Changing the trustee of your family trust can trigger a range of issues – so many, in fact, that partner Scott Hay-Bartlem has produced a series of six ‘It Depends’ videos to cover the tricks and traps for advisers and their clients.
In the third video in the series, Scott talks about debts and liabilities of your family trust.
Welcome to this edition of It depends, which is one in a series where we’re talking about, ‘Should I change the trustee of my family trust?’
Should I change the trustee of my family trust?
Well, this is the big ‘it depends’. Now, in this edition, I’m going to look at what it means if you’ve got debts or liabilities or creditors.
Why is having debts or liabilities in a trust relevant to a change of trustee?
So, there’s a couple of reasons why we should think about debts and liabilities and creditors as part of a change of trustee. The first thing is you might need to go to that creditor and get their consent. For example, if you’ve got real estate with a mortgage, you’ll need to talk to the bank before you change the trustee, and they may want more documents. The other issue is that the trustee of a family trust is personally liable for all the debts of the trust. So, if you become a trustee of a trust, personally, then you personally are going to become responsible for whatever those debts are. So, if there’s a mortgage over real estate and there’s a default, and you can’t get all the money back from the sale of the property, you can be required to put that money in. So, it can be important to be aware of those liability issues when becoming a trustee.
Is there a way of minimising liabilities of trustees?
So, when it comes to having trusts, best option normally is to have a company as trustee that only acts as trustee of that trust. That will then quarantine or silo the liability to that company. Now, the obvious exception is if the creditor, the bank, for example, wants personal guarantees, that will still affect your liability as a guarantor. But the best option is to have that company in place to minimise the liability contaminating other non trust assets.
So again, lots to think about when changing a trustee. This is one part of the sessions we’re doing on this. So, watch out for the others as well. Thanks for watching this edition of It depends.