August 2004

If you operate a Trust, or are considering using one, you may wish to consider the extent of your liability.

A Trust, in law, is not a separate entity to the Trustee.  A Trust can be described as the relationship that exists between the Trustee, who holds the legal ownership of the Trust property, and the beneficiaries, who hold the beneficial ownership of the Trust property.  The Trustee and the Trust are therefore one and the same entity and, where the Trustee is an individual, the Trustee is personally liable for all Trust debts.

For example, Jack owns property in his personal capacity worth $500,000 and is also personally the Trustee of his Family Trust that conducts the family business.  The Family Trust has assets to the value of $300,000.  A creditor of the business successfully sues the business for the sum of $400,000.  Jack is personally liable as Trustee to satisfy the creditors claim and is obliged to pay the $400,000.  By virtue of his right of indemnity against the Trust assets, Jack recovers the $300,000 from the Trust assets.  Jack would personally have to carry the loss of $100,000 being the difference between the Trust assets and the claim.

The most common option to overcome this is to have a $2 shelf company act as Trustee with the sole director of that Trustee company being an individual with minimal assets.

Generally, a Trustee may be removed and replaced by new Trustee without any stamp duty or tax implications.

The point of the matter is that the Trustee should own minimal assets in its own right.

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