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Individuals pose risks as trustees

A recent court case highlights the dangers of not using a corporate trustee.

Tuesday, February 17th 2004, 11:19PM

by Rob Hosking

People setting up a trust should consider a corporate trustee rather than appointing individuals.

The departure of a trustee through death or other reasons means the trust is likely to face – at best – the costs of changing over the title deed, says Bob Brown, of financial adviser firm Company Solutions.

"Often people appoint their lawyer or their accountant as a trustee and then they fall out, or change them for whatever reason," he says.

"If a trust owns several properties and you change the trustees, you have to change the title deeds and the costs can run into several thousand dollars."

The alternative to this is to set up a company, which then acts as the trustee, and directors are appointed to that company who would otherwise be appointed as trustees.

"So if there is any reason to change, it is simply a matter of changing the directors of the trustee company, which is comparatively straightforward."

While there is the cost of setting up the corporate trustee, and then the ongoing administration costs, these are small when set alongside the costs of changing trustees, he says.

Depending on the trust deed and the circumstances of the case, the costs can be considerable.

A recent court case, involving Calan Healthcare Properties, highlights the perils, he says.

A stake in the company was held by a trust, and one of the trustees wanted to retire.

The other directors of the company argued that the retirement triggered a pre-emptive rights issue and the stake would have to be sold to the other shareholders.

Last November the High Court agreed, and said the trust would have to sell the shares.

"If the investment had been through a company the issue would never have arisen."

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

« Trustees need to be aware of the risksRisks in setting up own trust companies »

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