Power of appointment
It is fair to say that in a modern discretionary trust, true control rests not with the trustee, but with the Appointor – the person who has the power to remove or appoint the trustee.
In our experience, Appointors are almost invariably individuals rather than companies, and a properly drafted trust deed should allow for the orderly succession of the power of appointment. If the person who has the power of appointment suffers from a personal misfortune (such as accident, illness, bankruptcy or even death) it is important that the transfer of power can be appropriately managed.
It is important to note that the power of appointment has long been regarded by the courts as a personal right rather than a proprietary right (see, for example, Re: Burton : Wiley v Burton (1994) 126 ARL 557), which means that the power should not vest in a bankruptcy trustee – not through lack of trying, however.
In Fordyce v Quinn & Anor  QSC 307 (Fordyce) a trustee in bankruptcy argued that a bankrupt discretionary beneficiary who had been the only beneficiary to receive distributions, was the named beneficiary and the director of the trustee company gave the trustee in bankruptcy sufficient standing to apply for a trust to be wound up (with the trust property vesting in the trustee in bankruptcy) under the Bankruptcy Act 1966 (Cth) (Bankruptcy Act). The trustee in bankruptcy sought to apply findings in Australian Securities and Investments Commission (In the Matter of Richstar Enterprises Pty Ltd) v Carey (No 6) (2006) FCA 814 (Richstar) including that:
“…where a discretionary trust is controlled by a trustee who is in truth the alter ego of a beneficiary, then at the very least a contingent interest may be identified because … it is as good as certain that the beneficiary will receive the benefits of distributions either of income or capital or both.”
In Fordyce, the Queensland Supreme Court distinguished the facts from Richstar which dealt with the meaning of property under the Corporations Act 2001 (Cth) rather than the Bankruptcy Act, with Jackson J stating:
“It is difficult to accept as a principle of reasoning that a beneficiary’s legal or de facto control of the trustee of a discretionary trust alters the character of the interest of the beneficiary so that it will constitute property of the bankrupt if the beneficiary becomes a bankrupt.”
Division 4A claim
It is likely that bankruptcy trustees will continue to attempt to access trust assets, whether through application of the findings in Richstar, or under Division 4A of the Bankruptcy Act, which allows access to certain types of trust assets. The elements of a Division 4A claim are, generally:
- the bankrupt supplied personal services to the controlled entity without commensurate remuneration for those services and/or provided financial contributions to the trust.
- the trust acquired property, and/or their net wealth increased from those services or financial contributions.
- the bankrupt derived a benefit from the property when the bankrupt controlled the entity.
- the controlled entity still has an interest in the asset.
At this stage, we consider that the power of appointment could remain safe in the hands of a bankrupt appointor, however it is prudent to consider the appointment of alternative or nominee appointors to ensure that the question doesn’t arise, or to deal with other circumstances (such as illness or injury or loss of capacity) that may affect an appointor’s ability to exercise its power.
What should you do?
It is important to review your trust deed to ensure that the deed allows for the appropriate succession of the appointor/principal role.
Ballantyne Law Group is able to assist clients with reviewing, and where necessary amending, trust deeds as part of our estate planning process.
Please contact us by telephone on (07) 5606 7332 or by booking a meeting here to discuss this or any other matter with us.