CONTROL OF A TRUSTEE

The father had made a non-binding death benefit nomination that his benefits be shared equally between the daughter and the son. However, being a non-binding nomination the Trustees (Linda and her husband) were not bound to comply with the nomination and the distribution of the death benefit was therefore at the discretion of the Trustees. Linda had been asked, and had refused, to confirm that she would give effect to the non-binding death benefit nomination.
The case was summarised by the Judge as “This is a contest between a brother and sister over the control of superannuation trust fund.
The assets of the fund exceed $1,000,000.00.”

Where the distribution of trust assets (whether a superannuation trust or a family trust) is at the discretion of the Trustee the question of who controls the Trustees after the death or incapacity of the Founder may be of paramount importance.

1. The role of the Appointor in a family/discretionary trust.

The Appointor is a person who has power to remove a Trustee and install a replacement Trustee. So, if the Appointor does not like the way a Trustee is behaving, he simply removes the Trustees and installs a compliant replacement.

2. What happens when an Appointor dies or becomes incapacitated?

The first and foremost aim should be to ensure that the trust does not fall under the control of one person or family who might make decisions for their benefit to the exclusion of other beneficiaries.
Take a typical scenario:

The father of a family group is the Appointor. He dies and there are three children who are beneficiaries. Frequently a trust will provide that on the death of a named Appointor the new Appointor shall be a named person or someone appointed by the Father/Appointor of the Executor of the Father/Appointor’s Will. Any person named as Appointor should ideally be representative of all the beneficiaries or totally impartial. Probably the best result would be to have as Appointor a person or persons who are totally impartial e.g. a Solicitor or Accountant (or both). In such a case the Appointors could be specified by description rather than by name e.g. “the person who is the longest serving Partner for the time being in the legal firm of XYZ” or “the Appointor shall consist of two persons one of whom shall be the person who is for the time being the longest serving Partner in the legal firm of XYZ and the person who is the longest serving Director of ABC Accountants Pty Ltd”.

If this is thought to be unsatisfactory and it is designed to keep the Appointor in the family and the family consists of say three children it might be appropriate to say that all three children shall be Appointors.
If any one of them dies or becomes incapacitated then the deceased child’s children (if adult) should nominate one of their number to be the substitute Appointor. If the deceased’s child’s children are infants the surviving Appointors should nominate a person to represent their interests.

3. Is it possible to achieve the right result without a new Appointor?

The answer depends on what the aim is. If the aim is to allow the Trustee full discretionary powers up to the vesting date then an Appointor is needed in case the Trustee oversteps the mark. If the aim is to ensure that up until the vesting date the Trustee cannot overstep the mark it will be possible to amend the Trust Deed to limit the Trustee’s discretion after the death of the original Appointor e.g. to say that the Trustee cannot lend, hire, lease or transfer any property to a beneficiary. Additional protection could be achieved by saying that the Trustee cannot lend, hire, lease or transfer any property to anyone other than for full market consideration. So far as the distribution of income is concerned the Trust Deed could be amended to specify who is to receive the income and in what proportions or to say that particular beneficiaries or class of beneficiaries are not to receive less than a specified percentage of the income.

4. Are there any problems with amending the Deed of Settlement?

There may be a number of problems. First, it is necessary to find a power of amendment in the Deed. Strict compliance with the provisions of the Deed will be required. Most Deeds contain a power of amendment.

Second, there may be CGT consequences if the amendments constitute a resettlement. To quote from an article in the April 2006 issue of the Australian Law Journal titled “Resettlement – Finding the new Charter of Rights” “any time an Australian Commercial Trust Deed is amended, the question “is this a resettlement” is almost inevitable. Nowadays there are two principal issues: is the amendment authorised by the Trust Deed and does it trigger capital gains tax under CGT event E1. CGT event E1 occurs upon the creation of a trust by declaration or settlement.
If changes are made to a settlement which so alter the nature and character of a trust relationship that the original trust ceases to exist and a new trust is created that is a resettlement and triggers CGT event E1.

Unfortunately the question of what is or is not a settlement is not always simple. The ATO has issued a Statement of Principles seeking to clarify when changes to a trust are such that for income tax purposes one Trust comes to an end to be replaced by another. Each case must be looked at individually.

Third, there may be stamp duty consequences. Under the Duties Act 2000 liability for duty arises on certain transaction including a declaration of Trust relating to dutiable property (Section 7 (1)(b)).
Such a declaration is a dutiable transaction. Duty on such a dutiable transaction is charged as if the transaction was a transfer of dutiable property (Section 8(1)). The property transferred is deemed to be the property which becomes subject to the Trust. So, if a variation to a settlement is a resettlement then the value of any real property in the Trust might be dutiable.

There are no clear guidelines for what constitutes a resettlement for stamp duty purposes. In an article in the May 2006 addition of the Law Institute’s Property and Environmental Law section newsletter John Glover, Barrister, says “conflicting advice has emanated from the State Revenue Office about the duties consequences of amending discretionary trusts”. Once again each case needs to be looked at individually on its own facts.

5. How do you control the disposition of the Trust assets on the vesting day? (On the assumption that the Founder of the Trust is then dead).

One mooted suggestion is that the Founder should leave a set of instructions. This might be effective but it would not be binding and is therefore not a recommended procedure. Most Deeds of Settlement will provide that as from the vesting day the assets be held for such of the beneficiaries in such shares as the Trustee appoints by Deed before the vesting date. This Deed of Appointment can be made at any time and would normally be made as part of the Will making process. A Deed of Appointment may be revocable or irrevocable. To ensure that the Founder’s wishes are carried into effect such a Deed of Appointment could be expressed to be revocable during the Founder’s lifetime and irrevocable thereafter.

6. But shouldn’t I also try to control the Trustee?

The answer is yes – the problem is how to exercise control. Assume there are three children who (and whose children) constitute the beneficiaries. If it wished to have the beneficiaries control the Trustee there are two scenarios:

First – the three children are the Trustees

OR

Second – the Trustee is a company.

In the first case the Trust Deed should provide that the three children are the Trustees, their decisions must be unanimous, and that if and when one child dies or becomes incapacitated the Trustees can act only to appoint a new Trustee and that new Trustee must represent the deceased child’s branch of the family.

If the Trustee is a company both the shares and the Director’s decision making procedures require attention.

As the shares carry voting rights and the right to elect Directors (and as the Directors make the company’s decisions) it is desirable that no person or persons gain control of the shares. One method of achieving this aim would be for the Founder (in whose name the shares are presumable registered) to leave the shares by Will on Trust for a long period so that they remain in the Executors/Trustees name. It is a given that the Executors/Trustees must be independent to the extent that they will be impartial between the beneficiaries.

Additionally, the constitution of the company should provide that:-

- The Directors must at all times be three in number and that one Director represent each child or that child’s children.

- The Directors may not make any decisions while their number is less than three other than to fill a vacancy.

- All decisions of Directors must be unanimous.

- No Director has a casting vote.

- A quorum for Directors meetings is all three Directors.

It is probably also desirable to include in the constitution a statement of what the intention of the Founder is so that any uncatered for contingencies can be dealt with in the light of what was intended.