Trusts can be beneficial mechanisms for asset protection and tax purposes. There are various types of trusts each with its advantages and disadvantages depending on the desired purpose. Discretionary trusts, sometimes referred to as family trusts, are particularly beneficial for small businesses and estate planning. There are four main roles in a discretionary trust, as follows:
- The Settlor;
- The Trustee;
- Beneficiaries; and
- The Appointor.
If you have a family trust, are a beneficiary of a trust, or looking to establish one, you need to be aware of all these roles, what they mean, and the powers of the trustee and Appointor. The information below is relevant to family and discretionary trusts. Of these roles, the “Appointor” of the trust may be the most crucial and most overlooked position.
Appointor
The Appointor of a discretionary trust has a crucial role in the administration of the trust in that it can appoint and remove the trustee. This means that the Appointor has the ultimate reserve power in the control and administration of the trust. As the role of the Appointor is to have oversight and monitor the trustees, it is generally recommended that the Appointor is either the person for whose benefit the trust is primarily created or a trusted independent person. It is also crucial that there is clear succession of the Appointor in the trust deed in the event that the Appointor loses capacity or dies.
It is imperative that careful consideration is given to the person that is to be the Appointor but also how this is accounted for in the trust instrument when considering the document as a whole.
In the case of Mercanti v Mercanti [2016] WASCA 206, a Perth businessman established two family discretionary trusts. Each trust had a respective corporate trustee controlled by Mr Mercanti, his wife and his son. By way of Deeds of Variations executed by the corporate trustees, his son, Tyrone, was made Appointor of both trusts. This was done as part of a family business succession plan under which it was intended he would one day own the family businesses.
There was later a falling out between Tyrone and his parents which resulted in Tyrone being removed as a director of the trustee companies. In effect, his parents were trying to cut him out of the business. Following this, Tyrone exercised his powers as Appointor by removing the existing trustees and replacing them with another company trustee controlled by his wife.
In the proceedings, along with various other arguments, Mr Mercanti argued that the appointment of his son as Appointor was void or voidable as the trustees of the trust did not have power to amend the relevant trust deed (more relevantly the Schedule to the deed) to change the Appointor of the trust. It was held in this case that although there is no implied power of a trustee varying a trust deed, on detailed analysis of the relevant trust deeds the court found that the particular trust deed did confer a power to change the Appointor. This meant that the appointment of Tyrone as Appointor was valid.
The finding in the Mercanti case, where the power to amend the trust terms in order to change the Appointor is found in the construction of the terms of the trust instrument, was confirmed in the Queensland case of Palmer v Palmer [2018] QSC 217.
Conclusion
The key takeaway from these cases is that it really does matter who you choose to be the Appointor, and each trust needs to be interpreted according to its own specific trust deed.
In a discretionary trust, it is important that individuals have carefully considered the role and power that is provided to the Appointor. It is the Appointor who can hire, and fire trustees therefore ultimately holds the power of the administration of the trust. It is vital that, in setting up of a discretionary trust, the relevant parties involved have received appropriate advice about the legal effects of the structure and, in particular, the trust instrument. Additionally, any amendments to such trust instruments must also be carefully considered before execution.
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Written By
Daniel Dash
Senior Associate
NB Lawyers – lawyers for employers
[email protected]
+61 (07) 3876 5111
Zahra Rashedi
Lawyer
NB Lawyers – lawyers for employers
Daniel Dash and Zahra Rashedi are part of the commercial law team at NB Lawyers – lawyers for employers working with individuals and business owners on a range of matters including business sales, property disputes, estate disputes, shareholder agreements, intellectual property, litigation and taxation matters.