Who should be the Appointor of my Family Trust

10 November 2016

When completing an instruction form for arranging a new family trust for a client, it is very likely that the form will ask the question – Who do you want to be the “Appointor” of the trust?

It’s a very important question, because typically the appointor is the person who has the power to “hire and fire” the trustee of the trust. So even though the trustee is the person (or entity) which holds the legal title to all the assets of the trust and is the person who typically has full management and control over the affairs of the trust, ultimately if the appointor believes that the trustee is not doing their job properly (or for that matter, any other reason) the appointor has the power to remove that person and replace them with one or more new trustees.

More often than not, the appointor will also have additional “powers”, such as the ability to veto certain actions by the trustee (who may be required to provide prior notice of certain intended actions to the appointor). This may extend to important issues such as:

  • Amending the trust deed;
  • Changing the vesting date (or end date) of the trust; and
  • Changing the beneficiaries of the trust.


Given that the appointor often has the power to block certain actions by the trustee and has the power to remove and replace the trustee, the role is often seen as a protective one to prevent excesses and abuses of power by the trustee. Indeed, the role of appointor is often described in trust deeds as “the protector” or “the guardian”.

However, the appointor is also often considered to be the “real power” behind the trust, the one who is pulling the strings of the puppet that is the trustee. Viewed in this light, the role seems less benevolent.

Rather than being a “guardian angel” to watch over the affairs of the trust, the appointor is now more often considered to be the ultimate controller of the trust, and even the “prime mover” of the family behind the establishment and ongoing management of the trust.
 
As a result, in many modern (and it must be said, “cheap and nasty”) family trust deeds available from certain document providers, the beneficiaries of the trust are even defined around and by reference to the appointor (so that the beneficiaries are literally defined to be the appointor, the appointor’s spouse, the appointor’s children, and so forth).

The so-called “benefit” of this approach is that the document provider typically only needs three names with which to completely populate a template for a family trust deed – the name of the settlor, the name of the trustee, and the name of the appointor.

Unfortunately for the client, the potential downsides of this approach can be severe – especially where the adviser who orders such a family trust deed is not aware that the trust deed is drafted in this manner!

Example:

1.    Your client Homer wishes to set up a family trust. You as his adviser go to the website of your
       favourite trust deed supplier, where for a mere $99 you can plug in a few details and a credit
       card number and Voila! a completed trust deed pops into your email inbox a few minutes later!
       When completing the order form for the trust, it asks you to insert the name or names of the
       appointor, who is also described as being the “main beneficiary” of the trust and around whom
       the other beneficiaries are defined. As Homer is your client and the “ultimate power” behind the
       trust, you are happy that it makes sense to insert his name as the appointor. You are also
       comfortable that the other trust beneficiaries should be defined around Homer as the “main
       beneficiary”.

2.    A little while later Homer comes back to you, concerned that he should no longer be the appointor
      of the trust because his business is failing and he wants to distance himself from control of the
      trust for asset protection purposes. Instead he would like to appoint his friend Barney as the
      appointor in his place. You look at the trust deed and notice that the appointor can nominate their
      successor by notice in writing to the trustee. You prepare the appropriate notice, which Homer signs
      and gives to the trustee, and the matter is dealt with.

3.    A few years down the track the Taxation Office audit the trust’s tax affairs. They ask you to provide
       them with a copy of the trust deed and any amendments and changes of appointments, which you
       do. The auditor notices that the beneficiaries of the trust are actually defined as the appointor, the
       appointor’s spouse, the appointor’s children, and so forth – and that a few years back the
       appointor was changed to Barney. This means that all the trust distributions made by the trustee
       since that change of appointor (which have been in favour of Homer and his family) were invalid –
       because they were no longer the beneficiaries of the trust!

4.    As result:

      (a)    The trustee has been in breach of trust for those years by making invalid distributions of
              trust income and capital to persons who were not beneficiaries of the trust;

      (b)    Under the terms of the trust deed, where the trustee fails to make a valid distribution of
              the trust income in a year, the income of the trust is automatically distributed equally
              between the default beneficiaries of the trust. Under the trust deed, the default
              beneficiaries are the children of the appointor – namely the children of Barney, not of
              Homer! Plus, Barney’s children during those years were all minors…

      (c)    The tax auditor informs you that he will be re-opening the tax assessments of the trust
              for those years with a view to:

              (i)    Changing the trust tax returns to reflect the “correct” beneficiaries and the default
                     distribution of trust income;

              (ii)    Changing the individual tax returns of Homer and his family to reduce their income
                      by thousands of dollars of trust income that was incorrectly distributed to them ;

              (iii)   Changing the individual tax returns of Barney and his family to increase their income
                      by the amounts of trust income which should have been distributed to them by default
                      – and issuing them with assessments for outstanding tax (at the top marginal tax
                      rate plus Medicare Levy for Barney’s minor children) plus penalties and general interest
                      charge – which Barney promptly asks Homer to pay since Barney and his family never
                      received anything from the trust ; and

5.    Homer comes to you to ask “Please explain??”. Your explanation that you are not a lawyer and you
       did not realise what the trust deed actually said does not go down well… with either Homer or your
       PI insurer.

(If this all sounds like it might be based on a true story, unfortunately it is – the names of the parties have been changed to protect the guilty from further embarrassment!)

So, what are the important “take-away” points from this tragic tale?

1.    The role of the appointor of a family trust is usually considered to be the ultimate controller
       of a trust.

2.    Succession of the role of appointor must also be considered – not just on the death of the
       appointor, but also on the appointor’s incapacity.

3.    The ability of the appointor to voluntarily resign from the role must also be considered.

4.    You must also consider what other roles the appointor may have under the trust deed –
       not just the assumed one of being able to “hire and fire” the trustee.

5.    At the end of the day, before making the initial appointment to the role of appointor and
       before contemplating any changes – ALWAYS, ALWAYS READ THE TRUST DEED FIRST!!!

If you have any doubts as to what your client’s family trust deed says (especially if you did not arrange the trust deed for your client, but even if you did), you can send a copy to us for review.

 

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