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The Importance Of Choosing The Right Appointor

By Riley Jones

The appoinor holds a very powerful role within a discretionary trust, so choosing the right appointor is extremely important.

Sometimes we get questions about who should be the appointor of a discretionary trust, or we receive an order where the proposed appointor does not seem appropriate. We can'€™t tell your clients who should have this important position in their trust, but we can provide some guidance.

A recent case discussed in the NTAA'€™s Tax Hot Spots 2016 seminar (Mercanti v Mercanti [2015] WASC 297 (€˜Mercanti's case€™)) highlighted how important the position of appointor is, and the consequences of giving the '€˜wrong' person this power. In that case, in order to give effect to their succession planning objectives, the Mum and Dad involved with two family trusts varied the trust deeds of those trusts to remove Dad as appointor of each trust and replace him with one of their four sons. Under both trust deeds, the appointor basically had the power to '€˜hire and fire' the trustee, thus effectively giving the appointor ultimate '€˜control' of the trust.

However, eight years later, the relationship between the family members broke down, and Dad took legal action seeking a declaration that the deeds of variation were invalid and, as such, he was still the appointor of both trusts. In response, the son executed notices removing the current trustees of the trusts and appointing his own company as the trustee of both trusts. The Supreme Court concluded that one of the deeds of variation was ineffective (due to inherent problems with the original deed) but that the other deed of variation was effective, meaning that the son was the appointor of that trust and, as such, he ultimately controlled the trust from that time (and his decisions regarding the removal and appointment of trustee were valid). By appointing his company as trustee of the trust, this also gave him complete control of the trust'€™s assets. As the assets in a discretionary trust are generally '€˜controlled' by the appointor of the trust, in conjunction with the trustee, it is important to carefully consider when, how and to whom the control of the trust will be passed.

Ordinarily, the appointor should be a close family member, who can be trusted to make decisions regarding the trust for the benefit of the family. Mercanti'€™s case also illustrates that, whilst it is fine to hope for the best in terms of succession planning, it is good to plan for the worst (such as a breakdown in family or business relationships). For example, in this case, the parents could possibly have achieved their desired objective by passing control of the trusts to the son in the Dad'€™s will (i.e., which could have been changed at any point prior to his death), rather than passing control immediately by making the son the appointor under the deed of variation.