Pierce the veil and the Domino Theory

As alluded to in last week’s post, utilising a corporate trustee as the corporate beneficiary of a trust can be a problematic approach.

Aside from difficulties that often arise in relation to whether the company is in fact a beneficiary under the terms of the deed, a significant issue also exists from an asset protection perspective.

In particular, given a trustee is directly liable for all activities of the trust (subject to an indemnity against the assets of the trust), where the effort has been made to appoint a corporate trustee, it is always preferable to ensure the total assets of that corporate trustee in its own right are limited to a nominal amount (for example $2).

Where a corporate trustee has been used as a corporate beneficiary (even if the distributions remain outstanding as an unpaid present entitlement), the value immediately becomes significantly more than $2.

While steps can generally be taken to ‘unwind’ the adverse aspects of distributing to a corporate trustee, as with many adjacent areas of the law, prevention is always better than the cure.

Image courtesy of Shutterstock

Bespoke Corporate Trustee Constitutions

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses some of the key issues in relation to ‘bespoke’ corporate trustee constitutions’ and trust splitting in a ‘vidcast’ at the following link - https://vimeo.com/145236253

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

One of the things that we're spending a lot more time working with is what we loosely call a ‘de facto corporatisation’ or indeed a de facto trust splitting exercise.

In other words, tailoring what would otherwise be a constitution for a shelf company, so as to provide all of the same outcomes that you might otherwise see under a trust split, and embedding those arrangements at least into the company’s constitution, but may be also into the trust instrument itself.

As part of segregating particular assets sitting underneath the trust structure, you can put in place a bespoke or a tailored company constitution, and regulate the way in which directors are appointed to that company, regulate the way in which the shareholders can operate, regulate the way decisions are made in relation to particular assets sitting down inside the trust.

If you actually contractually go and put that into the terms of the constitution, what you can effectively have is, for example, if you're talking about this in an estate planning context, kid 1 controlling part of the trustee company, and giving kid 1 complete autonomy over decisions in relation to assets that are related to that part of the trustee company.

You can then have kid 2 likewise in relation to another control part of the structure and so on.

Alternatively, many people will only look to regulate control in relation to the trustee company.

So they’ll say look, we'll put in place voting requirements, we'll say that one kid has a super vote, or we'll actually appoint an independent board to that company and regulate how those decisions might be made, and this will be an overall strategy for the trust at the trustee company level.

Corporate Trustee Duty – A Practical Example

Earlier posts have looked at various aspects of corporate trustee duty – see http://blog.viewlegal.com.au/2010/06/corporate-trustee-duty-part-2.html

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to corporate trustee duty and trust splitting in Western Australia and Queensland in a ‘vidcast’ at the following link - https://vimeo.com/143839535

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

If, for example, you've got your mum and dad as the shareholders in a trustee company, and as part of the trust splitting arrangement, you're wanting to actually transfer the shares in that company, because you're wanting to transfer the ultimate control, what the stamp duty offices may do is notionally deem the value of that company to be exactly equal to the value of the assets inside the trust.

Effectively this creates a situation where, even though that’s invariably only a $2 company, for stamp duty purposes, the shares in the trustee company will be notionally deemed to be the same value as the family trust, and the shareholders will pay stamp duty on that value.

There are exemptions to that outcome, but the starting point is that it is dutiable.

If you're not aware of this risk and you've had clients enter into one of those transactions, you need to become very aware of it, because there's now data matching between the Australian Securities Commission and the revenue authorities in both WA and Queensland. Therefore if you do your share transfer and process it through ASIC and haven't lodged that with the Stamps Office, you'll likely get a letter from the Stamps Office saying ‘please explain’.

Incapacity and SMSF control

Where a member of an SMSF dies, leaving (for example) their spouse as the sole member and a reversionary pensioner, issues can arise where that member themselves loses capacity.

In this scenario, much depends on the exact circumstances including the timing of the various death/incapacity events and whether the SMSF has an individual or corporate trustee.  Broadly, where corporate trustee is in place:

1. Upon the death of the first member (leaving a reversionary pension for the other member), the remaining member would control the SMSF as sole director of the corporate trustee.  The executor for the deceased member would not have any ongoing involvement in the SMSF or corporate trustee.


2. Upon the subsequent incapacity of the second member, their financial power of attorney would, subject to the exact provisions of both the SMSF deed and the constitution for the corporate trustee, have the ability to remove the incapacitated director and appoint themselves in their place. 


3. While there must be an enduring power of attorney in place before the event of incapacity, there is no specific wording required in the document itself, rather the SMSF deed and the constitution will be critical.


4. The attorney for the incapacitated member would then perform the administrative functions in their capacity as director of the corporate trustee.

Image credit: Sippanont Samchai cc