Appointor of a Family Trust – risks and tips to manage them
Family trusts are used today for lifetime wealth accumulation, greater flexibility in tax planning and asset protection. Testamentary trusts (trusts in Wills) are often used for post death asset protection and tax minimisation opportunities for surviving family members.
This bulletin will focus on the role of an Appointor in a family trust. It will look at the unique risks associated with the role and provide tips to assist Appointors to better manage those risks.
Structure of a Trust
A trust is a legal relationship. A trust is not a legal entity. The legal relationship is documented in a trust instrument (a trust deed or a Will). The legal relationship in most trusts is usually between the trustee, the beneficiaries, and the Appointor. The trust instrument also usually provides for a trustee and an Appointor to be an individual or a company.
The trustee makes the day-to-day decisions concerning the operation of the trust. Depending on the terms of the trust, trustees usually make decisions about distributions of income and capital from the trust fund, when to make the distributions and which people or entities that come within the definition of beneficiaries in the trust will receive distributions. The trustees, either alone or with the consent of the Appointor, make other important decisions such as how the trust fund assets should be invested prudently for the benefit of the beneficiaries and when to bring the operation of the trust to an end.
Why have an Appointor?
It is often said that an Appointor occupies the most important role in a trust and has ultimate control of the operation of the trust. In some trust instruments, Appointors can be described by other names such as Protectors or Guardians of the trust. In more sophisticated family trusts, Appointors, Protectors and Guardians can all occupy positions at the same time with different roles and functions.
The important role of the Appointor is reflected in the controlling power given to the Appointor (often the sole controlling power in most trusts) to remove the trustee and replace the trustee with a new trustee selected by the Appointor. This is because the role of the Appointor is to protect the beneficiaries of the trust. If the trustee is not performing its duties, is not properly considering the interests of the beneficiaries, or is promoting its own interests over those of the beneficiaries, then the Appointor can act in the best interests of all the beneficiaries by exercising its power to remove that trustee and appoint a new trustee.
Risks for Appointors
The most significant risk for an Appointor is potential personal liability for not performing its role in accordance with its legal duties and obligations to the beneficiaries of the trust as required by the terms of the trust instrument or as required by general law or statutory law.
The risk stems from the nature of the Appointor’s role and the power given to the Appointor. The power to remove a trustee and appoint a new trustee is generally considered to be a fiduciary power conferred on the Appointor by the trust instrument. The power must therefore be exercised in the best interests of the beneficiaries.
It may be difficult for an Appointor to obtain all the necessary information to know when to exercise the power given to it and if doing so is in fact in the best interests of the beneficiaries. The Appointor may not know what to do or may be required to obtain independent legal advice.
The potential problems and disputes that can arise in the day-to-day operations of a family trust can be many and varied. They may stem from the terms of the trust instrument, the relationship between the parties to the trust or circumstances that have arisen in the operation of the trust.
In one trust dispute dealt with by us, the Appointor was threatened with legal proceedings by the lawyers acting for one of the discretionary beneficiaries of the trust and at the same time was also threatened with legal proceedings by the lawyers acting for the trustees of the trust if the Appointor exercised its power to replace the trustees.
The dispute involved a father and his two children who were discretionary beneficiaries of a lifetime family trust established by the mother/grandmother of those beneficiaries. The father was estranged from his children. He had experienced financial difficulties in the past and asked the trustees to exercise their discretion to distribute income and capital to him. The trustees did so on numerous occasions and on the last occasion asked the father beneficiary to sign a disclaimer to any further interest in the trust. This was to ensure the remainder of the trust fund was kept for the grandchildren as the father had remarried and his new spouse had children from a prior relationship.
The lawyers acting for the father wanted the trust fund to be distributed fully to the father. It was claimed that this was the real intention of the mother who established the trust for asset protection for the father, her only child, who was in financial difficulty because of significant debts stemming from past problem gambling by the father. It was also claimed that the disclaimer signed by the father was signed under duress at the insistence of the trustees and the father was placed under undue pressure because of his need to obtain an immediate distribution from the trust.
The dispute was settled. The Appointor is insisting on a full release from all relevant parties to the dispute to all claims stemming from the dispute and the operation of the trust generally.
Some other common risks faced by Appointors may stem from trustees claiming high and unreasonable fees from the trust fund, numerous poor investment decisions by the trustees resulting in continuing losses for the trust fund, trustees failing to properly consider important indirect and direct taxation considerations, trustees non-compliance with the terms of the trust instrument and beneficiaries agitating a position with or without any proper legal basis.
Tips for Appointors to manage risks
The tips to manage risks will differ depending on the terms of the trust instrument and the relationship of the parties to the trust. The following are important tips for all Appointors:
Appointors must read and understand the trust instrument and their duties and obligations. If in doubt, they should obtain legal advice and request that the reasonable costs of that legal advice be paid from the trust fund.
If the Appointor only becomes aware of their appointment after the establishment of the trust, they may want to consider their legal right to resign as Appointor immediately after they are made aware, especially in families where there has already been legal conflict and such conflict is likely to continue in relation to the operation of the trust.
If not already provided for in the trust instrument, Appointors can (if permissible) insist on the trust instrument being amended to give the Appointor the right to request documents and information relating to the operation of the trust, the financial position of the trust fund and any dispute between the trustees and the beneficiaries. This will allow Appointors to properly discharge their fiduciary obligation to the trust beneficiaries.
Appointors should consider the provisions in the trust instrument for the appointment of a successor Appointor in the event of their incapacity or death. In those circumstances, they need to give careful consideration as to who should succeed them and be satisfied as far as possible that the successor Appointor will continue to act in the best interests of the beneficiaries.
Amendments or variations to the trust instrument often require the consent of the Appointor. It is important that Appointors ensure the procedure set out in the trust instrument for changes to the trust instrument is correctly followed.
In the event of a trust dispute, uncertainty about the interpretation of the trust instrument or problems that may arise in the administration of the trust, Appointors can try and assist trustees and beneficiaries. Appointors can suggest that trustees, in appropriate circumstances, utilise the statutory powers given to them under the NSW Trustee Act 1925. These powers can include the right for trustees to apply to the Court for judicial advice pursuant to s. 63 or to ask the Court to approve a dealing advantageous to the trust pursuant to s. 81 because it is expedient and in the best interests of the trust beneficiaries. Alternatively, if uncertainty exists, Appointors can suggest that trustees or beneficiaries approach the Supreme Court pursuant to Part 54 of the NSW Uniform Civil Procedure Rules 2005.
Finally, in relation to any trust dispute or in relation to uncertainty that may have arisen about the interpretation of the trust instrument or problems that may have arisen during the administration of the trust, there may be a settlement or an agreement to move forward notwithstanding the dispute, the uncertainty, or the possible problems. In any such circumstances, a prudent Appointor will insist on a complete release of the Appointor from all legal claims that could be made against the Appointor by the trustees, the relevant beneficiaries and their successors.
Issues with Appointors and Family Trusts
If you have read this bulletin and think you may need assistance with your legal position as an Appointor or in relation to the operation of the family trust, please feel free to contact the author or any member of our private clients team for advice and assistance.