Corporate vs. Individual – The Trustee Conundrum
Many clients ask us for a corporate trustee because they’ve “heard its better.” There are significant differences between corporate and individual trustees, so we don’t want you to rely on, simply, “what you’ve heard.” Here is some solid information, put together by our legal team, to help you out.
There are a lot of reasons for changing to a corporate trustee, including death or the break-down of a marriage. However, you could also want the change because, quite simply, you want to borrow money from the fund in order to purchase property. In fact, most of the major lenders require a fund to have a corporate trustee.
The table below outlines the advantages of having a corporate trustee. This might assist in conversations with your fellow trustees, who may not see the value of the additional cost that comes with setting up a company to act as trustee. Check out the ATO’s guidelines for SMSF company trustees.
In most situations, it will be better for an SMSF to have a corporate, rather than individual, trustee. The major disadvantage of a corporate trustee is the up-front cost of establishing the company, but it should be remembered that the ongoing costs of having a corporate trustee are actually very low. However, there are longer-term benefits of having a company, which generally outweigh the extra cost.
Now, let’s look more in depth at both the advantages and disadvantages of corporate and individual trustees:
- Sole Member SMSF
You can have an SMSF where one individual is both the sole member and the sole director. - Continuous Succession
A company has an indefinite life span. In other words, it cannot die. Therefore, a corporate trustee can make control of a SMSF more certain in the circumstances of the death, or incapacity of a member. - Lump Sums and Pensions
There is no dispute regarding an SMSF with a corporate trustee being able to pay benefits, either as pensions or as lump sums. - Administrative Efficiency
When members are admitted to, or cease, membership in the SMSF, all that is required is that the person becomes, or ceases to be, a director of the corporate trustee. As the corporate trustee does not change, title to all the assets of the SMSF remain in the name of the corporate trustee. - Greater Asset Protection
As companies have limited liability, a corporate trustee will provide greater protection where a party sues the trustee for damages, especially if that company only acts as trustee of the fund. - Estate Planning Flexibility
A corporate trustee ensures greater flexibility for estate planning, as the trustee does not change as a result of the death of a member. - Single Penalty
If a trustee does something wrong and the ATO hits them with an administrative penalty, the penalty will only apply once because there is only one trustee.
- Sole Member SMSF
A sole member SMSF must have two individual trustees. - Trusteeship Ceases Upon Death
If the SMSF has individual trustees, i.e., a mum and dad, then timely action must be taken on the death of a member to ensure the trustee/member rules are satisfied. Note: SMSF rules do not allow a sole individual trustee/member SMSF. - Lump Sums Only Payable on Commuting Pension
Some practitioners argue that a member of a fund without a corporate trustee can only be paid a lump sum if they have first started a pension. Then they must surrender or commute that pension entitlement, because an SMSF trustee must be a corporation or have the primary purpose of paying a pension, and extra paperwork may be needed. - Extra and Costly Paperwork
Introducing a new member to an SMSF with individual trustees requires that member become a trustee. As trust assets must be held in the names of the trustees, it is a requirement that the title to all assets must be transferred to the new trustees any time a member is admitted to, or exits, the fund. - Less Asset Protection
If an individual trustee suffers any liability, the trustee’s personal assets may also be exposed. The SMSF’s assets may also be exposed if the individual is sued personally. - Extra Administration and Costs
The death of a member requires there to be a change of trustee. This gives rise to considerable administrative work, and costs, at an inopportune time. - Multiple Penalties
If the trustees do something wrong and the ATO hits them with an administrative penalty, the same penalty will apply to each trustee. This means the total penalty will be increased based on the number of trustees.
We can help you with the change from individual to corporate trustee structure. If you would like to discuss your options, you can call us at 02 8114 2290, or email us at admin@sequoia.com.au.
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