beneficiaries of discretionary trust

Trustees can get sued. Usually the trustee is indemnified out of the trust assets, but if the trust assets are not enough then the personal assets of the trustee are at risk. So if you are trustee and the trust is sued, you could lose your house. So it is better to have a company that owns nothing as trustee.

Having 1 director reduces risk in 2 broad ways.
1. When you are getting loans it is the director that is asked to give personal guarantees. guarantees are risky. so you want to minimise them by having as few directors as possible. There is no point in having a second director.
2. If the trustee is sued and the company goes into liquidation/administration then the director will have a bad credit rating, and sometimes directors can be liable for company debts if they have broken the law, such as trading while insolvent.

Hi Ryan

I just spent 20 min typing a reply, and it disappeared!

in Summary, …..

The director of a company can be liable for company debts in a few instances, such as company tax which isn't paid, debts incurred while the company was insolvent, or some other illegal acts. Generally the buck stops at the company. It is a legal person separate from the people behind it.

A guarantee, in relation to loans, is basically when someone offers to repay the loan if the borrower cannot. What the lenders are concerned about is the company/trust being an empty shell if they repossess the property and there is a shortfall. They want someone substantial which they can chase for any shortfall.

Giving guarantees hurts serviceability because giving a guarantee is pretty much the same as getting the loan itself. Imagine if you borrowed for 10 properties v guaranteed the loan for 10 properties. You must still be able to service the 10 loans either way or your guarantee is worthless.

Lenders require the trustee to guarantee the loan as they are the legal owners of the trust assets and they are the person running the trust. If the trustee is a company then they will want the directors to give the guarantee. This is why it is best to have 1 director so as to limit the guarantees being given. If the property sinks the directors go down with the trust/company. That is why it is good to have 1 spouse who is not part of the trust or company at all.

Beneficiaries of the trust are sometimes asked to give guarantees. This is to be avoided at all costs and one way of avoiding it is not to specifically name anything, besides yourself. They can still be covered as beneficiaries indirectly, eg 'Spouse of X', 'children of X' (people under 18 are not asked to guarantee though).

Yes, that is exactly what happens.

You can't always have your cake and eat it too!

If that happens you can add a person or substitute a person. Usually this can be done without having them to be a director. A shareholder, or beneficiary of the trust could offer a guarantee, for example.

I am not sure what you mean in the first paragraph. What I am trying to say is to use 1 director to limit the compulsory guarantees and then if this person's borrowing capacity is used up then start to offer more people to the bank to guarantee the loan. These could be added as director, or could be beneficiaries of the trust or maybe even shareholders of the trustee company.

If you have  group thing going on, then probably a unit trust may be better with the units owned by each party in their own discretionary trust. If you do a group thing in a DT then there could be problems as the trustee has discretion on how the incomes are to be distributed. You could have additional directors so all parties are covered, but then it is the appointor who has the power to hire and fire the trustee, so you would need equal appointorships too.

If the person who is the trustee of a trust is sued for personal reasons such as ex partners are the assets in the trust at risk?

So if the trustee is a company and an individual is the director, the Family Law Act does not apply if that individual is sued by an ex partner therefore the assets in the trust cant be touched, is this correct?

Hi,

Looking to set up a Discretionary Trust but I'm a bit confused as to whether I need to set up a  "Family Company" as a beneficiary or can i use

"each corporation of which a Beneficiary is a director and owns at least one share (alone or with another person)"

to take advantage of income distribution at the 30% rate.

Also, what is the pros and cons of  having a Family Company named as a beneficiary?

Many thanks in advance to all your inputs.

Good morning to all experts, I am looking for information on how much can a family trust disdtribute imcomes to its beneficiary (family members)? Can someone tell me where can I look this up?
HK0617

Terry, how about children's age Vs how much can be distributed? hk0617