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November 9, 2018

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Replacing the Appointor

November 9, 2018

 

Within a discretionary trust, the appointor ultimately controls the trust through the power to appoint and remove the trustee.  The position of appointor is not required in the context of general trust law principles and is instead a creation of the particular trust deed.

 

The position of appointor in respect to appointing and removing a trustee is facilitated in each of the states and territories legislation, which provies that although a trustee may be appointed pursuant to legislation, it will always be subject to the terms of the instrument creating the trust. Where a trust deed nominates an appointor with the power to appoint the trustee, the trust deed must be complied with, and the appointor is able to make that appointment.

 

The term “principal” is used instead of “appointor” within some deeds.  Deeds may also contain the additional role of a “guardian” whose consent is necessary to the decisions of the trustee.  The terms, roles and extent of powers will depend on the terms of each trust.

 

 

Replacing or adding appointors

 

At some point after a trust is established, there may be a wish to replace the appointor or appoint additional appointors.

 

There are several possible methods for appointing replacement or additional appointors.

 

Trust specifies mechanism – The trust deed itself includes a specific mechanism for the appointment of a successor appointor.

 

Event initiated replacement–In a family discretionary trust often both spouses will be nominated as the appointor of the trust. Upon the death of one spouse, the surviving spouse is often authorised to appoint a new appointor in their own will. Where no successive appointor is nominated in the deceased’s Will the appointor’s role may pass to the executor of the deceased appointor depending on the terms of the trust. 

 

Trust deed amendment– Where a trust deed does not include a provision for the replacement of an appointor then the  variation of the deed may be considered.  This will depend on the power of variation within the trust deed which must be reviewed and considered carefully to consider the extent of the variations allowed.

 

Court ordered replacement or intervention – The Court may intervene to ensure that there is a proper administration of the trust.

 

Trust deed amendment

 

Where the variation power of the trust deed is used for the replacement of the appointor, the terms of the trust deed must be carefully reviewed.

 

In a previous Opportuna Legal article we reviewed Mercanti v Mercanti [2015] WASC 297, which is a leading example of the paramount importance of the terms of the trust deed being carefully considered.

 

In brief, the court examined two trust deeds, the MMF Trust Deed and the FW Trust Deed. 

 

The MMF Trust Deed provided that the trustee’s power of variation extended to all or any of "the trusts terms and conditions hereinbefore contained".  The Court held that this power of variation allowed for the trustee to vary the text of the trust deed including the power to change the appointor.

 

Whereas for the FW Trust Deed, the power of variation referred only to varying "trusts" and not provisions, terms or conditions.  The Court held that the power of variation within the FW Trust Deed did not allow the trustee to vary the identity of the appointor.

 

Lessons learnt

 

There are important lessons to be learnt at two separate stages of the life of a discretionary trust deed.

 

At the drafting stage consider, what appointor provisions should a deed contain?

 

Appointor Succession - A trust deed for a discretionary trust should provide for succession of the appointor. This may provide that in the event of the death of the appointor, the executor will become the appointor of the trust. This event assumes that the appointor has a current Will at the date of death.

 

A preferable provision is one which contains this automatic succession provision in addition to the appointor able to nominate their successor, either at the commencement of the trust, or during the lifetime of the trust. This allows for the nominated person to become appointor of the trust upon the death of the nominator.

 

The ability to change the Appointor during the lifetime of the Trust -

A discretionary trust deed should also allow the appointor to appoint a replacement in their stead. This may occur for a variety of reasons including where a  relationship breakdown occurs.

 

For the appointor to automatically vacate - A discretionary trust deed should also provide that in the event of incapacity or bankruptcy the appointor’s position is vacated.

 

Joint Appointors  - Joint appointors may be desirable in certain situations.  Accordingly provisions should allow, for where there are joint appointors,  the powers are exercised  “jointly”.  Survivorship should be considered carefully in this situation and whether the survivor of the joint appoint is the remaining appointor or alternatively that each appointor may nominate their own successor. 

 

Where there is more than one appointor there is the risk of disputes arising during the lifetime of the trust, accordingly a dispute resolution provision is important to enable for the resolution of disputes to occur outside of the courts.

 

The appointor provisions should not be considered in isolation. Additional provisions within the deed should be carefully considered as to how they interact with the appointor provisions.  The  power of variation is an important provision in the context of Mercanti v Mercanti and should preclude a power to vary the appointor or, at least, not without the appointor's consent.

 

At a later stage, if the appointor is sought to be replaced, and the mechanism within the trust deed is utilised, this should be strictly followed.  If the variation powers of the trust deed are utilised, the wording of such a variation power must be carefully considered, in light of Mercanti v Mercanti, to consider whether such a variation is permitted under the terms of the trust deed.

 

If you are considering replacing the appointor or appointing additional appointors, contact us for advice. 

 

Disclaimer

Opportuna Legal communications are intended to provide commentary and general information. They should not be relied upon as legal advice. If you would like further information in relation to this matter or other legal matters please contact Opportuna Legal.

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