An increasing number of individuals, especially those with complex professional and personal affairs, are using discretionary trusts as part of both their day to day wealth management strategies and also as part of their approach to long term planning.
Discretionary trusts can be an excellent vehicle for the management and distribution of assets and income and also for the transfer and preservation of wealth for the benefit of successive generations. However, as family structures become ever more complex and people are living far longer than previous generations, conflict as to the management of discretionary trusts is becoming more common.
From time to time the need to replace an Appointor or Guardian of a discretionary trust may arise due either to conflict between various parties or as a result of the death or incapacity of an officeholder.
If the need to replace an officeholder arises it is important to consider the different roles each officeholder fulfils and also to have a clear understanding of the correct process for replacing an officeholder.
Different roles and different titles
For a discretionary trust to be properly established several specific roles must be assigned to designated individuals.
A discretionary trust must have Trustee. The Trustee is likely to have very wide powers of management including the right to determine to whom trust funds will be distributed. This includes the power to distribute trust assets and income to themselves. A Trustee might be one or more natural persons or it may be a company.
Ordinarily, a discretionary trust will also have an Appointor. An Appointor is the individual or individuals tasked with the power to remove an existing Trustee and appointing a new trustee. The role of an Appointor is very important with respect to a Trust.
A Guardian is a person who has the right to receive notice of any proposed decision or appointment by a Trustee. A Guardian’s consent may also be required before any decisions or appointments are made. This is essentially the power of veto over a Trustee’s powers including in relation to matters such as the inclusion or exclusion of beneficiaries to the trust and the distribution of trust assets and income. It is a role literally designed to safeguard certain interests against decisions or conduct of Trustees that may be prejudicial. Not all discretionary trusts will have a Guardian as part of the trust structure. An Appointor may also be a Guardian.
Where an Appointor or Guardian may need to be replaced
Once a discretionary trust is established the original Appointors (for example the parents in a family trust) may wish to step down from the day to day running of the trust. An Appointor may choose to maintain ultimate veto power over specified decisions such as the distribution of trust income and capital while appointing one or more of their children as Appointors. Alternatively, a trusted professional such as a lawyer or accountant may be appointed to the role. An office of Guardian could be established to provide a retiring Appointor with some ongoing safeguard powers.
Similarly, at some point after a trust is established a Guardian may no longer wish to have the responsibility of overseeing the actions of the Trustee. When this occurs there are several possible methods for appointing replacement officeholders.
The need to replace an officeholder will also arise if they die or become incapacitated in such a way that they are no longer able to fulfil the obligations of the role.
Methods of replacement
A number of methods of replacement of both a Trustee and Guardian are possible.
Trust specifies replacement – The trust deed itself contains a specific mechanism for the appointment of successor Appointor and Guardians. It is essential that any specifi requirements in the Trust deed are met. If not the action taken to replace a Trustee may be invalid with various consequences following.
Legislation – If the trust deed does not specify a methodology for replacing an officeholder then you may need to consider the relevant legislation applicable to the trust. This will vary depending on which jurisdiction you are in. Importantly, you may find that while the applicable legislation provides a mechanism for appointing a trustee, the relevant legislation may not deal with the power to remove a Trustee. We recommend that you seek legal advice prior to making any changes to a trust especially if you are seeking to replace an officeholder and are relying on a particular Act such as the Trustee Act 1936 (SA).
Replacement upon death – Often in a family discretionary trust one or both parents will be nominated initially as the Appointor (and possibly also the Guardian) of the trust. When one parent dies the surviving parent is ordinarily authorised to appoint a new Appointor or Guardian a deed or alternatively in their own will. If no successive Appointor or Guardian is nominated in the deceased’s Will then depending on how the relevant provisions in the trust deed are drafted the Appointor/Guardian’s role may pass to the executors of the last surviving Appointor or Guardian.
Intergenerational transfer – A trust deed may provide for the transfer of appointments between successive generations. Including an intergenerational transfer provision must be given very careful consideration particularly where there is more than one child involved, as subsequent life events such as bankruptcy and relationship breakdowns may affect the suitability of a nominated transferee.
Amendment of a trust deed – If a trust deed does not include a provision for the replacement of an Appointor or Guardian then it may be necessary to consider how the deed is able to be amended. Whether this is possible will firstly depend on whether there is an appropriate amendment power provided for in the trust deed and secondly on whether the power to amend the deed is restricted in any way. Trust deed amendments should only be undertaken with specialist legal and taxation advice as the consequences of getting it wrong can be extremely inconvenient and very expensive.
Court ordered replacement or intervention – In certain circumstances and particularly in cases where a dispute between parties affected by the trust arises, a Court may intervene to make orders so as to ensure the ongoing proper administration of the trust.
A carefully structured discretionary trust can be an excellent vehicle for managing wealth. Should the need arise to replace an Appointor or Guardian it is recommended that advice be obtained prior to any changes to ensure that the replacement is arranged in accordance with either the relevant trust provisions or applicable legislation. Our expert lawyers can advise you and work with you to ensure this occurs.
If you or someone you know wants more information or needs help or advice, please contact us on (08) 8344 6422 or email [email protected].