Trusts offer powerful advantages for Australian businesses — protecting assets, improving tax outcomes, and supporting better finance access. However, managing a trust requires strict attention to legal duties. Trustees must act carefully to avoid exposing personal or business assets to risk.
In this Part 2 article, we explore how trusts protect assets, trustee obligations, and key risks that business owners need to understand when organising trust finance.
(Missed Part 1? Read it here)
Please note: This article provides general information only and does not constitute legal, tax, or financial advice. You should contact us for advice suited to your individual circumstances before acting on any information contained herein.
Trust Finance and How Trusts Protect Business Assets
Trust finance plays a critical role in asset protection. By separating legal ownership (trustee) and beneficial ownership (beneficiaries), a trust shields assets from the direct reach of creditors — provided the structure is properly maintained.
Example:
An engineering business may place key equipment and property into a discretionary trust. If the trading company faces legal claims, these trust assets are generally beyond creditor reach, protecting the owner’s long-term wealth.
Important: The protection is only effective if the trust is structured and operated properly. Mixing personal and trust assets can undermine the shield.
Trustee Duties Under Australian Law
Trustees carry heavy legal responsibilities under common law, legislation, and the trust deed itself.
Key trustee duties include:
- Act honestly and in good faith
- Act in the best interests of all beneficiaries
- Follow the terms of the trust deed strictly
- Avoid conflicts of interest
- Keep trust property separate from personal property
A failure to meet these duties can expose the trustee to personal liability — which also impacts trust finance eligibility.
Trustee Signing Requirements and Risk Implications
When signing contracts, applying for loans, or acquiring assets, trustees must clearly disclose that they are acting in their trustee capacity. This is essential to limit personal liability and maintain clean trust finance records.
Examples of Correct Signing:
- Preferred (trustee only):
"ABC Pty Ltd as trustee for the XYZ Trust." - Stronger obligation (trustee and personal capacity):
"ABC Pty Ltd in its own capacity and as trustee for the XYZ Trust."
Incorrect Signing:
"ABC Pty Ltd."(No mention of trustee capacity — dangerous.)
Important Differences:
- Signing only as trustee typically limits liability to trust assets, assuming proper conduct.
- Signing in both capacities (own and trustee) extends liability to the trustee’s personal assets (or company assets if the trustee is a company).
Lenders often prefer or require trustees to sign in both capacities, especially for significant finance arrangements, to maximise their recovery options if default occurs.
Company Trustees and Directors: Additional Risks
If the trustee is a company, and the trustee status is not disclosed correctly:
- Primary liability falls to the company itself.
- However, the directors of the company could also become personally liable if they:
- Allow the company to trade while insolvent;
- Breach directors’ duties under the Corporations Act 2001 (Cth);
- Provide personal guarantees;
- Engage in misleading or deceptive conduct.
In trust finance applications, lenders closely scrutinise these risks.
They assess not only the trust’s structure but also the financial health of the trustee company and the conduct of its directors.
Key Takeaway:
Clear trustee disclosure is critical to protecting trust assets, trustee assets, and maintaining eligibility for future trust finance.
Here’s a visual table summarising the key risks across individual trustees, company trustees, and directors of corporate trustees:
| Role | If Trustee Status Disclosed Correctly | If Trustee Status NOT Disclosed Correctly | Additional Risks |
|---|---|---|---|
| Individual Trustee | Liability limited to trust assets (generally). | Personal assets at risk for trust debts and contracts. | Difficulty securing future finance. |
| Company Trustee | Liability limited to company assets (generally). | Company assets at risk for trust debts. Potential corporate collapse. | Company structure and solvency closely reviewed by lenders. |
| Director of Company Trustee | Protected if directors’ duties are complied with. | Personal liability for insolvent trading, breaches, or personal guarantees. | Personal financial exposure; reputational damage. |
What Happens if a Trustee Acts Outside the Trust Deed?
Trustees must strictly follow the terms of the trust deed.
Actions beyond the deed (known as ultra vires acts) are legally invalid.
Example:
If a trust deed prohibits property development but the trustee enters a construction contract, the contract may be unenforceable against the trust — but the trustee could be personally liable.
This creates major risks for business finance. Lenders may refuse finance to trusts with unclear or mismanaged deeds.
Trustee Appointments After Business Finance is Arranged
Sometimes, a trustee is appointed after a loan is arranged.
Example:
- In 2020, John Smith borrows $500,000 personally.
- In 2022, John is appointed as trustee of the Smith Family Trust.
Can the lender pursue trust assets to recover the loan?
Generally no.
The trustee’s personal debts do not automatically attach to trust assets unless specific clauses or guarantees were provided.
However, changes in trusteeship must be properly documented to avoid confusion in future finance applications.
Types of Trusts and Their Relevance to Trust Finance
Understanding trust types helps business owners choose the right structure:
- Discretionary (Family) Trusts:
Trustee decides how to distribute income/assets. Favoured for asset protection and tax flexibility. - Unit Trusts:
Beneficiaries have fixed units (like shares). Common in business joint ventures. - Hybrid Trusts:
Blend of discretionary and unit features. Used where both flexibility and certainty are needed. - Bare Trusts:
Trustee holds assets for a single beneficiary with no discretion. Used in specific business finance structures like custodial arrangements.
Choosing the right trust is crucial for trust finance success.
Can Trustee Powers Be Limited?
Yes.
The trust deed can impose limits on trustee powers, such as:
- Restricting borrowings without beneficiary consent;
- Prohibiting certain types of investments;
- Requiring independent approvals for asset sales.
Example:
Some deeds require all major trust decisions to be approved by a “Protector” — an independent person or entity.
When arranging trust finance, lenders review these limitations closely.
Practical Tips for Business Owners
- Always act within the trust deed.
- Clearly disclose trustee status in all dealings.
- Maintain separate trust bank accounts.
- Get legal and financial advice before signing contracts.
- Update lenders promptly if trusteeship changes.
Trustee Changes and Trust Finance: Hidden Tax Traps and Opportunities
In trust finance, business owners often overlook how changing a trustee can impact asset ownership, tax obligations, and loan eligibility.
When a trustee is replaced, the legal title to trust assets moves from the old trustee to the new one. However, the beneficial ownership — that is, the right to benefit from the assets — remains with the trust itself.
This distinction is crucial. In many cases, transferring assets between trustees does not trigger major taxes, such as Capital Gains Tax (CGT) or stamp duty, provided strict legal requirements are met.
This can make it easier for businesses to reorganise their structures without creating a large tax bill — a key advantage when seeking new trust finance or restructuring for asset protection.
Trust Finance Implications of Trustee Changes
From a trust finance perspective, lenders assess both the trust’s asset position and the trustee’s legal obligations.
If a trustee change is planned or has recently occurred, it must be properly documented to avoid complications, especially regarding:
- Asset verification for secured lending,
- Trust compliance (trust deeds, resolutions, TFNs),
- Tax and duty liabilities affecting asset values.
Poor documentation or an incorrectly executed trustee change can jeopardise finance approvals.
Can Changing Trustees Reduce Taxes?
Potentially, yes.
Under Australian tax laws:
- Stamp Duty:
In most states, if there is no change to the trust’s beneficiaries or their entitlements, only nominal stamp duty applies when assets transfer from one trustee to another.
For example, in New South Wales, the nominal duty is currently $50. - Capital Gains Tax (CGT):
If beneficial ownership remains unchanged, a CGT rollover may apply under Subdivision 126-G of the Income Tax Assessment Act 1997.
This means no immediate CGT is payable on the transfer.
These benefits help preserve the trust’s asset base, enhancing its borrowing power in future trust finance applications.
But Caution is Needed
If the trustee change is combined with:
- Changes in beneficiaries,
- Changes in beneficiary entitlements,
- Transfers of control without clear documentation,
then full stamp duty and full CGT liabilities may apply.
This could reduce the trust’s asset position, complicate finance negotiations, or even trigger lender re-assessments.
Further, state-by-state variations exist. Trust finance strategies must factor in local tax laws and be supported by robust legal advice.
Why This Matters for Trust Finance
When seeking business loans secured by trust assets, lenders closely examine:
- The trust’s asset history,
- How trustees were appointed and changed,
- Whether any hidden tax liabilities exist,
- Whether trust deeds permit the new trustee to borrow or offer security.
An undocumented or incorrectly executed trustee change can delay or derail a finance application — or worse, leave directors personally exposed.
What’s Next?
Managing trusts properly is vital for both asset protection and successful business finance.
At Convergent Capital Corp, we connect business owners with finance consultants who understand trust structures and lender requirements.
Contact us today to protect your assets and improve your finance outcomes.
Explore our latest finance insights here.
Relevant Articles from our Catalogue
- Debt Market Mirage: The Truth About Global Business Funding
- The Silent Storm: How Tariffs Wreck Economic Growth
- Debt Market Mirage: The Truth About Global Business Funding
