To appointor or not to appointor

It has long been the case in modern trust deeds that the concept of the 'appointor' referred to the person with the power to appoint or remove the trustee(s). Generally the concept is unchanged, though can extend to the power to veto amendments to the trust deed. These factors mean that the appointor of a family discretionary trust is considered the controller and most powerful person under the trust.

When establishing a discretionary trust, the parties need to consider whether there should be an appointor, what powers vest in the appointor and who it should be.

 

The appointor's role

A discretionary trust need not have an appointor and the role has no defined meaning at law. If an appointor position is created under the discretionary trust it is done so under that particular discretionary trust deed (Deed) and the powers conferred on the appointor will depend on the Deed's terms.

At a minimum the Deed will confer on an appointor the power to appoint or remove the trustee. The appointor may also be granted protective powers: for instance, the trustee may need the appointor's consent to add or exclude additional classes of beneficiaries, or vary the Deed.

The appointor's role is generally seen as the most definitive role in the discretionary trust. This is because, although the trustee under the Deed is granted the discretion as to whom and in what proportion the capital and the income is distributed to beneficiaries, the appointor controls who acts as trustee and, therefore, who exercises those discretions.

Should I appoint an appointor?

An appointor may also be advisable for administrative ease: for instance, if the trustee becomes unable to act or insolvent, then it is a relatively simple process for the appointor to remove that trustee and appoint another.

An appointor also makes sense as a means of planning for future contingencies. The trustee of a discretionary trust is given full discretionary powers up to the vesting date — usually a period of 80 years. During this time, a trustee may be administering a sizeable trust fund. The presence of an appointor may:

  • help ensure that the trustee acts in compliance with its obligations; and
  • provides a simple and effective process for replacing the trustee if the trustee falls short in meeting its obligations or becomes conflicted in meeting its duties.

Ultimately the answer may turn on the trust's objectives, and whether having an appointor will further those objectives. For instance, if the primary purpose of the trust is asset protection, then for the reasons referred to under 'Other considerations' below, it would be advisable:

  • that the trust has an appointor; and
  • that the appointor is a trusted family member who is not a named beneficiary.

Appointor succession

Just as it is important to determine who will act as appointor, it is also important to consider who will step into the role as appointor of the trust when the appointor dies or is incapacitated.

These options include:

  • Successor named in deed

    The Deed states who will succeed the appointor on their death. It can be a particular named person, or the executor of the appointor's will (i.e., the appointor's legal personal representative).

  • Successor appointed by will

    The Deed states that the appointor is permitted to appoint a replacement appointor under the terms of the appointor's will. That person takes over the appointor role on the appointor's death.

  • Joint appointor succeeded by survivor

    The Deed names two (or more) appointors, and provides that on the death of one appointor the survivor(s) continue to act as appointors.

  • Appointor replaces themselves during the term of the Deed

    The Deed permits the appointor to appoint additional or replacement appointors.

  • Temporary succession (i.e. due to incapacity).

    The Deed provides for temporary succession during any period when the appointor is unable to act. The replacement appointor may be determined by one of the methods above.

  • Combination of approaches

    The Deed may set out a combination of the above to deal with succession. For instance, on the death of the appointor the appointor's spouse becomes appointor, and on the death of the spouse the spouse's executor becomes appointor.

It is recommended that the appointor provisions and succession of the appointor be carefully considered before establishing a discretionary trust. Having provisions in the Deed which deal with the resignation, removal and appointment of the appointor is necessary to ensure certainty of the Deed and remove any confusion when an appointor wishes to resign, dies, lacks capacity or is bankrupt.

Other considerations — might a person have a definable interest in a discretionary trust?

In the Federal Court decision in Richstar[1], the Federal Court held that a discretionary trust was the 'alter ego' of the beneficiary who effectively controlled the trust. As a consequence the beneficiary had an interest in the trust property that was akin to a contingent or proprietary interest.[2]

To view Maddocks summary and comments on the decision in Richstar click here.

The Richstar case involved a request by ASIC for the appointment of a receiver in relation to assets held in a discretionary family trust associated with the defendant. Justice French accepted the argument by ASIC that the defendant had a contingent interest in the discretionary trusts as in all practical terms they controlled the trust. Justice French considered that if a person is one of the open class of beneficiaries and that person also has the power to remove or appoint new trustees, then that person has a contingent interest in the property of the trust. That interest, may amount to 'property' for the purposes of the Corporations Act 2001 (Cth).

The Richstar case, although limited in its application, has raised concerns as to the extent which a discretionary trust effectively controlled by one person, provides effective asset protection where a beneficiary is also the appointor and possibly also a trustee (or director of a corporate trustee).

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of trust topics.

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[1] Australian Securities and Investments Commission in the matter of Richstar Enterprises Pty Limited v Carey (No.6)

[2] [2006] FCA 814.