You update and change the Guardians/Appointors for many reasons.
The Appointor & Guardian Update:
Example: Mum and Dad are the Appointors. Mum dies. Dad continues as the Appointor. Dad is happy to control the Family Trust by himself. Nothing in the Trust Deed or Mum’s Will states anything different. Therefore, all Dad is doing in the Appointor Update is formally removing Mum as Appointor. Mum’s executor or next of kin signs on Mum’s behalf. The Family Trust may have a system or procedure for dealing with dead Appointors.
Stamp Duty is a State tax. It is payable when assets are transferred from one person to another person.
Capital Gains Tax, is a federal tax. CGT is payable when you ‘dispose’ of an asset.
However, by changing the Appointors you generally do neither. The class of beneficiaries remains the same. There is no change to the object or purpose of the Family Trust. There is generally no ad valorem Stamp Duty or CGT payable in Australia. (The Latin phrase “ad valorem” means “according to value.” Ad valorem taxes are levied on the market value of some of the assets in your Family Trust.)
Most Family Trust deeds merely define the Appointor by naming an actual person. E.g. John Edward Smith.
Less commonly the Appointor is defined by a position. For example, the “Appointor is the Default Beneficiary”. If this is the case speak with your accountant.
Our letter of advice, that comes with this document, confirms that there are no generally no ‘resettlement’ issues. The law firm’s letter of advice comes with every document you build on Legal Consolidated’s website. We are a law firm and we are responsible for your document.
Stamp duty is a state tax. Capital Gains Tax is a federal tax. The ATO oversees the collection of CGT.
The ATO issues two main Private Rulings: Authorisation numbers 1011616699832 and 1011623239706. This is with particular reference to the ‘resettlement’ CGT events E1 and E2.
They confirm that there is usually no tax resettlement on the change of an Appointor. There is generally no ‘resettlement’. And therefore generally no CGT. This is where:
The ATO is just a regulator. It is not the finally interpretor of the law. The Australian Courts interpret the law. And their decision binds the ATO. This is whether the ATO likes it or not.
FCT v Clark [2011] FCAFC 5 is court authority that changing a Appointor generally does not trigger any tax issues.
In Clark’s case there are major changes to the trust deed, including:
But the court said that they did not cause a resettlement of the trust for tax purposes.
But this is on the basis that of the continuation of property and beneficiaries. They are ascertainable at all time.
The court went as far to say that there is a resettlement only if the trust is deprived of all assets and then ‘re-endows’ them on a different set of people.
The ATO’s response to Clark’s case is Taxation Determination TD 2012/21. It is rather disappointing. And smacks of sour grapes by the ATO. In particular the ATO makes no direct comments on the Appointor changing. And none of their examples deal with a change in the Appointor or succession planning.
Rather, blandly, the ATO confirms that, unless variations causes a trust to terminate, then there is no resettlement for tax purposes.
Who is in charge? Is it the Trustee that ‘owns’ the assets? No, the Appointor is god. The Appointor bosses the Trustee. The Trustee looks like it is in control, as it has the assets in its name. However, the Trustee takes it marching orders from the Appointor.
The Appointor can sack the Trustee on a whim. This is for no reason at all.
The Deed of Variation of the Appointor:
The wonderful thing about trusts is that they suffer very little meddling by the government. You are free to put into your trust deed pretty much anything you want. (That is why it is important to have a specialist law firm, like Legal Consolidated, prepare your trust deeds.)
There are two main persons in a Family Trust: ‘controller’ and the trustee. The ‘controller’ of the trust acts like a god. It can do whatever it wants. It ‘controls’ the trust. Depending on who prepared your Family Trust deed the ‘controller’ may be known by many different names.
Yes, commonly mum and dad are Appointor together. But you can have as many Appointors as you wish.
You also have as many Backup Appointors as you wish. The Backup Appointors are often your children. And commonly the family trust for the Backup Appointors use this expression in the Family Trust Deed:
‘the union of Dad Full Name and Mum Full Name’.
It is becoming more common to set up a company as a dedicated Appointor of a family trust.
So, for example:
Obviously, the shareholders have ultimate control of the company, not the directors.
Commonly you would also have a Shareholders Agreement to lock in the rules. If the beneficiaries getting the shares are minors then the executor(s) in mum and dad’s Wills control the shares (and therefore the assets in the Family Trust). They can only act in the best interests of the minor children. (Whether you have a 3-Generation Trust Will the position is the same.)
All companies prepared by Legal Consolidated can be used as an Appointor of a Family Trust. However, you can not expose the company to anything that may make it insolvent. So you should not let the Appointor company operate a business. This is either in its own right or as a trustee. Because running a business is high risk. The company should serve no purpose other than be the Appointor (or future Appointor) of the Family Trust.
To labour the point, obviously the Appointor company should:
The Appointor company should hold no positions. This is other than to be the Appointor (or Backup Appointor) of the Family Trust.
If you do not have a Legal Consolidated company, then check with the law firm that prepared that company. And get in writing whether it can be used as an Appointor. Or just update the Company Constitution.
Company as Trustee of Family Trust – Why have a family trust corporate trustee company?
You can build the Shareholders Agreement here.
The Appointor is god. Or rather the current Appointors are gods. The Backup Appointor is nothing. You can keep changing the Backup Appointor.
We talk about the Trustee of the Family Trust remaining in that capacity at the whim of the Appointor.
Similarly, the Backup Appointor can be changed at the whim of the Appointor. You just build another Appointor Family Trust Variation Deed.
At law there is no requirement to tell the next controllers of the Family Trust who they are. But it common sense to let them know. And to educate and train them on how Family Trusts operate.
Otherwise upon your death (as the Appointor) it is a steep learning curve to have to deal with your death and the control of this strange vehicle called a Family Trust.
I get annoyed when well healed parents tell me that their children are not ‘money savvy’. Or they are only a housewife or butcher.
My dad was a butcher. During WW2 he was forced to leave his London school. He didn’t get much education pass year 7. But he was wonderful with money. He taught me the value of investing and running a business at a young age.
If your children are not ‘money savvy’ then you do something about it. You are the parents.
Appointor insane? Family Trust succession planning
A Will gives away what you own.
The correct way to deal with the succession of the Appointor is to build a Deed of Variation.
It is wrong and foolish to allow your Will (or any trusts formed under your Will) to control the succession of your Family Trust. The only way that you should update or direct who is the controller ofhttps://www.legalconsolidated.com.au/company-as-trustee-of-family-trust/ your family trust is via a Deed of Update. This is the document you are about to start building. Just press the blue-button above to start the process. Read the hints as you build the document.
This is the cast of players in a Family Trust
So let’s have some of these players die:
A Last Will and Testament should not have any control over a family trust. Badly drafted Wills may state:
“In the event of my death the Appointor of my Family Trust will be my executors”.
That is silly. It is wrong. A Will is a grubby little document. It can be challenged by many family members. Even with a Considered Person Clause the Will can still be challenged.
In contrast a Family Trust can only be challenged by your spouse or de facto.
So you should not let the Will contaminate the succession planning of a Family Trust. Rather you either:
Appointors (and Backup Appointors) should review and upgrade their:
And while you have a company as trustee of your Family Trust then upgrade your:
After the Appointor or Appointors all die (or go bankrupt or lose mental capacity) your Back up Appointors take over. If you have one child and expect more children then commonly the backup Appointors are “Child One Full Name” and “Unborn Children”. But what happens if the Appointors all die and there is only under 18-year-olds as the Back-up Appointors? That is fine. Their position is protected until they turn 18. In the meantime, the minor’s legal personal representative (guardians) hold that position in trust for those minors. However, the Court may direct another person to take charge of the Appointor position. But at all times that person or persons must always act in the children’s best interests. The assets in the Family Trust are protected for the minors.
No, you do not get control of the Family Trust back. There are bankruptcy risks to set up the Appointors succession plan in that way. Choose your co-Appointors and Back-up Appointors carefully.
The trustee of a family trust is either a:
The Appointor is god. The Appointor can sack the trustee. So the most important part of control and succession planning is the Appointor.
But it is good if the current Appointor ‘controls’ the trustee as well. This may not always be possible because:
It is also useful if, when the Appointor dies the “Back up Appointor” controls the trustee as well. Again, this is often not possible because of the 4 reasons above.
Specific Gifts in a Will are not usually a good idea, as it dates the Will. However, the ‘last to die’ Appointor can gift, in their Will, the shares in the corporate trustee to the designated Back up Appointor. A better approach is for the ‘last to die’ Appointor to leave a signed, but undated, transfer form for the shares to the designated Back up Appointor. Your accountant can prepare this blank share transfer for you.
If the Back up Appointors are all the children and the children are the residuary beneficiaries in your Will then this becomes even less important.
The reason I am not that concerned with the control of the trustee of the Family Trust is that:
Mum and Dad can rewrite their Wills and POAs as often as they wish, for free. They can, for example, cut out children and loved ones from their Wills.
Similarly, Mum and Dad, as the current Appointors, can build another Deed of Variation of their Family Trust and change the Back up Appointors.
And Mum and Dads do change their trustees. This is he particularly the case if the wrong child now or will have control of the corporate trustee of the Family Trust in the future.
Just as you do not know if and when a parent has changed their Will, you do not know if your parents have changed the succession planning of their Family Trust.
Legal Consolidated in the drafting of this Deed of Variation or any update of a Family Trust, only acts for the current Appointors. Legal Consolidated does and can only acts for the Appointors. Legal Consolidated does not act and can not give advice to the Back up Appointor.
The Back up Appointors are on their own. They should seek their own independent legal advice. This is from another law firm.
The current law is that the trustee-in-bankruptcy cannot stand in the shoes of the Appointor.
The case of Harris v Rothery [2013] NSWSC 1275 confirms that the trustee-in-bankruptcy cannot take over the job of Appointor. This is because the Appointor is not an ‘asset’. A ‘power’ over assets does not itself constitute ‘property’. The role of Appointor is not part of the insolvent’s estate. Instead, the role of the Appointor is an ‘obligation’. The job of Appointor is one of ‘fiduciary’.
The Appointor is god. What happens if the Appointor goes bankrupt (if a human) or insolvent (if a company)?
What if the trustee-in-bankruptcy gets control of the Family Trust’s Appointor position? The trustee-in-bankruptcy merely instructs the Trustee (puppet) to distribute 100% of the Family Trust assets to the bankrupt person. Then trustee-in-bankruptcy then gets all the Family Trust assets.
As the law currently stands the trustee-in-bankruptcy cannot get its hands on the Appointor position. This is the case even if the Appointor is bankrupt.
What happens when you go bankrupt under the Bankruptcy Act? All your assets are available to distribute to your creditors. This includes:
“the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit…”.
The Appointor’s position is a ‘power of appointment’. It is considered an obligation or a job. Therefore, it is not considered ‘property’. And therefore, it cannot vest in the trustee-in-bankruptcy. See Re Burton; ex parte Wily v Burton (1994) 126 ALR 557
In Re Burton the trustee-in-bankruptcy argues that Mr Burton is the Appointor. He is also a beneficiary of the Family Trust. He has the right to direct the trustee to distribute all capital and income to himself. And therefore the trustee-in-bankruptcy could scoop up the asset from Mr Burton.
The Court states that the Appointor has fiduciary powers. And must be exercised for the benefit of the beneficiaries.
The Appointor’s powers are exercised only to further the purpose of benefiting the beneficiaries.
The powers of an Appointor are not ‘property’. And as such the position and the right cannot pass to a trustee-in-bankruptcy.
Nevertheless, the above doomsday scenario is my fear. I think the laws will change. This is why with a Legal Consolidated:
the Appointor automatically loses their position as Appointor. This is if the Appointor goes bankrupt or insolvent.
We are a conservative taxation law firm. We do not leave anything to chance. We assume that future laws will change. That is to the detriment of our clients. We put asset protection into our Family Trust deeds, accordingly.
The Court in Blenkinsop v Herbert [2017] WASCA 87 attacks the Appointor/Guardians by looking at:
Fred and Judith Blenkinsop start two discretionary trusts during Fred’s lifetime. (Trusts that start while you are alive are ‘inter vivos’. Trusts that start at your death are in your Will. These include 3-Generation Testamentary Trusts.)
While it is usually your children, in this instance Fred, Judith, and their five children are the primary beneficiaries of both Trusts. All 7 of them are the default beneficiaries.
Both Family Trusts have corporate trustees. Dad Fred and Mum Judith are the directors. This is until Fred dies.
The trustee’s powers for both Trusts are broad. But, as is the case for Family Trusts, such powers are subject to the Guardian’s consent.
Fred sadly dies in 2004. Judith and one of her daughters became directors of both corporate trustees. More importantly, Judith becomes the Guardian and Appointor of the Trusts.
For the next five years, both Trusts are controlled by Judith. Judith uses the assets in the Family Trust as if they were her own. This is common and usual.
Judith, the mum is getting older and wants succession planing.
She makes her five children all directors and shareholders of both trustees companies.
Judith, the mum, is going to set up a Shareholders agreement. But it is never signed.
Two years later the corporate trustees sign a deed of variation. Judith is the Remaining Appointor. Her five children as are the New Appointors. There is now 6 Appointors of both Family Trusts.
One of the children gets greedy. There is a director’s meeting of the corporate trustees. Motions require Trust income to only go to the greedy child. Mum goes to court to stop this. She asks the Court to remove the Corporate Trustee and the greedy Guardian/Appointor. This is under the Trustees Act 1962.
His Honour set out five issues. They confirm that the trust deeds, as varied, show an objective intention that the individual guardians may exercise their powers. But only in the interests of the beneficiaries and not in their own interests:
His Honour states that the the trust deeds, as varied, give the power of guardians upon beneficiaries, is to allow each of them to have the right to consent or withhold consent to decisions which may benefit only one or more of them.
His Honour found that to remove the Guardians, so that there was no Guardian under the trust deed, would be to effect a substantial amendment to the trust deeds and that the intention of the trust deeds was to fetter the discretion of the trustee.The
Whilst the number of Guardians, and the requirement that they act unanimously, may be impracticable, to remove them on those grounds would be contrary to the intention of the trust deed and could not be done.
The Court of Appeal agrees with the primary judge’s decision. The Guardians cannot be removed. It considers the role of a Guardian. And the fiduciary powers:
The Court is suggesting that it has power to remove a Guardian. But only if the Guardian had a fiduciary power.
Interesting, it seems that guardians are not always fiduciaries. The duties and powers of the Appointor/Guardian is considered. And the facts of how the Family Trusts have been set up and for what ‘purpose’.
How do you decide if Guardian is fiduciary? The Court looks at the Family Trust Deed. It seeks to find the purpose of the trust. It seeks to carry out the trust’s purpose. It tries to give the Family Trust meaning. It does not want to amend or change the Family Trust’s purpose.
Most modern Family Trust deeds allow for Appointor succession. If there is no power in the Family Trust deed for Appointor succession then you can usually find a general power of variation.
If necessary the Family Trust deed may need to be update to allow for Appointor succession.
However, any Appointor changes must be permitted by the Family Trust deed or a variation of a Family Trust deed: Mercanti v Mercanti [2016] WASCA 206.
In Mercanti amendments to two Family Truss are considered. Each trust deed had a different variation clause.
The amendments considered in that case were allowed in the trust with the broader variation clause, but not the other.
Should the power to amend the Family Trust deed be not sufficiently broad, then the trustee may not be allowed to amend the deed in a particular. This may result in the amendment being invalid.
Look at the original Family Trust deed, as well as each subsequent deeds of variation. The document assumes that the Appointor, Guardian, Principal or similar power holder has the power to retire and appoint a replacement Appointor in its place. If you are unsure of this position, it is recommended that you seek legal advice.
Telephone us as you build the Family Trust Appointor Update. We can help you answer the questions
Adj Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
National Australian law firm
National: 1800 141 612
Mobile: 0477 796 959
Email: [email protected]