Subsidiary Structuring for PSGEs – Custodian Trustees
As part of their settlement process, “post settlement governance entity”, or PSGE, to hold and manage the assets received on settlement. For various reasons, these PSGEs are often set up as private trusts, made up of several individual trustees.are required to nominate a
Technically speaking, a private trust like a PSGE is not a standalone legal entity, but rather an organised “relationship” between the trustees and beneficiaries. This means that all of the assets and obligations of a PSGE are legally held by the trustees in their individual names, but for the benefit of the trust’s beneficiaries.
This can cause serious difficulties when trustees of a PSGE resign or are replaced by elections; ownership records like property titles and share registers need to be updated every time there is a change in trustees, but for many reasons these updates are often neglected. Often when the trust then goes to deal with that property or those shares, they can get a shock to realise some or even all of the names on the ownership record are of former trustees who are no longer in office.
Purpose of a Custodian Trustee
To deal with this, many PSGE trusts establish a custodian trustee. This is a separate person or legal entity (for example a company) set up to hold and administer trust property on behalf of the trustees. A custodian trustee is effectively a “puppet”, which can only deal with trust property at the written direction of the trustees. Although the individual trustees may change over time, the custodian trustee does not.
Although the custodian trustee is the legal owner of the assets (i.e. the name on the title or ownership instrument), it is not entitled to any benefit from those assets. All of the benefit of those assets still sits with the PSGE trust, and ultimately with thebeneficiaries.
Removing trust assets from the trustees’ personal names also mitigates the risk of any individual trustee misusing assets or treating them as their personal property.
While the trustees have a number of duties, both at law and under their trust deed, a custodian trustee will not be subject to those duties and does not otherwise take on the liability of a trustee for the administration of the trust.
However that protection only lasts as long as the custodian trustee is acting in compliance with the terms of its appointment and in accordance with the directions of the trustees. If the custodian trustee fails to act in accordance with the trustees’ directions, it will be liable to the trustees for that failure under s67(3) of the Trusts Act 2019.
Often a custodian trustee will be established as a company, so the trustees can be registered as directors and shareholders. This makes the link to the trust very clear, and ensures that the trustees are still the ones in charge of the assets. When the trustees change, it is much easier to change the directors and shareholders of the custodian trustee company than to update land titles, share registers or other ownership records.
If a PSGE’s trust deed allows the appointment of a custodian trustee (which most trust deeds will), the relationship between the PSGE trust and the custodian should be formalised by way of deed. This document would normally set out the custodian trustee’s limitation of liability expressly, and may include an indemnity for the custodian when acting in accordance with the directions of the trustees. If a trust deed does not include an express clause authorising the appointment of a custodian trustee, it might be possible to vary the deed to include this.
The key disadvantage to a custodian trustee is one of perception – the trust assets are legally transferred out of the personal control of the trustees to a separate entity, and there is not always a great deal of understanding about what this means. However this can be mitigated by proactive and clear communication withmembers, explaining the role of the custodian and emphasising that assets are still the property of the trust and must be managed in accordance with the direction of the elected trustees.
Custodian trustees may also be appointed in relation to trusts constituted under Part 12 of Te TureMaori Act 1993, either as permitted by a trust order or through an application to the Maori Land Court. Specific provisions apply to custodians appointed in this way, including how decisions can be made by trustees and notified to a custodian, the custodian’s rights and obligations and the custodian’s right to remuneration.
Custodian trustees can be a simple and cost-effective solution to the issue of trustee resignations and rotations, removing the need for regular title changes for trust assets, protecting assets from potential misuse by an unscrupulous trustee, and avoiding headaches when dealing with outdated ownership records. No beneficial ownership rights are lost, and liability for proper management remains with the trustees. The need for written instructions also ensures that trustees’ decisions must be recorded properly. Where a company is the structure of choice, establishment can be done quickly and relatively inexpensively. While there can be some confusion among trustees orabout the role, there are very few downsides to the appointment of a custodian trustee.
Jessica Middleton is a Senior Associate in our Commercial Team and can be contacted on 07 958 7436.
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