to function in the future. Depending on those circumstances, who you choose for your trustees may change. This article will explain two possible kinds of trustees you can choose from: corporate trustee or individual trustee. It will also cover what trustees duties are and how this plays out in the overall functioning of the trust itself.
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What is a Trust?
A trust is a way that you can manage your assets and gain income from them, without owning the assets yourself. This means that you have a variety of protections available to you. It works like this:
You, the settlor, gives or sells your assets (such as real estate, a business, or other capital) to another person (the trustee) to manage and maintain. The trustee manages and maintains the trust assets for the benefit of someone else (the beneficiary). The settlor can be a trustee or a beneficiary, or even both. The trust is the legal relationship between these people. It is its own entity for tax purposes, but in any other legal way it is not. Benefits to a trust can include:
- lower tax rates and
- asset protection.
Duties of A Trustee
As the legal owner of the trust and the person who manages it, the trustee gains a lot of power in controlling how the trust works. They own the trust assets and distribute those assets to the beneficiaries. But, the trustee has to operate its trust in line with its objectives and maintain the trust property in the best interests of beneficiaries. The trustee must act honestly and in good faith, and abide by any rules set by the trust deed (the document that outlines how the trust operates).
Other trustee duties may be adjusted by the trust deed when you create it. If the trust deed does not change these duties, then they apply. These include duties to:
- invest trust funds and trust assets prudently;
- act impartially towards the beneficiaries;
- act unanimously if there is more than one trustee;
- avoid a conflict of interest between the trustee and the beneficiaries;
- not profit from the trust (unless the trust deed allows it);
- not bind trustees to future discretion;
- keep proper books and records; and
- consider the full consequences of whether they exercise their power or not.
Corporate Trustee vs Individual Trustee
The key difference between a corporate trustee and an individual trustee lies in who they are. However, both have to fulfil the duties of being a trustee.
A corporate trustee is a company. Usually, this company has been set up with the express purpose of being a trustee. Such trustee companies already exist, but many trusts with corporate trustees will create an entirely new company to manage the trust as a trustee. The company owns the assets as a separate legal entity. The directors of the company will handle the day to day management of the trust.
An individual trustee is a person who carries out the trustee duties. The assets of the trust will be in this person’s name, but they still have to distribute the income from that trust to the beneficiaries. A trust can have multiple trustees, and they all have to fulfil the objective of the trust.
How Does This Play Out?
Trust Management
If a company manages your assets, this makes it easier to tell the difference between the trust’s assets and personal assets. An individual trustee will have everything in the same name, so there is not this extra level of separation. The directors of a company may also have more specialised commercial knowledge than an individual trustee who is managing a trust. Also, if an individual trustee dies, there is a lengthy process to choose a replacement. A corporate trustee avoids that.
However, there is an extra set of legal obligations that a company must follow.
Liability
The trustee is responsible for any losses suffered by the trust. For an individual, this makes them personally liable – this may not be what you want in your situation. For a corporate trustee, the company itself is liable, but not the individuals that direct the company and manage the trust. As long as the company director has not acted recklessly or against the law, then they do not have personal liability as the trustee. This offers an extra level of protection for your assets and your own business affairs.
Key Takeaways
A trust must have trustees to maintain and manage it. Trustees have a responsibility to that trust and the people that benefit from it and have a set of duties that make up that responsibility. You can choose a company as a corporate trustee, or a person as an individual trustee to fulfil that role.
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Frequently Asked Questions
It is a trustee’s job to manage and maintain a trust for the benefit of its beneficiaries. An individual trustee is a person who fulfils these duties, and a corporate trustee is a company that does so.
Companies operate in the law as separate legal entities. This means that they can do a lot of the same things a person can do – such as be trustees. Because of the special nature of a company, this can mean more protection for your assets and limited liability.
A trust is a legal relationship that happens when a settlor gives or sells property for a trustee to maintain for the benefit of beneficiaries. The trust holds this property and may generate income for the beneficiaries.
A trustee is the recorded owner of the assets held in a trust and is responsible for the management of the trust. A trustee has mandatory duties they must follow to manage that trust in an effective way.
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