Operating Your Business Through a Trust: Trading Trusts and Corporate Trustees
A trading trust commonly refers to the situation where a limited liability company performs the role of the trustee rather than a natural person. Rather than acting as the trustee, the individual can create a company and take control of the company as it’s director. As a result, the insertion of a corporate trustee offers limited liability and therefore overcomes one of the major risks a natural person would face if they were to act as the trustee - personal unlimited liability.
Advantages of Using a Corporate Trustee
Electing to run your business through a corporate trustee can also provide taxation advantages. For example, due to the beneficiary income rules, if the beneficiaries of the trust have individual tax rates of 10.5% or 17.5%, the income distributed will be subject to a lower tax rate. Furthermore, if they were in the higher marginal tax brackets of 30% and 33% respectively, the lower corporate tax rate would also provide a tax advantage.
The insertion of a corporate trustee can also provide continuity advantages whereby changes can be made to the corporation acting as trustee without incurring the costs of changing trustees.
Furthermore, the use of a corporate trustee also helps remove some of the reluctance an individual would face whereby trustees may be required to sign up (guarantee) loans owed by the settlors or the trust. This is of particular concern to non-professional trustees such as family members of the settlors.
Issues to be Aware of When Using a Corporate Trustee
While there are some advantages of using a corporate trustee, it is important to be aware that there also some issues you should be aware of. One of these issues is that as the director of the corporate trustee, you will be subject to the various rules on directors duties that are found in the Companies Act 1993. This can mean that if you breach these directors duties, you will find yourself personally liable for the debts that were incurred as a result of this breach.
Other factors to keep in mind would also be that financial statements need to be prepared for the corporate trustee each year.