(I will follow**) the leading case about fettering of a trustee’s discretion

Previous View posts have considered the issues of a trustee fettering its discretion in the context of an insurance funded buy sell arrangement.

The principle in relation to the probation on a trustee fettering its discretion is arguably best captured in the decision of Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liquidation) [2001] FCA 1628.

In this case the key concepts concerning fettering were summarised as follows –

‘… a trustee is not entitled to fetter the exercise of a discretionary power (for example a power to sale) in advance: Thacker v Key (1869) LR 8 Eq 408; In re Vestey’s Settlement [1951] Ch D 209.

If the trustee makes a resolution to that effect, it will be unenforceable, and if the trustee enters into an agreement to that effect, the agreement will not be enforced (Moore v Clench (1875) 1 Ch D 447), though the trustee may be liable in damages for breach of contract …’

Thus in the case mentioned above of In re Vestey’s Settlement, a binding decision to indefinitely make set annual distributions to a particular beneficiary was held to generally be seen as invalid due to the rule against fettering.

The decision in Lambert and Commissioner of Taxation [2013] AATA 442, another case featured in other View posts, further reinforces the above points.

In this case the court confirmed that a trustee is under a fiduciary duty to exercise its powers and discretions upon real and genuine consideration in accordance with the purposes for which the discretion was conferred.

In particular, as confirmed in Karger v Paul [1984] VR 161, it as an inherent requirement of the exercise of any discretion that it be given real and genuine consideration, or as set out in Partridge v The Equity Trustees Executors and Agency Company Limited [1947] HCA 42, there must be the 'exercise of an active discretion'.

Other examples in this regard include:

1. the granting of a call option under a lease for the lessee to buy the property was an invalid fetter on the ability for the trustee to sell the property (see: Re Stephenson's Settled Estates (1906) 6 SR (NSW) 420). This outcome should be contrasted to the conclusion in last week's post, where the trust deed expressly allows a trustee to grant options.
2. an attempt by a willmaker to mandate via a letter of wishes about how distributions from a testamentary trust set up under the will should made, was an invalid fetter on the trustee's wide discretionary powers for the trustee under the will (see: Burns v Burns & Anor [2008] QSC 173). Specifically it was confirmed that trustees (and third parties) cannot fetter the future exercise of the trustee’s powers. Any fetter is of no effect. Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power.
3. as an example in contrast, it has been held that more general statements about the preferred manner of a trustee exercising its discretion - that do not in fact create a binding obligation on the trustee - are not an invalid fetter. Simply because a trustee consistently, and every year for many years in a row, follows an identical approach in determining how to exercise its discretion, this will not automatically mean the trustee has forgone having any real choice (see: Entrust Pension Ltd v Prospect Hospice Ltd [2013] PLR 73, [37]).

Next week's post will consider one of the leading cases where an arrangement that would have been under the above principles amounted to a breach of the rule against fettering of a trustee’s discretion was in fact enforced.

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 U2 song 'I will follow’.

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Holistic Estate Planning for the New Year(‘s Day)** - Trustee duties and powers under discretionary trusts

The decision of Mantovani v Vanta Pty Ltd (No 2) related primarily to a lost trust deed, an issue explored in previous View posts.

Helpfully however, the decision also sets out a summary of the key duties owed by a trustee, noting that the office of trustee carries with it a number of strict obligations and duties, many of which are fiduciary in nature.

Fiduciary duties are generally seen as the most onerous of all legal duties and where they apply they require a person to act solely in another party's interests.

The case specifically confirms that the duties of a trustee include to:

1. become thoroughly acquainted with the terms of the trust and all documents relating to or affecting the trust property;
2. adhere rigidly to the terms of the trust and conform to and carry out the wishes of the settlor as expressed in the deed of trust; which is said to be ‘perhaps the most important duty’ of a trustee;
3. keep and render proper accounts and report to beneficiaries or to a court regarding the administration of the trust;
4. act fairly and impartially between beneficiaries;
5. administer the trust property in a way so as to avoid benefiting one beneficiary or set of beneficiaries at the expense of another;
6. make an application for judicial advice where the trustee requires advice or direction in relation to the management or administration of trust property or the interpretation of a trust instrument.

In relation to the last mentioned duty (ie to seek advice), it should be noted that a failure to seek advice has been held to be at the trustee’s 'own peril'. This is because any departure from the terms of the trust and any negligence in the performance of the duties of the trust will amount to a breach of trust.

Similarly, any acts in contravention of the duties imposed on the trustee by the trust or in excess of its powers will also be a breach of trust.

The ability of a court to review, and potentially unwind, a decision of a trustee, including for a breach of fiduciary duties, is in many respects predicated on the trust adviser's mantra profiled often in this journal, namely: 'read the deed'.

The issues in this regard can be particularly critical in relation to discretionary trusts where, at least in theory, there are few limitations placed on a trustee concerning most key aspects of the administration of the trust.

In a sentence, the rule the courts appear to apply is that a trustee's decision cannot be reviewed unless, on the material before the trustee, it is one that no reasonable trustee could have made.

What this rule means in any particular factual matrix can however be somewhat nuanced – reinforcing the value that advisers who adopt a holistic approach to estate planning can add in this space; pending ChatGPT taking over.

To learn more about holistic estate planning in 2023 – and specifically the following topics, join View’s next webinar (see: https://viewlegal.com.au/product/webinar-estate-planning-2023/):

• the key estate planning related court decisions over the last 12 months
• taxation and stamp duty changes impacting on estate planning
• the impact of key legislation changes
• latest examples of the attitude of the Australian Taxation Office towards various estate planning strategies
• insights into the latest bespoke planning opportunities we have sourced from the last 12 months

** For the trainspotters, the go to song for new year references is riffed today, namely U2 and ‘New Year’s Day’.

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PPS – the image today is around the 12th year in a row of the image being taken with the same 4 kids in the exact same location.

PPS ... according to ChatGPT:

A trustee is a person or entity that holds and manages assets for the benefit of another party, known as the beneficiary.

Trustees have a legal duty to act in the best interest of the beneficiary and to manage the trust assets responsibly.

Some of the specific duties of a trustee include:

• Investing and managing trust assets in a prudent manner
• Keeping accurate records and accounting for trust transactions
• Providing regular reports to the beneficiary
• Following the terms of the trust document
• Avoiding conflicts of interest
• Acting honestly and in good faith

Trustees can be held liable for any losses to the trust assets resulting from their failure to fulfill their duties.

Sometimes** the law matters: Binding nominations and wills

Today’s post looks at whether the superannuation death benefits can be regulated via a will.

This issue was considered by the Superannuation Complaints Tribunal (SCT) in D11-12/066 where the deceased failed to execute a binding death benefit notice (BDBN) or a non-binding nomination.

Instead, she executed a will which appointed her spouse, son and daughter as legal personal representatives (LPR) and left a specific bequest to her spouse.

The trustee of the fund was of the opinion that in the absence of a BDBN, the entire superannuation benefit had to be paid to the LPR of the deceased, to be distributed in accordance with the terms of the will.

The deceased’s spouse challenged this decision arguing that it was unfair and unreasonable given the deceased had left a specific bequest in her will to her. The spouse argued that this bequest constituted a death benefit direction.

The SCT found that the decision of the trustee to distribute the superannuation benefit to the deceased’s LPR was not unfair, unreasonable or contrary to law. The trustee’s decision was in accordance with the terms of the deed and the superannuation law and this, according to the SCT, was the correct decision.

The decision highlights the importance of standalone nominations and that it is unlikely a provision in a will can ever constitute a valid nomination.

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

** for the trainspotters, ‘Sometimes’ is a song by U2.

Happy New Year’s Day**! & some further reasons for the rise and rise of share sales

Last week’s post considered some key aspects impact of the introduction of the 50% general discount on business succession.

A further significant related transaction cost issue that has also changed over the last few years to further encourage purchasers to consider a share acquisition relates to the tax consolidation rules.

In particular, it was historically the case that in order for a purchaser to be able to claim depreciation in relation to the market value of the assets they had acquired, they needed to physically acquire those assets.

In contrast, if the shares in the relevant company were acquired, then there was no adjustment to the tax carrying costs of its assets.

In very broad terms, if a purchaser acquires shares in another company and that company becomes a member of the purchaser’s tax consolidated corporate group, then it is permitted to 'reset' the tax carrying costs of all assets of the company.

Although there can be a number of problems that arise with this resetting, in very general terms, the intention of ensuring that the tax outcome for a purchaser on a share sale as compared to an asset sale in what is otherwise an identical transaction are normally broadly achieved.

One last permutation worth remembering relates to where a purchaser is open to consider a share sale arrangement but wants to ensure that any historical difficulties with the company currently operating the business are quarantined to the maximum extent possible.

In these circumstances, it is often sensible for the vendor to suggest that a restructure be done before completion (often the finalisation of the restructure will be a settlement day condition precedent) whereby the assets of the existing company are 'rolled over' into a cleanskin company.

Obviously, there are a number of commercial, tax and stamp duty issues that need to be considered with this approach, however in many instances, it can deliver the precise outcome that each of the parties are aiming for.

** for the trainspotters, the title here is riffed from the U2 song ‘New Year’s Day’.