Corporate Trustee v Individual Trustees The type of trustee (corporate or individual) you choose is the single most critical decision, from a structural point of view, that you will make for your SMSF. It impacts your expenses, your legal obligations and how much stress you cause for your family in the future. This guide takes a close look at the two ways to help make up your mind.

What Are the Two Options?

Before you open an SMSF, you need to decide who will operate it. Under the law, a fund must be "enabled by a natural person or entity to have legal ownership of the fund." This participant is known as a "trustee." You have two choices.

Option 1: Personal Trustees In this setup you and the others in fund runs, manage the fund. As a husband and wife, you are both trustees. You both sign the documents. You both own the assets in your name, true. In most jurisdictions two individual trustees are mandated by law. You can't do it as a human alone.

Option 2: Corporate Trustee You form a corporation under this arrangement. This corporation serves as the trustee. You and the rest are directors of that company. The company owns the assets. You are in charge of the company, the company runs the super fund. This puts an extra wall between you and the money that flows into — and (hopefully) out of — a fund.

The Cost Difference: Now vs. Later

Money's the first thing most people consider. These two structures are not at all costly. They work in opposite ways. One is a discount today and high price tomorrow. The other is costly now but can actually be cheaper later.

Setup Costs

Personal trustees are inexpensive to establish. You don't have to start a company. You just need a trust deed. This is a valuable thing that many non-government providers offer really cheaply on-line. It is occasionally bundled in a package. There is no government registration fee for an individual trustee.

Corporate trustees cost more to establish. You must create a company. You will need to register this company with ASIC. This costs money. It costs more than $500 to register a standard company. It's a cost of doing business, which is more outlay up front. This fee can look steep if you have a small balance.

Yearly Costs

Costs to individual trustees are minimal. There is no annual fee to the government simply for being a trustee.

Corporate trustees charge an annual fee. You are required to pay an annual review fee to ASIC. But there is a special rule for SMSFs. The company is a "special purpose company" if all it does is serve as the trustee for the fund. This reduces the fee. The annual fee payable by a special purpose company is a lot less than an ordinary company. It is usually under $70.

On paper, individual trustees seem cheaper. You save about $600 in the beginning and then $60 each year. But this little bit of savings can end up costing a lot. We'll get to that in later sections.

How Asset Ownership Works

The key difference between the two is how you hold assets. It probably sounds like a minor point of administration. It is, in fact, the source of the bulk of all SMSF headaches.

Naming the Assets

Every asset your fund is purchasing must have a legal owner. The name on the title deed, bank account or share registry needs be accurately listed.

For Single Trustees: The property is registered in the name of an individual.

Example Name: Mr John Smith and Mrs Jane Smith as Trustees for the Smith Family Super Fund.

Each document must have the names of all owners. If you purchase a home, both names are attached to the land title. If you open a bank account, the names of both end up on the account.

Corporate Trustees: The corporation is holding the assets.

Example Name: Smith Super Pty Ltd as trustee for the Smith Family Super Fund.

Note that the members themselves (John and Jane) are not named on the title deed. Its the company who owns it.

The Danger of Mistakes

You must get the name right. It's the law that your fund's assets need to be distinct from your personal assets. If you mistakenly stick an asset in just your own name, you break the law. It is easier to do with individual trustees.

For instance, John may create a trading account. He could fail to include "as trustee for..." or forget to mention Jane's name. Instead, the account reads simply "John Smith." The ATO might assume that this cash is John's own. This is a serious breach.

The difference with a corporate trustee is obvious. The company name is unique. It's difficult to mix up "Smith Super Pty Ltd" and "John Smith." This is to protect you from unintentional errors.

Penalties: Who Pays the Fine?

When it comes to breaking the rules, the Australian Taxation Office (ATO) may also penalise you. These are called administrative penalties.

Individual Trustees: In the event that the ATO levy penalties, they penalize each trustee. If there are two trustees (you and your spouse), you each take a fine. So if the penalty is $2,000, for example, John pays $2,000 and Jane pays $2,000. What the family must pay in total is $4,000. You may not pay these fines using money from the fund. You also have to pay with personal savings.

Corporate Trustee: ATO penalising company. The company's one firm. It receives only one fine. Company that's $2,000 fine is $2,000 fine. The directors (John and Jane) are equally liable, yet there is only one penalty. This mitigates the penalty risk by 50% (or more) for the family.

The Nightmare of Changing Trustees

This is the most important part. Here's where the "cheap" single trustee structure becomes costly.

An SMSF is to be developed for the long-haul. It lasts for decades. During that time, life changes. People die. Couples divorce. Children join the fund. Children leave the fund. Members lose mental capacity.

The trustee structure changes every time a member leaves or joins.

The Individual Trustee Problem

Just remember, those assets are in the individual trustees' names.

Current headlines: John Smith and Jane Smith

Imagine Jane dies. John is the only one left. Under the law a single member fund can not have one person as trustee. John will need to pick another person to act as trustee, or switch to a company. Consider this, John nominates his son, Mike.

New Title: John Smith with Mike Smith

Now, John has a massive job. Every single important asset has a new legal owner. The previous owner was "John and Jane." "John and Mike" are the proud new owners.

Now, John will need to change the ownership on every holding in the fund:

• Real Estate: He'll need to hire a lawyer to alter the title on the land. There are fees for this charged to state land registries. It can take thousands of dollars in legal and government fees.
• Bank Accounts: His is the task of visiting the bank. He will have to close old accounts, or sign new forms. He must prove who Mike is.
• Share Registries: He has to get in touch with each company the fund holds shares in. He needs to file "Off Market Transfer" forms. Some registries charge fees.
• Managed Funds: He needs to get in touch with every fund manager.

This takes months. It costs money. It occurs at the worst time for him — when John is mourning his wife.

The Corporate Trustee Solution

Now consider John and Jane with a corporate trustee.

Previous Name: Smith Super Pty Ltd

Jane dies. Jane was a director. John is the surviving director. That company, Smith Super Pty Ltd, does not die. It lives on. The assets are held within Smith Super Pty Ltd. The owner has not changed.

John doesn't have to transfer the title of the land. John doesn't have to close bank accounts. John does not have to ring the share registries.

The only paperwork is internal. John resigns Jane as director of the company. He notifies ASIC. This takes one form. It costs nothing. There have been no changes to the assets. There is no stressful administrative work.

Succession and Estate Planning

With a company, succession is more seamless. A company continues forever. This is called "perpetual succession."

Single Member Funds

Single member can occur if you are single or your partner passes away.

Individual: You cannot be the sole trustee. You'll need to find a second person to co-sign checks with you. You might not trust anyone. You may not want to inform your children. This creates a tremendous problem for widows and widowers.

Corporate: There can be one director in the company. It is possible to run the fund completely on your own. You don't have to involve anyone else. This gives you total control.

Mental Incapacity

If you become mentally incompetent (such as from dementia), you cannot serve as trustee. Enter your Power Of Attorney, otherwise known as your Legal Personal Representative.

Individual: Your name should be taken off all titles to property. The Rep's name needs to go in. This sets off all the costs and title changes described above.

Corporate: You quit as a director. Your Representative becomes a Director. The asset names remain the same.

Reducing Stress for Long-Term Members

The majority of people establish an SMSF for the purpose of saving for retirement. They do not initiate it to produce paperwork.

We see many older members who are being stressed by their SMSF. They are 80 years old. One spouse passes away. The survivor is then blindsided with the need to reorganize the fund and comply with legal guidelines. They must look for another trustee. They're required to sign transfer forms. They must negotiate with lawyers.

This is unnecessary stress.

Eliminate the hassle of your family acting as a trustee and consider implementing a corporate trust structure. It is insurance against later paperwork. You pay a modest fee to ASIC each year ($63) so that when life's randomness and tragedy threaten you and your family, the questions of what lies behind the superannuation fund are at least one less thing to worry about.

Why Lenders Prefer Companies

Are you looking to take out a loan in your SMSF? This is known as a Limited Recourse Borrowing Arrangement (LRBA).

This usually requires a corporate trustee, which most banks and lenders demand. Providers will not lend to sole trustees. If you purchase individual trustees and suddenly decide to get a property with a loan, you will be required to restructure. You will also have to form a company and transfer all your assets into the business. This kicks off the "change of ownership" work we talked about. You'd have to update land titles and share registries. It is best to establish the corporation initially.

Summary of Pros and Cons

How to Choose the Right Structure

How do you decide? Follow these clear steps.

Step 1: Budget Check Can you swallow the ~$1000 difference to get started? (this includes the company formation and ASIC charge). This can be difficult if you have a very small balance. For a reasonable balance, amortize this cost over 20 years. It is very small.

Step 2: Evaluate Your Family Situation Is it just you? If so, then corporate trustee it is. It's what you have to do if you want total control and can't involve another party. Are you a couple? Think about the future. Do you want the survivor to have to spend months dealing with paperwork if one of you dies? If not, select a corporate trustee.

Step 3: Analyze Your Investment Plans Are you going to borrow money in order to buy real estate? If the answer is yes, then to select a corporate trustee. You're probably going to need it anyway. Will you be trading often? If the answer is yes, use a corporate trustee for record-keeping.

Step 4: Think about Your Long Term Plan Are you doing this for a year or are you picturing 30 years from now? If it is for the long term, I think the corporate trustee is better. And the small annual fee covers the flexibility and ease of succession.

Conclusion

Saving money upfront is a powerful draw. Individual trustees are popular because they are "free" to establish, many people will opt for those.

But an SMSF is not a short-term commitment. It is a lifetime commitment. In the life of a fund, there are going to be changes. Members will die. Relationships will end. Children will come and go.

Under the individual trustee model, each of these life events leads to costly, aggravating, time-consuming bureaucratic meddling. You will need to change every title, name or registration.

With a corporate trustee arrangement, the company stands. It survives the members. It holds the assets securely. It enables the survivors to concentrate on their family, not on transfer forms.

The corporate trustee currently costs more to establish. But it purchases you simplicity and security and peace of mind. For most people, it's an investment worth making.