A recent case involving a prominent South Australian wine-making family highlighted the importance of making sure that control of a trust following the death of the appointor is transferred in a way that is permitted by the trust deed.
These days, many family businesses and assets are operated and owned by discretionary family trusts. The day-to-day control of the trust lies with the trustee. However, overall control of a trust is often considered to lie with the appointor (older trust deeds might use the terms “principal”, “guardian” or “custodian”). The role of appointor, usually filled by one person, is considered to have overall control of the trust because that person has the right to remove and appoint trustees. For most trusts, that right is never exercised and the role of appointor is often forgotten as the years go by.
The role of appointor needs to be considered in long-term succession planning for the trust because the person in the role effectively controls the trust. As the power of appointment is personal and not a property right, it does not ordinarily form part of your estate to be dealt with in accordance with your assets upon your death. Similarly, if you go bankrupt, it is not a role that can be assumed by your trustee in bankruptcy.
So the question is, who will the appointor be upon the loss of capacity or death of the current appointor and by what authority will that person get control? The first step in determining this is to review the trust deed, which usually provides for what will happen when the appointor wants to transfer the power of appointorship to someone else either during their lifetime or upon their death.
It is important that the proposed method of transfer is permitted by the trust deed as it will be an invalid transfer if it is not permitted by the trust deed. Any subsequent removal or appointment of a trustee by the invalid appointor will also be invalid. Complicating the issue is that all trust deeds are different and do not always cover the method of transfer proposed by the appointor.
The trust deed might state that, upon death, the legal personal representative is the new appointor or that the appointor is permitted to appoint a new appointor in their will. The trust deed might also state that the appointor has the power to appoint a new appointor during their lifetime (usually by deed or resolution).
Case in point
In the South Australian case of the wine-making family, the appointor had attempted to transfer the power to his wife and two other persons under his will. However, the trust deed did not permit him to transfer the power under his will. In fact, the trust deed had given him the power to transfer the appointorship during his lifetime but, as the court held, not otherwise.
Furthermore, the trust deed stated that, in the absence of him making an appointment during his lifetime, the executor under his will became the new appointor. The sole executor was his wife. Accordingly, control of the trust went solely to his wife, as executor under his will, rather than his wife being a joint appointor with the two other persons as he had directed in the will.
That case shows the importance of ensuring that the proposed method of transfer must be in a manner permitted by the trust deed.