Since the landmark decision in Kennon v Spry; Spry v Kennon [2008] HCA 56 incited fear that no assets could be distanced from the reach of the Family Court, the role of Appointor of a family trust has been scrupulously reviewed and sometimes creatively addressed by professional advisors alike. Since such decision, the critical advice provided by advisors is that control of a family trust must be diluted. No one person must bear sole control. Control must be shared or one risks the Family Court reaching into the family trust in the event of a relationship breakdown.
It is becoming increasingly common for a professional advisor or firm to agree to undertake the role of Appointor for a client to dilute control. However, it is important to be aware that, when agreeing or suggesting undertaking the role of Appointor, the advisor or firm is likely creating a fiduciary relationship.
Let’s take a deep dive into the creation of a fiduciary relationship at law.
At law, there are well established categories of fiduciary relationships and you would be most familiar with:
- Solicitor/client;
- Director/company;
- Trustee/beneficiary;
- Agent/principal;
- Attorney/donor;
- Parent (guardian)/child (ward); and
- Partners.
The categories are not closed and a fiduciary relationship can be created between parties in contract or in the circumstances (even implied in the circumstances). What defines a fiduciary relationship is not necessarily a fixed concept but fundamentally, the Courts look at whether Party A has agreed to undertake, act or exercise a power or discretion on behalf of, and for the benefit of, Party B. This relationship must be grounded in trust and confidence because the powers and discretions vested in Party A can be a double-edged sword; that is, they can equally be wielded to the detriment of Party B. This makes Party B vulnerable to Party A.
So, do the terms of the family trust deed create a fiduciary relationship on the Appointor and to whom is it owed?
In our experience, in most family trust deeds, the Appointor has two powers – to “hire” and “fire” a trustee. However, almost all family trust deeds do not prescribe when or for what reason an Appointor can exercise those two powers. It is an implied understanding that the Appointor will exercise those powers where a trustee is wayward or fails to act in the best interests of the beneficiaries.
Therefore, it follows that a fiduciary duty is owed to the beneficiaries (who are otherwise very limited in the manner in which they can influence and balance the trustee).
It also follows that the beneficiaries are vulnerable to the Appointor exercising those two powers. The absence of the prescriptions for when and for what reason to exercise those two powers means that the Appointor can simply do nothing. If the Appointor does nothing, then the beneficiaries continue to be beholden to the trustee. Conversely, if the Appointor exercises those powers, the Appointor may appoint a trustee better aligned with their point of view.
Now, it is important to distinguish here that when using the description “wayward trustee”, we do so with a very large brush. Certainly, we do not limit it to a trustee who is breaching the terms of the trust deed, breaching their fiduciary relationship with the beneficiaries or is otherwise, acting negligently or criminally. Beneficiaries have a degree of recourse in such situations. However, wayward can also extend to differences in point of view on:
- The investments of the Trust;
- The administration of the Trust;
- The exercise of discretionary powers, particularly around discretionary beneficiaries; and
- The instruction of other professional advisors to assist the trustee.
Beneficiaries may not have any recourse on such exercise of powers and discretions.
In a practical sense, the beneficiaries only option would be to approach the Appointor with their concerns and implore the Appointor to exercise their two powers.
At Coleman Greig Lawyers, we take into consideration the breadth of meaning of “wayward” and build in greater protections into this role. After all, one the horse has already bolted (that is, once a trustee has acted waywardly), the powers to “hire” and “fire” do little to mitigate the loss. It is far better to intercept a wayward act, than react.
So, you have accepted a fiduciary duty as Appointor. What does that mean?
As a professional advisor, you are no doubt already beholden to a higher standard of conduct.
However, you will also be subject to the “no profit” and “no conflict” rules without obtaining the beneficiaries’ consent. Consent could be drafted into the terms of the family trust deed.
You need to also consider whether you are exposed to any liability and whether the terms of the family trust deed do or need to indemnify the Appointor for any loss, claim brought or damage caused in connection with the Appointor’s powers and discretions. Using the bolting horse as an example – could the beneficiaries hold you accountable if the trust fund vanishes and you failed to realise the trustee had mismanaged, was negligible and/or acted criminally? Ergo, failed to exercise the Appointor’s powers?
It is not common for the Appointor to be indemnified, so it is worthwhile looking at the terms of the family trust deed before accepting the role.
Is this strategy effective?
This can only be answered case by case. As you are aware, who is appointed Appointor is not solely driven by fear of the Family Court. It can be driven by:
- A genuine intention to have a separation of powers;
- The different functions of a trustee and Appointor in the administration and oversight of the family trust;
- People:
- What skillsets are around the table?
- Who does the client trust?
- What actually is best for the beneficiaries overall.
However, we understand there have been murmurings that the Family Court may view professional advisors as neutral in an analysis of the controllers of the family trust. The Family Court may be more inclined to look at controllers who are also beneficiaries. Therefore, there may not be a strong dilution of power proffered by the appointment of an advisor or firm as Appointor in the family law context.
For further information on controllers of family trusts and fiduciary duties, please contact a member of Coleman Greig’s Wills & Estate Planning Team, who would be more than happy to assist you today.
Please note this is intended to be a general guide and you should obtain specific advice for any specific matters.
