To cut a long story short** In conclusion - 1 related issue

Subject to the terms of the relevant trust deed, a change to the appointor or principal provisions should have no adverse revenue consequences. Any change should, even if not expressly required by the deed, be done with the consent of the incumbent appointor. This is because of the significant ultimate powers retained by the appointor.

This conclusion about the extent of an appointor's powers however does not mean that where an appointor or principal is declared bankrupt, their power of appointment is considered 'property' which vests in and can be exercised by the trustee in bankruptcy.

Historically, there has been some confusion around this issue, given that the property of a bankrupt under the Bankruptcy Act which is available for distribution to creditors includes "the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit…".

However, it has been held that the right of a bankrupt to exercise a power of appointment under a discretionary trust is not property of the bankrupt (see Re Burton; ex parte Wily v Burton (1994) 126 ALR 557).

In that case, the argument of the trustee in bankruptcy centred on the fact that Mr Burton was the appointor and a discretionary beneficiary of a family trust. He could in theory therefore appoint himself (or an entity that he controlled) as trustee.

In rejecting the argument, it was held that the powers of an appointor are fiduciary powers that must be exercised accordingly, in the interest of the beneficiaries.

In other words, the powers of an appointor must be exercised solely in furtherance of the purpose for which they were conferred.

This means that the powers of an appointor do not amount to 'property' that passes to a trustee in bankruptcy.

The powers are also not something that can be exercised by the bankrupt for their own benefit.

By analogy, the power to remove an appointor is also considered to be a fiduciary power (see Ash v Ash [2016] VSC 577).

This means that equitable relief may be imposed upon a third party who knowingly receives some benefit from the fiduciary's wrongful conduct or is knowingly involved in that wrongful conduct (see Barnes v Addy (1874) LR 9 Ch App 244).

An attorney may be able to exercise the powers of an appointor, if this is anticipated by the trust deed or attorney document (and indeed, ideally, both documents in a complementary and considered manner).

An attorney may also be able to exercise an appointor's powers where there is informed consent. Such consent must however involve more than inference from an alleged plan of the principal, particularly where that plan is vaguely defined and based on inference itself. That is, there must be clear evidence of the salient details of the transactions affecting the principal's interests being provided to them before their incapacity (again see Ash v Ash [2016] VSC 577).

Like last week, the above post is again based on an article that we originally contributed to the Weekly Tax Bulletin.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Spandau Ballet song ‘Cut a long story short’.

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Court removal of trustees and appointors (who should hang their heads low)

Last week’s post explored what issues a court will consider before a trustee is removed against their will and mentions the (in)famous decision from the Lang Hancock and Gina Rinehart saga (namely Hancock v Rinehart [2015] NSWSC 646).

A related issue is whether a court will unilaterally remove an appointor or principal of a trust – that is a party who has the right under a trust deed to change the trustee.

The decision in McNee v Lachlan McNee Family Maintenance Pty Ltd [2020] VSC 273 is a useful reference point in this regard.

Relevantly the factual matrix was as follows:

1. A 12 year old son of former life spouses was the primary beneficiary of a child maintenance trust (a form of trust explored in other View posts that allows access to excepted trust income for infant beneficiaries following a relationship breakdown).
2. The mother was the sole director and shareholder of the trustee company and sole appointor of the trust until the son turned 18, at which time the deed mandated he would become the appointor.
3. The trust owned a residential property which the mother and son lived in, until their relationship fractured and the son moved in with his father.
4. The mother continued to live in the property owned by the trust (and had been given this right to occupy under the trust deed, as had the son) and the son (via his father) approached the court to remove the trustee and appointor and appoint an independent third party.

The court confirmed as follows:

1. as mentioned in last week's post, whether the court exercises its discretion to remove a trustee turns upon the circumstances of each case;
2. a lack of confidence in the trustee can be sufficient justification that the court should exercise its powers;
3. this said, here there were a range of reasons that meant removal as trustee was appropriate such as friction and hostility between the key parties, the trustee's failure to read and understand the trust deed, the trustee consciously acting in breach of the trust deed (including a failure to keep proper records), the trustee preferring the interests of others rather than the beneficiary, failure to exercise powers of investment for the benefit of the beneficiaries, failure to proactively address a clear position of conflict and a failure to offer any reasons for why an independent trustee would not be appropriate;
4. any one of the above reasons on its own may have been sufficient to justify removal, however in combination made the decision overwhelming in favour of removal;
5. the suggestion that a co-director could have been appointed to the trustee company was rejected as it would have failed to address the inappropriate conduct of the mother;
6. for similar reasons, the mother was also replaced as appointor of the trust, given that if she retained this role she could have later removed the independent trustee appointed by the court. In this regard, the court confirmed that where the trust instrument already contains an express power of appointment, the court has the ability to change the appointor. This outcome was contrasted with the decision in W E Pickering Nominees Pty Ltd v Pickering [2016] VSC 71 where it was held the court can not ‘grant’ a general power of appointment in circumstances where the trust instrument does not make any provision for an appointor;
7. the court confirmed that it was appropriate for the trustee and appointor to be the same person, given that the trust clearly established the settlor’s intention in settling a trust with a trustee whose controlling mind (ie being the mother as sole director) was also the appointor (again, the mother);
8. the trustee and appointor would be an independent third party, nominated by the President of the Law Institute; and
9. the mother was however entitled to continue to reside in the property subject to certain conditions. This said, the son (under the deed) would have the right once he turned 18 to terminate the trust (and thus end his mother's right to occupy).

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Bananarama song 'Cruel Summer’.

View here:

 

Generals and majors (or attorneys and appointors, as the case may be) **

Previous posts have considered the broad limitations to an attorney's powers.

A key related question is whether an attorney can act on behalf of a donor for any principal or appointor role held by a donor under a family trust.

Generally, a well crafted trust deed will expressly address the issue and include a clause along the following lines -

'If the principal suffers the loss of lawful capacity through age, accident, or illness (evidence of which is by certificate of a registered medical practitioner), then the principal is the financial attorney of the principal under a valid enduring power of attorney.'

Where the trust instrument does not address the question, the preferred position appears to be that the principal powers can be exercised by an attorney.

The leading case in this regard is generally seen to be Belfield v Belfield [2012] NSWCA 416 where it was held that an attorney could have exercised the principal’s power under the Deed while the principal was incapacitated. In other words, even in the absence of any express provisions in the trust deed addressing the incapacity of a principal, the principal's powers can be exercised by a validly appointed attorney on their behalf.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, ‘Generals and Majors’ is a song from 1980 by the band XTC, listen hear (sic) –

What I am** and should I be the appointor?

Today’s post considers the above-mentioned topic in a ‘vidcast’.

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below.

The Richstar case has featured in many previous posts. As usual, if you would like access to those posts, please contact me.

In terms then of who should be an appointor, despite what Richstar says, which was that the appointor is highly critically important from an asset protection perspective, that’s not actually the law. Richstar has been rebutted. Therefore, we would argue that in the ordinary course, it does not matter who the appointor is.

Now as with all trust areas, I would argue there is an exception to that general rule.

The exception to the general rule is do not set your client up to fail unnecessarily.

Therefore, you want to have at least two other things on your list when you’re looking at an appointor I would argue at the bare minimum.

Point number 1, make sure that embedded into the trust instrument, there is an automatic disqualification of the appointor if they commit any act that allows the court to look at the act. By crafting the provisions that way, you do a couple of things.

First, it sets the rules of the game before the trust is even started. It’s therefore almost impossible for anyone to argue that that was some sort of inappropriate strategy because it was there from the very start.

The second thing is that if any court comes in, the bankruptcy court, the family court, etc., before they come in, the deed self-executes and makes sure that the appointor is automatically removed.

The next point is just thinking about who you actually want as your appointor. Maybe it isn't the smartest thing to have the at-risk individual. Not because of itself is going to cause the trust assets to be exposed, but why even raise a question when you can actually avoid the issue.

The one thing I would flag on that is that having a non-at-risk person as appointor can be a lot easier said than done. The appointor has the ability to hire and fire the trustee in its complete discretion.

The person needs to be someone you can completely trust in order to deliver that role in a way that actually is going to align with what the people behind the trust are actually striving for.

As always thanks to the Television Education Network for the video content here.

** for the trainspotters, the title here is riffed from the Edie Brickell song ‘What I am’.

Appointor (and a life of) succession **

Previous posts (including last week), have considered various aspects of an appointor or principal power under a trust deed.

In almost every estate plan involving a trust, it is necessary to consider the best way to appoint a successor appointor.

Predictably, the starting point in this process was to review the trust deed.

Often, the deed will permit the incumbent appointor to have their successor nominated under the will.

Generally, if available, a nomination under the will is the easiest and most commercially sensitive approach to take.

In other instances, for example, where there may be a challenge to the will, it may in fact be more appropriate to structure the appointor succession in a standalone document that sits outside the will.

Any approach is always subject to the deed, which are consistently inconsistent with the approaches available, for example:

1. appointment via will;
2. appointment via enduring power of attorney;
3. automatic lapsing of the role;
4. mandated succession embedded into the trust deed;
5. no appointor or principal role in the first place;
6. succession nominated by some other party (eg a ‘guardian’ or ‘nominator’);
7. no provision in the deed at all as to what happens to the role and no rules as to how appointor might appoint a successor; and
8. some combination of one or more of the above

** for the trainspotters, the title here is riffed from the Morrissey song, ‘My life is an endless succession of people saying goodbye’.

Appointor disqualification**

Last week, we had a situation where under the terms of a trust deed, the principal or appointor (ie the person with the right to unilaterally remove the trustee) had become automatically disqualified.

This type of provision is not unusual in a trust deed, however the exact mechanisms by which the disqualification took place were somewhat unique.

In this particular situation, the appointor was disqualified from acting if they left the jurisdiction that the trust was set up in (which was New South Wales).

The issue had never come up before until it was an issue, with the appointor now wanting to exercise its powers to remove the existing trustee; and the trustee wanting to resist their removal.

The trustee challenged the proposed unilateral removal by the appointor on the basis that the trust deed no longer gave the appointor the relevant power because the appointor was living in Victoria.

On a plain reading of the deed, the advice to the trustee was; yes, they were correct, and the appointor had been automatically disqualified.

Therefore, not only could the (former) appointor not remove the trustee, there was likely the ability for the trustee to proceed with a variation to appoint a new (friendly) appointor. An approach assisted by the fact that variations under the deed did not require appointor consent.

The situation is (yet) another reminder that before taking any step in relation to a trust; read the deed.

** for the trainspotters, the title here is riffed from the only song I could find with the word disqualification in it, ‘The Winner’ by Coolio.

Changing an appointor - just like changing a trustee; simple! (in theory ...)

A previous post explored the key revenue issues in relation to changing the trustee of a discretionary trust (see - 'Changing trustees of trusts – Simple in theory … not so simple in practice').

An equally important and related issue concerns a decision to change the principal or appointor role of a family trust. That is, the person, people, or company having the unilateral right to remove and appoint a trustee.

As regular readers of this blog will know, there does not necessarily need to be an appointor or principal provision under a trust deed. However, where there is one, a trust deed itself will normally set out in some detail the way in which the role of appointor is dealt with on the death or incapacity of the person (or people) originally appointed.

Where there are no provisions in relation to the succession of the appointor role, it is often necessary to try and rely on any power of variation under the deed to achieve an equivalent outcome.

Generally, from a trust law perspective, it is possible for the appointor provisions to be amended. However, any intended change must be permitted by the trust instrument, meaning the starting point must always be to 'read the deed' – a mantra regularly profiled in this blog. The decision in Mercanti v Mercanti [2016] WASCA 206 (this Court of Appeal judgment stands following the High Court's refusal to reject an appeal) being a leading example of the principle in the context of purported changes to appointorship.

The tax and stamp duty consequences of changing an appointor can be similarly complex.

Stamp duty costs on changing an appointor

In broad terms, the stamp duty consequences of changing an appointor provision can normally be managed in most Australian states.

This said, care always needs to be taken, particularly where the trust deed simply defines the appointor by reference to some other named beneficiary in the trust.

For example, it can often be the case that the appointor is defined as being the primary beneficiary of the trust and that primary beneficiary may also be a default beneficiary.

In these circumstances, depending on how the deed is crafted, there may be stamp duty consequences of implementing any change.

Tax Office views on changing an appointor

In relation to the tax consequences of changing an appointor, there are a number of private rulings published by the Tax Office which support the ability to change an appointor role, particularly if it is part of a standard family succession plan.

Arguably the 2 leading private rulings concerning the tax consequences of changing an appointor are Authorisation numbers 1011616699832 and 1011623239706. Broadly, these each confirm that there should be no tax resettlement on the change of an appointor where –

• The relevant trust deed provides the appointor with the power to nominate new appointors and also allows for the resignation of an appointor; 
• The intended change complies with the trust deed (the "read the deed" mantra again highlighted); 
• The proposed amendment is otherwise analogous with the changing of a trustee and is thus essentially procedural in nature; and 
• The original intention of the settlor is not changed such that there will not be any change to the beneficiaries, the obligations of the trustee or the terms or nature of the trust. 

Clark case

The conclusion that there should be no adverse tax consequences on changing an appointor is also supported by the decision in FCT v Clark [2011] FCAFC 5 ("Clark") and which has been profiled previously in this blog.

In particular, the Full Federal Court in Clark held that significant changes to a trust instrument would not of themselves cause a resettlement of the trust for tax purposes, so long as there is a continuum of property and membership, that can be identified at any time, even if different from time to time. That meant that, in Clark, although there had been a change of trustee, a change of control of the trust, a change in the trust assets and a change in the unitholders of the trust between 2 income years, this did not trigger a resettlement for tax purposes.

Rather, it is only where a trust has been effectively deprived of all assets and then 're-endowed', that a resettlement will occur.

While the Tax Office released a Taxation Determination (namely TD 2012/21) following Clark, it unfortunately does not provide any specific commentary around when the Tax Office will deem changes to an appointor or principal of a trust to amount to a capital gains tax event under CGT events E1 and E2 (ie a resettlement).

Rather, in broad terms, the Tax Office simply states that unless variations cause a trust to terminate, then there will be no resettlement for tax purposes.

While a number of examples are provided, which give some guidance around issues such as changes of beneficiaries and updates to address distribution of trust income, the examples ignore issues such as changing appointors and multiple changes (for example, changing beneficiaries, the trustee and the appointor as part of an estate planning exercise).

In conclusion - 1 related issue

Subject to the terms of the relevant trust deed, a change to the appointor or principal provisions should have no adverse revenue consequences. Any change should, even if not expressly required by the deed, be done with the consent of the incumbent appointor. This is because of the significant ultimate powers retained by the appointor.

This conclusion about the extent of an appointor's powers however does not mean that where an appointor or principal is declared bankrupt, their power of appointment is considered 'property' which vests in and can be exercised by the trustee in bankruptcy.

Historically, there has been some confusion around this issue, given that the property of a bankrupt under the Bankruptcy Act which is available for distribution to creditors includes "the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit…".

However, it has been held that the right of a bankrupt to exercise a power of appointment under a discretionary trust is not property of the bankrupt (see Re Burton; ex parte Wily v Burton (1994) 126 ALR 557).

In that case, the argument of the trustee in bankruptcy centred on the fact that Mr Burton was the appointor and a discretionary beneficiary of a family trust. He could in theory therefore appoint himself (or an entity that he controlled) as trustee.

In rejecting the argument, it was held that the powers of an appointor are fiduciary powers that must be exercised accordingly, in the interest of the beneficiaries.

In other words, the powers of an appointor must be exercised solely in furtherance of the purpose for which they were conferred.

This means that the powers of an appointor do not amount to 'property' that passes to a trustee in bankruptcy.

The powers are also not something that can be exercised by the bankrupt for their own benefit.

The above article is based on an article that we originally contributed to the Weekly Tax Bulletin.

Image courtesy of Shutterstock

Another reminder to ‘read the deed’

As highlighted in last week’s post, the need to ‘read the deed’ before making any variation to a trust deed is critical (see for example http://blog.viewlegal.com.au/2015/09/always-read-deed.html).

The case (Jenkins v Ellett [2007] QSC 154) mentioned in passing, in a previous post (see - http://blog.viewlegal.com.au/2010/09/when-power-to-vary-is-not-power-to-vary.html) and again last week, remains a leading example of this mantra.

As usual, a full copy of the decision is available via the following link - http://www.austlii.edu.au/au/cases/qld/QSC/2007/154.html

Broadly the situation in this case was as follows:

A principal under a trust deed had the ability to remove and appoint the trustee of the trust.

The principal purported to rely on a power of variation to remove himself as principal and name a replacement, which effectively changed the schedule to the trust deed that automatically appointed the principal’s legal personal representative (LPR) as his replacement on death.

When the LPR of the principal purported to exercise the principal powers following the death of the original principal and was challenged, the Court held that the previous attempted variation was invalid, effectively confirming the LPR’s authority to act as the principal.

The attempted variation was held to be invalid because the relevant power in the trust deed was crafted so that it could only be used in relation to the ‘trusts declared’, and in particular did not extend to varying the schedule to the trust deed.

Until next week. 


Image credit: Jenni C cc

Is appointorship an asset?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Is appointorship an asset?’ If you would like a link to the video please email me.

As usual, a transcript of the presentation for those that cannot (or choose not to) view the presentation is below –

Whether the appointor role is an asset on the holder’s bankruptcy is probably one of the most contentious issues to have arisen in recent years. Certainly, the feeling amongst lawyers that act on behalf of trustees in bankruptcy or creditors is that absolutely the role is a potential asset.

If it is an asset, then it forms part of the bankrupts’ estate. The reality however when you actually look at the decisions that have been handed down is the exact opposite. So in other words, the role of an appointor is a personal role, akin to a directorship. Therefore, that’s not an asset that can be handed onto creditors.

Having said this, the issue does not seem to be going away and the conservative view would be that you would try, when setting up this type of structure, to ensure that you do one of a myriad of things.

So for example, making sure that if there is an at risk person that is needing to fulfil the role of appointor or principal, that they don’t fulfil that role individually and solely, that ideally there's some other person acting with them.

Secondly, the way in which the role is structured, it's embedded under the trust instrument, whether it be a family trust or a testamentary discretionary trust, the appointor is automatically disqualified in the event of committing an act of bankruptcy.
Until next week.

A further reminder – read the deed

As regular readers are aware, there have been numerous posts highlighting the importance of reading trust deeds and recently we had (yet another) reminder.

Many advisers would be aware that, particularly for deeds established in New South Wales (due to the stamp duty rules there), there is often a prohibition on any trustee, and in some instances any former trustee, being a beneficiary of a trust.

The example that came up again recently (it seems to be one that comes up every few weeks) involved an individual trustee of a standard family discretionary trust. That individual trustee was also the sole primary beneficiary and sole appointor.

While there were potential issues from an asset protection perspective that we were reviewing, the more fundamental concern was that under the trust deed the trustee was specifically prohibited from ever receiving any income or capital distributions. A brief review of the balance sheet of the trust showed that substantial distributions had in fact been made to the trustee as primary beneficiary over a number of years.

There are now a myriad of issues that the trustee and his adviser are needing to work through, not least of which being how to address the enquiries of the lawyers for the trustee’s former spouse who are alleging a breach of trust and what steps will need to be taken from a tax perspective in relation to the various years in which invalid distributions have taken place.

Until next week.

Appointor succession - read the deed

As highlighted in previous posts, it is critical to 'read the deed' when providing advice that involves a trust.

Following last week's post (and again with thanks to Tara Lucke) about Montevento Holdings, this post reinforces the importance of reading a trust deed before taking any step. 

In Montevento Holdings, a disgruntled beneficiary sought to rely on a technical interpretation of the way the appointor could exercise their power under the trust deed to change the trustee to support the argument that the change was ineffective. 

The relevant clause precluded individual appointors from personally being appointed as trustee.  As mentioned last week, the individual appointor appointed a company as trustee of which he was personally the sole director and shareholder. 

The High Court held that the ordinary and natural meaning of the clause was that an individual person holding the office of appointor could not personally appoint themselves as trustee.  However, because the trust deed consistently distinguished between individuals and companies, it did not prohibit the appointment of a corporate trustee, even if that trustee was controlled by the individual appointor.

Until next week.

Appointor succession – choose wisely

With thanks to co View Legal director Tara Lucke, today’s post looks at how the role of the appointor is often the most important to consider when establishing or reviewing a trust. There does not necessarily need to be an appointor provision under a trust deed, however where there is, a trust deed will normally set out in some detail the way in which the role of appointor is dealt with on the death or incapacity of the person (or people) originally appointed.

Failing to understand succession arrangements of an appointor can create a range of difficulties as highlighted in the recent case of Montevento Holdings Pty Ltd v Scaffidi (2012) HCA 48. A full copy of the case is available at http://www.austlii.edu.au/au/cases/cth/HCA/2012/48.html

The case concerned a challenge by a beneficiary of a discretionary trust to a change of trustee by the appointor. The challenging beneficiary was Guiseppe Scaffidi who, along with Maria (his mother) and Eugenio (his brother), was within the range of potential beneficiaries of the Scaffidi Family Trust.

The original appointor of the trust was Antonio Scaffidi (the father). On Antonio’s death, Maria became the appointor and by deed Maria subsequently appointed Eugenio Scaffidi as the appointor.

After his appointment, Eugenio appointed Montevento Holdings Pty Ltd (a company of which he was the sole director and shareholder) as the sole trustee, effectively giving him complete control over the trust and its assets.

Guiseppe’s challenge to the appointment of the trustee company ultimately failed before the High Court, essentially because the appointment complied with the provisions of the trust deed. The decision highlights that the role of appointor can often give ultimate control of a trust. Furthermore, it is a timely reminder of the importance of regularly reviewing the appropriateness of the appointor role in the context of succession planning, particularly where multiple beneficiaries are arguably intended to benefit from a discretionary trust over time.

The mechanics of the decision will be explored further in next week’s post.

Until next week.