Discretionary Trusts – roles, trustees, responsibilities
In a discretionary trust structure, several key roles play distinct and important parts. Understanding the functions and interrelationships of the Appointor, Guardian, along with the Trustee, Directors and Shareholders (or the alternative of an individual trustee) is crucial. Let’s break down each role:
Appointor
- Primary Function: The Appointor is the most powerful figure in a discretionary trust. Their key role is to appoint or remove trustees.
- Control: Through the power to appoint or remove trustees, the Appointor indirectly controls how the trust’s assets are distributed, as they can influence the trustee’s decisions.
- Succession: The trust deed usually outlines how a new Appointor is appointed, often upon the death or incapacity of the current Appointor. There may also be provisions in the will of the appointor.
Guardian
- Advisory Role: The Guardian’s role is typically to protect the interests of specific beneficiaries. They may have powers to approve or veto major decisions by trustees, especially those impacting the distribution of trust assets.
- Safeguarding Interests: They ensure the trustees consider all beneficiaries’ interests, or those of a particular class of beneficiaries, in their decisions.
- Succession: Like the Appointor, the Guardian’s replacement upon certain events is usually outlined in the trust deed.
Corporate Trustee
- Administration: A corporate trustee, as opposed to an individual trustee, is a company that holds and manages the trust’s assets.
- Liability: As a separate legal entity, a corporate trustee provides limited liability protection. The company, not the individual directors or shareholders, is generally responsible for the trust’s debts.
- Continuity: A corporate trustee ensures continuity of management of the trust, as it does not have a natural lifespan like an individual.
Directors of the Corporate Trustee
- Management Role: Directors manage the corporate trustee. They make decisions regarding the trust’s management and administration.
- Fiduciary Duty: Directors have a fiduciary duty to act in the best interests of the trust and its beneficiaries, akin to the responsibilities of individual trustees.
- Compliance: Directors must ensure that the corporate trustee complies with trust law, corporate law, and the specific provisions of the trust deed.
Shareholders of the Corporate Trustee
- Ownership: Shareholders are the owners of the corporate trustee. However, their role is generally passive in terms of trust management.
- Appointment and Removal of Directors: Shareholders typically have the power to appoint or remove directors of the corporate trustee.
- Limited Involvement in Trust Operations: Their involvement in the daily operations of the trust is limited. The responsibility for managing the trust lies with the directors.
Individual Trustee (alternative option)
This role can be filled by a single person rather than a corporate entity. The individual trustee holds legal title to the trust’s assets and is responsible for managing them in accordance with the trust deed.
- Responsibility and Liability: Unlike a corporate trustee, an individual trustee does not benefit from limited liability protection. This means they are personally liable for the trust’s debts and obligations.
- Decision-Making: The individual trustee makes decisions regarding the trust’s assets, distributions to beneficiaries, and general management of the trust. This requires a high level of trust and confidence in the individual’s judgment and integrity.
- Succession and Continuity: Succession planning is crucial, as an individual trustee does not provide the same continuity as a corporate entity. Provisions should be made for the appointment of a new trustee in the event of the incumbent’s death, incapacity, or resignation.
- Fiduciary Duty: Similar to the directors of a corporate trustee, an individual trustee has a fiduciary duty to act in the best interests of the beneficiaries.
Individual vs. Corporate Trustee: An Overview
| Criteria | Individual Trustee | Corporate Trustee |
|---|---|---|
| Setup & Running Costs | Generally lower | Higher due to company registration and ongoing fees |
| Personal Liability | Personal liability for trust debts | Limited liability, protecting personal assets |
| Succession Planning | Complex, with a need for asset transfer | Simpler, no asset transfer needed upon director change |
| Asset Management | Difficult to distinguish personal/trust assets | Clear distinction between personal and trust assets |
| Operational Continuity | Affected by the trustee’s life events | Uninterrupted by directors’ personal circumstances |
| Risk in Bankruptcy | Personal bankruptcy can impact trust assets | Trust assets are typically protected in director bankruptcy |
Making the Right Choice
The decision between an individual and a corporate trustee hinges on the trust’s needs, scale of operations, and the personal responsibility and risk you’re willing to bear. While an individual trustee is more cost-effective and offers a personal touch, a corporate trustee provides greater protection against liabilities and ensures continuity.
Interplay and Importance
- Appointor and Guardian: These roles are critical in ensuring the trust adheres to the settlor’s wishes and protects specific beneficiaries’ interests.
- Corporate Trustee (and its Directors): This entity carries out the trust’s operations, holding legal title to trust assets and making distributions to beneficiaries according to the trust deed. Directors’ decisions are paramount in the trust’s day-to-day management.
- Shareholders of the Corporate Trustee: They have an indirect influence on the trust’s management through their role in appointing the directors of the corporate trustee.
Each role in this structure is designed to balance control, management, and protection of beneficiaries’ interests. The corporate trustee, through its directors, handles the operational aspects, while the Appointor and Guardian provide oversight and ensure alignment with the trust’s objectives.
The devil is in the detail. This summary is intended to provide you with an overview, however it can’t replace experience and technical knowledge or the myriad exceptions and personal circumstances. Seeking appropriate Legal and Accounting advice is essential to navigate this complex structure, especially when setting up the trust and during major changes or decisions.
Please contact us if you want to know more.
