Robert J Garvey, Solicitor

If you control a discretionary trust with absolute discretion to favour yourself or someone else to the exclusion of other beneficiaries, you should still always act with propriety, tact and sensitivity in trust matters. Inflammatory or grandiose statements provide the fuel for disappointed beneficiaries to have a new trustee appointed by Court order.  Take for example this judgment delivered on 4 July 2008 in Perth.

The facts in the Elovalis case were that, in 1980, upon the breakdown of a marriage, the husband (Michael) arranged for a family discretionary trust to be established to hold significant property, including the family home, for the primary benefit of his 2 daughters (Helen and Vicki), with a corporate trustee. Michael’s brother (Chris) was invested with the power to change the trustee. Michael became ill and Chris retired early to move in with and care for Michael for 20 years until Michael died in 2002. Chris stayed on in the home. There were no significant distributions in favour of Helen or Vicki. After some cross words, the daughters asked the Supreme Court of Western Australia to appoint a new trustee to wrest control of the trust from Chris and his brother Steve, who was by then acting as trustee.

Given that Uncle Chris was also a beneficiary of the trust (being part of the wider family group of beneficiaries by virtue of being a close relation to the primary beneficiaries) and that no breach of trust or misconduct by Uncle Steve had been shown, the application was dismissed. Master Sanderson commented that the terms of the trust deed gave the trustee such wide and unfettered powers that Steve could ‘effectively do what he likes’ with the trust property or ‘do virtually anything with it’.

The analysis on appeal nicely sets out the two basics for a Court appointed replacement trustee, which is remedial not punitive. One is the Supreme Court’s inherent jurisdiction to protect the welfare of beneficiaries of a trust. Miller v Cameron 1936 54 CLR 572 is cited as the leading decision. See Latham CJ at 575:

It has long been settled that, in determining whether or not it is proper to remove a trustee, the Court will regard the welfare of the beneficiaries as the dominant consideration (Letterstedt v Broers). Perhaps the principal element in the welfare of the beneficiaries is to be found in the safety of the trust estate. Accordingly, even though he has been guilty of no misconduct, if a trustee is in a position so impecunious that he would be subject to a particularly strong temptation to misapply the trust funds, the Court may properly remove him from his office as trustee.

The other is pursuant to statute for reasons of expediency. The equivalent provision in Queensland is section 80, but the applicable provision to the decision was section 77 of the Trustees Act 1962 (WA):

The court may, whenever it is expedient to appoint a new trustee or new trustees and it is inexpedient, difficult or impracticable so to do without the assistance of the court, make an order for the appointment of a new trustee or new trustees either in substitution for, or in addition to, any existing trustee or trustees, or although there is no existing trustee.

In this context ‘expedient’ is taken to mean ‘conducive to advantage in general, or to a definite purpose; fit, proper, or suitable to the circumstances of the case’. Porteous v Rinehart 1998 19 WAR 495 and Re Estate of Roberts (1983) 20 NTR 13 at 17.

In his judgment, Martin CJ thrashes out that, even if the trust deed allows the trustee to act in spite of a conflict of interest and with the broadest, most unrestrained, absolutist, unfettered discretions, while it is nonsense to speak of impartiality when favouring or choosing between beneficiaries, the trustee must nevertheless not take into account irrelevant, irrational or improper factors or make a decision so unreasonable that no trustee, properly directed, could have made.

The Court concluded the allegations made by the daughters could, if substantiated, establish the trustee “had a closed mind with respect to the exercise of the discretionary powers conferred upon him, or misunderstood the nature of those powers and the obligations to which he was personally subject. If those propositions were made out, they could arguably sustain the removal of the trustee on the grounds of expedience.”

The issue of whether a trustee’s right of indemnity can be excluded by trust instrument was considered by the Honourable Justice Debelle of the South Australian Supreme Court in MOYES & ANOR v J & L DEVELOPMENTS PTY LTD & ANOR (No 2) [2007] SASC 261 in a judgment delivered on 11 July 2007.

The trustee (J&L) had purchased land and then gone on to win an appeal in the Environment Court against a local Council decision declining its request to build a house on the land. The neighbours and the Council appealed further to the Supreme Court and succeeded in reinstating the original Council decision, ordering costs against J&L as trustee.

J&L refused to pay the costs. As trustee, J&L amended the trust deed so that it expressly stated: “the Trustees shall not be indemnified out of the Assets of the Trust Fund”. Soon after J&L resigned as trustee and was replaced as trustee by a new company, Palm Hills Pty Ltd, which became the new registered owner of the land and which promptly sold the land.

The question was whether the order for costs could be enforced against the sale proceeds of the land. Justice Debelle referred to a division of judicial opinion on whether a trustee’s right to indemnity against trust assets can be excluded by trust instrument. The right was either an inseparable incident incapable of being excluded or a matter akin to contract law: if a trustee is willing to disadvantage themselves in that way they should be free to do so.

The answer was found in the Victorian Trustee Act 1958, which provides:

A trustee may reimburse himself, or pay or discharge out of the trust premises, all expenses incurred in or about the execution of his trust or powers.

It was noted the provision was enacted not only in the interests of trustees and beneficiaries but also in the public interest, especially creditors. The trust amendment removing the indemnity was found to be void against public policy and inconsistent with the statute.

There is little doubt the same decision would be reached in Queensland with the corresponding provision being found in section 72 of the Trusts Act 1973

A trustee may reimburse himself or herself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers.

A Queensland Supreme Court application on whether a family trust controller had successfully replaced himself before his death has been decided in the negative. In Jenkins v Ellett [2007] QSC 154, Douglas J pondered for some 6 months after hearing a typically elliptical clause allowing for changes to a discretionary trust:

 

“The Trustee may by Deed revoke add to release or vary all or any of the Trusts declared or any Trusts declared by any variation, alteration or addition made from time to time and may by the same or any other Deed declare any new or other trusts or powers concerning the Trust Fund but so that the Trustee shall not have any power to revoke add to or vary any of the Trusts so that the Settlor may acquire a beneficial interest in the Trust Fund or any part of it nor to effect [sic] the beneficial entitlement of any Beneficiary to any amount applied for him prior to the date of revocation or alteration and any other person or persons upon whom any power or powers so conferred on him or them. Upon this exercise of any release and revocation pursuant to this clause the power so released and revoked shall be absolutely and irrevocably determined.”

Mr. Jenkins, the original trust controller, relied on the clause to exercise power as trustee to amend the trust schedule to remove himself and install his only surviving child (Ellett – the respondent) as controller. After Mr. Jenkins died, probate was granted to his granddaughter (Jenkins – the applicant) who assumed control under the trust deed as the executor of the original controller.

Ellett’s counsel relied heavily on the Property Law Act 1974 which provides:

“205 Disclaimer etc. of powers

(1) A person to whom any power, whether or not coupled with an interest, is given, may by deed disclaim, release or contract not to exercise the power, and after such disclaimer release or contract shall not be capable of exercising or joining in the exercise of the power.

(2) On such disclaimer, release, or contract, the power may be exercised by the other person or persons or the survivor or survivors of the other persons to whom the power is given unless the contrary is expressed in the instrument creating the power.”

 

Jenkin’s counsel argued the power of the controller to remove and appoint trustees was entrenched and that it would be self-defeating to allow a trustee to get around that by amending the deed to remove the controller.

Douglas J saw the issue as a question of construction and context. He quoted Thomas on Powers (1^st ed., 1998) at pp. 585-586, paras 14-31 to 14-32 seemingly as the touchstone.

“In all cases, the scope of the relevant power is determined by the construction of the words in which it is couched, in accordance with the surrounding context and also of such extrinsic evidence (if any) as may be properly admissible. A power of amendment or variation in a trust instrument ought not to be construed in a narrow or unreal way. It will have been created in order to provide flexibility, whether in relation to specific matters or more generally. Such a power ought, therefore, to be construed liberally so as to permit any amendment which is not prohibited by an express direction to the contrary or by some necessary implication, provided always that any such amendment does not derogate from the fundamental purposes for which the power was created. Thus, a power of amendment will undoubtedly be capable of making amendments which are essentially ancillary to, and for the better execution of, such fundamental purposes, e.g. so as to substitute an easier form of communication or service for the one originally stipu­lated, or so as to make other powers exercisable in writing rather than by deed, or, indeed, introduce other amendments which are not simply administrative or managerial in nature. It does not follow, of course, that the power of amendment itself can be amended in this way. Indeed, it is probably the case that there is an implied (albeit rebuttable) presump­tion, in the absence of an express direction to that effect, that a power of amendment (like any other kind of power) cannot be used to extend its own scope or amend its own terms. Moreover, a power of amendment is not likely to be held to extend to varying the trust in a way which would destroy its ‘substratum’. The underlying purpose for the furtherance of which the power was initially created or conferred will obviously be paramount.”

Douglas J went on to notice that “this Trust” was defined in the deed to include the schedule (where the controller is named) but the power to amend clause referred to “the Trusts declared”. The difference between the singular and plural limited the power to amend to the trusts created in the document, not the document itself. Douglas J also affirmed the executor applicant, Jenkin’s argument based on common sense by describing the respondent’s position as “destroying the substratum of the deed”.

Less convincing was Douglas J’s handling of the statutory disclaimer issue. He found that a disclaimer under section 205 of the Property Law Act had not been sufficiently invoked, but even if it had been, because the purported replacement under the deed was not authorised, such a statutory disclaimer was invalid. There was no further analysis and it was unclear if his reasoning was that the deed sufficiently expressed a contrary intention.