Family trusts - holding the trustees accountable
NQLA Conference, 30 May 2009, Townsville
Scott Whitla, Senior Associate, Equity and Private Client Group
Dated: 30 May 2009
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Table of contents
1
Introduction ----------------------------------------------------------------------------------------- 1
2
The powers and discretions of trustees ---------------------------------------------------------- 1
3
4
Overview
1
Administrative discretions
1
Distributive discretions
2
Duties of trustees in exercising their discretions ----------------------------------------------- 2
Overview
2
Duty to act in good faith
3
Duty to consider
4
Duty to distribute to the correct objects
6
Duty to act personally
6
Duty to avoid dictation
6
Duty to avoid fettering discretion
7
Duty to act jointly and unanimously
7
Remedies for breach of duty ---------------------------------------------------------------------- 8
Overview
8
Remedies to prevent breaches of trust
8
Remedies for breaches of trust causing loss
9
Remedies for breaches of trust resulting in unauthorised gain
9
Tracing of trust property paid away in breach of trust
9
Removal of trustee for breach of trust
9
5
Case Summary - Burns v Burns and Anor [2008] QSC 173 ------------------------------------10
6
Conclusion – protecting the plan ----------------------------------------------------------------12
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Family trusts - holding the trustees accountable
Scott Whitla, Senior Associate, Equity and Private Client Group
1
Introduction
1.1
Family discretionary trusts (FDTs) and testamentary discretionary trusts (TDTs) are central to
many estate plans. But what happens when the trustees fail to exercise their discretionary
powers as contemplated by the estate plan or where they mismanage trust property?
1.2
The purpose of this paper is to outline the duties of trustees in exercising their discretionary
powers, explore safeguards available to protect estate plans and how they should be employed,
and set out the remedies for breaches of duty by trustees.
2
The powers and discretions of trustees
Overview
2.1
A trustee under a FDT or a TDT is invested with a range of discretionary powers. Those
discretions are often very wide. However, they are not unlimited.
2.2
The discretionary powers of trustees fall into two categories:
(a)
discretions relating to the management of the trust and the trust property, which can be
called administrative discretions; and
(b)
discretions in relation to the distribution of the income and capital of the trust, which may
be termed distributive discretions.
2.3
As a general rule, disputes are more likely to arise in relation to the exercise of distributive
discretions than administrative discretions. Further, disputes are more likely to arise with respect
to how trustees have exercised their discretions than in relation to how they have failed to
exercise them.
2.4
However, courts have traditionally been reluctant to impose their own opinions on how trustees
should exercise their discretions.
Administrative discretions
2.5
There is a broad scope for the exercise of administrative discretions by trustees in the day-to-day
management of the trust and the trust property. These administrative discretions range from
matters as simple as deciding where and when to hold meetings of trustees, to complex decisions
regarding the management of the trust property. 1
2.6
Some of the administrative discretions available to trustees are greatly constrained. For example,
trustees must maintain the accounts for the trust in a manner that conforms to proper accounting
" """ """ ""
Cases worthy of consideration include Bergade v La Provence Developments Pty Ltd [1995] QSC 224; Gra-Ham
Australia Pty Ltd v Perpetual Trustees WA Ltd (1989) 1 WAR 65; Invensys Australia Superannuation Fund Pty Ltd v
Austrac Investments Ltd (2006) 15 VLR 87.
1
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procedures. There is very little room for the exercise of discretion in relation to how the accounts
for the trust are maintained.
2.7
However, there are other administrative discretions which are much broader in scope. For
example, the power of trustees to invest is very broad indeed. However, it is not unlimited.
Legislation in all Australian jurisdictions specifies that trustees must exercise the level of care that
would be exercised by a prudent person in investing trust funds. 2 Further, the law specifies a
range of matters to which trustees must have regard in exercising the power of investment. 3
2.8
As a broad statement, it is fair to say that disputes and litigation are more likely to arise with
respect to how trustees have exercised their administrative discretions than in relation to how
they have failed to exercise them.4 However, courts have traditionally been reluctant to impose
their own opinions on how trustees should exercise their administrative discretions.5
Distributive discretions
2.9
3
Trustees of FDTs and TDTs are usually invested with broad discretionary powers in relation to the
distribution of the income and capital of the trust. The precise scope of distributive discretions –
also known as powers of appointment – are determined by the trust instrument. The distributive
discretions of trustees commonly relate to any or all of the following:
(a)
whether to distribute;
(b)
when to distribute;
(c)
how much to distribute;
(d)
to whom to distribute; and
(e)
what to distribute, i.e. income, capital, or both.
Duties of trustees in exercising their discretions
Overview
3.1
In Re Hay’s Settlement Trusts [1982] 1 WLR 202 at 210, Megarry V-C stated that:
‘… the duties of a trustee which are specific to a [power of appointment] seem to me to
be threefold. Apart from the obvious duty of obeying the trust instrument, and in
particular of making no appointment that is not authorised by it, the trustee must, first,
consider periodically whether or not he should exercise the power; second, consider the
range of objects of the power; and, third, consider the appropriateness of individual
appointments.’
3.2
Similarly, in Re Baden’s Deed Trusts (No 1) [1971] AC 424 at 449, Lord Wilberforce said that
trustees:
" """ """ ""
In Queensland, see section 22 Trusts Act 1973 (Qld).
In Queensland, see section 24 Trusts Act 1973 (Qld).
4 Ford and Lee, Principles of the Law of Trusts, [12.14130].
5 See, for example, James v Evans (1877) 3 VLR (Eq) 132; Marsden v Kent (1877) 5 Ch D 598, 601; Barker v
Addiscott [1970] Ch 261; Gra-Ham Australia Pty Ltd v Perpetual Trustees WA Ltd (1989) 1 WAR 65; Bergade v La
Provence Developments Pty Ltd [1995] QSC 224; Invensys Australia Superannuation Fund Pty Ltd v Austrac
Investments Ltd (2006) 15 VLR 87.
2
3
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‘must find out the permissible area of selection and then consider responsibly, in
individual cases, whether a contemplated beneficiary was within the power and whether,
in relation to other possible claimants, a particular grant was appropriate.’
3.3
These judicial statements make it clear that there are a range of duties that trustees must
comply with in exercising their discretions. Those duties include:
(a)
the duty to act in good faith;
(b)
the duty to act personally;
(c)
where there are multiple trustees, the duty to act jointly and unanimously;
(d)
the duty to consider whether and, if so, how the discretion should be exercised;
(e)
the duty to distribute to persons within the range of beneficiaries;
(f)
the duty to avoid dictation; and
(g)
the duty to avoid fettering the exercise of discretion.
Duty to act in good faith
3.4
In exercising their discretions, trustees must act in accordance with the high standards of probity
that the law requires of persons in fiduciary positions. The decided cases refer variously to
honesty, integrity, sincerity, genuineness, fairness and good faith. A trustee must act in good
faith when executing the trust. A trustee exercising a discretion must:
‘act with good faith and sincerity, and with an entire and single view to the real purpose
and object of the trust, and not for the purpose of accomplishing or carrying into effect
any … sinister object’.6
3.5
Similarly, in Cowan v Scargill [1985] Ch 270 at 288, Megarry V-C said that:
‘The starting point is the duty of trustees to exercise their power in the best interests of
the … beneficiaries of the trust, holding the scales impartially between different classes of
beneficiaries. The duty of trustees towards their beneficiaries is paramount. They must,
of course, obey the law; but subject to that, they must put the interests of their
beneficiaries first. When the purpose of the trust is to provide financial benefits for the
beneficiaries, as is usually the case, the best interests of the beneficiaries are usually
their best financial interests.’
3.6
Obviously, any attempt by a trustee to exercise a discretion so as to procure a benefit for himself
or herself or another person who is not an object of the discretion will constitute a breach of
trust.7
3.7
It would also be a breach of trust if a trustee sought to allocate the income or capital of the trust
by some random method, such as tossing a coin or rolling dice. Exercising a discretion on the
basis of random chance would involve a lack of good faith, in that there is no active and informed
consideration of the best interests of the beneficiaries.
3.8
The question of good faith can be a difficult issue. While it is clear that a trustee must exercise
discretions in good faith, the courts have traditionally been reluctant to interfere in the exercise
" """ """ ""
6 Duke of Portland –v- Lady Topham (1864) 11 ER 1242, 1251 per Lord Westbury LC.
7 Vatcher v Paull [1915] AC 372, 378 per Lord Parker.
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of discretions vested in trustees. In Gisborne v Gisborne (1877) 2 App Cas 300 at 307, Lord
Cairns LC said:
‘My Lords, in a case like this, where the Court of Chancery recognises that the trustees
and not the court, are to be the judges of the quantum to be allowed, where the trustees
are willing to exercise the discretion which they claim to exercise, and where the court
allows and declares their right to exercise that discretion, I do not understand it to be the
habit of the court to go and express any opinion as to whether the exercise of the
discretion by the trustee is a wise or an unwise exercise of that discretion. I understand
that the Court of Chancery steps aside and recognises the trustees as the persons to
exercise the discretion.’
His Lordship observed that, on the wording of the particular testamentary trust in question, the
trustees’ decision to distribute the trust property was not subject to review by any tribunal,
provided there were no mala fides in the exercise of the discretion.8
Duty to consider
3.9
As a corollary to the duty to act in good faith, trustees are under a duty to consider how best to
exercise their discretions.9
3.10
In the case of a FDT or TDT, the duty to consider how to exercise a discretion will commonly
apply in relation to the discretion to distribute the income and capital of the trust. In exercising a
distributive discretion, the trustee’s duty to consider will be concerned, primarily, with the
manner and time for the exercise of the discretion. Where the discretion is absolute, the trustees
will also have to consider whether to exercise the discretion at all. That does not, however,
relieve the trustee from the duty to consider whether and, if so, how to exercise the discretion.
3.11
The matters which trustees will have to take into account in carrying out this duty will depend on
the trust in question. The following sources of information may be relevant:
(a)
the trust instrument itself. The trust instrument is the primary source of power and
information for the trustees, and any wishes or preferences in the trust instrument should
be considered. It is important for trustees to consider the trust instrument as a whole, as
reading only certain parts of the instrument may lead to a decision that is inconsistent
with the instrument as a whole;10
(b)
any wishes or preferences expressed by the person creating the trust, whether orally
or in writing. It is acceptable for trustees to take into account comments made in
general conversation by the person creating the trust as part of their deliberations, even
though such comments are not legally binding;11
(c)
any inclinations or habits exhibited by the person creating the trust. For example, if
the person creating the trust was in the habit of making decisions in a particular manner,
then that should be taken into account;
(d)
the circumstances surrounding the creation of the trust. For example, if the trust
was established against the background of a family tragedy, such as the death of a
relative, then the trustees should consider that as part of their decision-making process;
" """ """ ""
8 Gisborne v Gisborne (1877) 2 App Cas 300, 305.
9 See Re Hay’s Settlement Trusts [1982] 1 WLR 202 at 210 per Megarry V-C, quoted at paragraph 3.1 above.
10 Ford & Lee, Principles of the Law of Trusts, Thompson Lawbook Co, 1995, 3rd edition, [12.14190].
11 See Hitch v Leworthy (1842) 67 ER 83, 86 per Sir James Wigram V-C; Re Manisty’s Settlement [1974] Ch 17, 26
per Templeman J; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405.
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(e)
the circumstances prevailing at the time for the exercise of the discretion. In a
long-running FDT or TDT, the circumstances prevailing at the time of a particular
exercise of discretion may be very different from the circumstances prevailing at the time
the trust was created. Changes in circumstances should always be considered by
trustees as part of their deliberations.
3.12
Trustees who do not take steps to obtain information prior to making a decision risk being found
to have failed to have exercised an informed discretion.
3.13
However, provided that the trustees give active consideration to how their discretions should be
exercised, it is acceptable for trustees to exercise their discretions without obtaining all the
relevant facts. There is no duty on the part of trustees to make their decisions in accordance
with the rules of natural justice.
3.14
In Karger v Paul [1984] VR 161, where the trustees of a testamentary trust exercised their
discretion to advance the entire capital of the residuary estate in favour of a beneficiary who also
happened to be one of the trustees. The trustees did not consult the residuary beneficiary in
remainder who would otherwise have been entitled to the capital of the residuary estate. The
remainderman sought to impugn the exercise of discretion on the basis that the trustees should
have allowed her to make representations to them prior to making their decision. McGarvie J
upheld the trustees’ decision, on the basis that there was no reason to import the rules of natural
justice into the exercise of discretions by trustees. At page 164, his Honour observed:
‘In my view, in this case it is open to the Court to examine the evidence to decide
whether there has been a failure by the trustees to exercise the discretion in good faith,
upon real and genuine consideration and in accordance with the purposes for which the
discretion was conferred. As part of the process of, and solely for the purpose of,
ascertaining whether there has been any such failure, it is relevant to look at evidence of
the inquiries which were made by the trustees, the information they had and the reasons
for, and manner of, their exercising their discretion. However, it is not open to the
Court to look at those things for the independent purpose of impugning the
exercise of discretion on the grounds that their inquiries, information or
reasons or the manner of exercise of the discretion, fell short of what was
appropriate and sufficient. Nor is it open to the Court to look at the factual situation
established by the evidence, for the independent purpose of impugning the exercise of
the discretion on the grounds that the trustees were wrong in their appreciation of the
facts or made an unwise or unjustified exercise of discretion in the circumstances. The
issues which are examined by the Court are limited to whether there has been a failure
to exercise the discretion in good faith, upon real and genuine consideration and in
accordance with the purposes for which the discretion was conferred. In short, the
Court examines whether the discretion was exercised but does not examine
how it was exercised.’12
3.15
It can be difficult, from an evidentiary perspective, to show that a particular exercise of discretion
was not made in good faith, or that trustees have breached the duty to consider how to exercise
their discretions. A corollary to the inapplicability of the rules of natural justice to the exercise of
trustees’ discretions is that trustees are generally not obliged to disclose reasons for the exercise
of a discretion in a particular way.13
" """ """ ""
12 See also Stuart v Amourguard Security Ltd [1996] 1 NZLR 484, 506 per McGechan J; Asea Brown Boveri
Superannuation Fund No 1 Pty Ltd v Asea Boveri Brown Pty Ltd [1999] 1 VR 144, 157 per Beach J; and Hennessey v
Perpetual Trustees Queensland Ltd [2000] QSC 311, [12]-[13] per White J.
13 Re Londonderry’s Settlement [1965] Ch 918, 929-929 per Harman LJ and 936-937 per Salmon LJ; Esso Australia
Ltd v Australian Petroleum Agents’ & Distributors Association [1999] VR 642.
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3.16
There have been dicta in cases concerning charitable trusts and superannuation funds to the
effect that a failure to give reasons may give rise to intervention by the courts. 14 However, to
date such a proactive role has not been taken in cases involving more traditional private trusts,
including FDTs and TDTs. Ford and Lee suggest that this may be due to the fact that cases
involving charitable trusts and superannuation funds often involve significant issues of statutory
and public policy, whereas cases involving private trusts generally do not. 15
Duty to distribute to the correct objects
3.17
The trustee, in deciding upon the persons or entities to whom income or capital will be
distributed, is limited to the range of objects specified in the trust instrument.
3.18
A decision to distribute income to a person or entity outside the range of objects in the trust
instrument is a breach of trust. If a distribution has been made to an invalid object, it is
immaterial that the trustee acted in good faith in making the distribution.
3.19
The question of whether any particular person or entity falls outside the field specified by the
trust will be determined by construction of the trust instrument. In cases of doubt, it is always
open to the trustees to apply to the court for directions as to whether a particular person or
entity falls within the range of objects of the trust. 16
Duty to act personally
3.20
It is clear that trustees must exercise their discretions personally. They cannot simply have
someone else make the decision for them.
3.21
It is not acceptable for trustees to delegate the exercise of their powers and discretions unless
specifically permitted to do so by the trust instrument or by statute.
3.22
Legislation in all Australian jurisdictions permits trustees to appoint delegates. In Queensland,
section 56 Trusts Act 1973 permits trustees to appoint an attorney where:
(a)
the trustee is temporarily absent from Queensland, or is about to leave Queensland
temporarily; or
(b)
the trustee is or may be about to become temporarily incapable of performing all of his
or her duties as a trustee by reason of physical infirmity.
Duty to avoid dictation
3.23
A corollary to the duty to act personally is the duty to avoid dictation. The very nature of a
discretionary trust requires that trustees must resist attempts by others, and in particular by
beneficiaries, to dictate the manner in which their discretions should be exercised. 17
3.24
One of the clearest examples of the trustee’s duty to avoid dictation is Re Brockbank [1948] Ch
206. In that case, a trustee wished to retire from a testamentary trust. The beneficiaries, all of
whom were of full age and capacity, desired the continuing trustee to appoint Lloyd’s Bank Ltd as
the new trustee. The continuing trustee refused to do so. The beneficiaries commenced an
action seeking an order that the trustee appoint Lloyd’s Bank Ltd as the new trustee. Their
application was rejected by the court. Justice Vaisey said, at page 210:
" """ """ ""
14 See Scott v National Trust [1998] 2 All ER 705, 719 per Robert Walker J; Maciejewski v Telstra Super Pty Ltd
(1998) 44 NSWLR 601, 602 and 604 per Young J.
15 Ford & Lee, Principles of the Law of Trusts, Thompson Lawbook Co, 1995, 3rd edition, [12.14510].
16 See, e.g., section 96 Trusts Act 1973 (Qld).
17 Finn, Fiduciary Obligations, Law Book Co, Sydney, 1977, Chapter 6.
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‘If the court, as a matter of practice and principle, refuses to interfere with the legal
power of appointment of new trustees, it is, in my judgment, not open to the
beneficiaries to do so.’
3.25
It is similarly not open to a beneficiary to prevent trustees from exercising their discretion to sell
trust property.18 Further, it is not possible for a beneficiary to require the trustees to distribute
the beneficiary’s share upon the beneficiaries attaining majority, where for economic reasons the
trustee is not required to do so.19’
3.26
Of course, this is not to say that a trustee must ignore the wishes expressed by the beneficiaries.
It is desirable, in the interests of the smooth administration of the trust, that the trustees should
maintain good relations with the beneficiaries. A wise and prudent trustee should therefore take
the views of the beneficiaries into account. 20
3.27
However, it is ultimately for the trustees, and the trustees alone, to consider whether, and, if so,
how to exercise a particular discretion.
Duty to avoid fettering discretion
3.28
A corollary to the duty to avoid dictation is the duty to avoid fettering discretion. Trustees must
not fetter themselves with respect to future conduct. In other words, trustees must keep their
discretions open and not put their appropriate exercise beyond their power.21
3.29
It is important to understand the difference between actions which may constitute a fetter, and
actions which do constitute a fetter. A fetter on the exercise of a discretion only occurs when
trustees take a legal step that binds them. Thus, if a meeting of trustees resolves to act in a
certain way in the future, this does not constitute a fetter because the agreement does not bind
them. Until the agreement has been acted upon so as to bind them, the trustees may revisit the
item.
3.30
Contrast the granting of an option to purchase trust property. Granting an option to purchase
does constitute a fetter. In Queensland, section 32(3)(b) enables trustees to grant a lease
containing an option to purchase. However, outside those circumstances, options to purchase
cannot be granted, because the option will preclude the trustees from exercising judgment as to
the propriety of the sale at the time the option is exercised.
Duty to act jointly and unanimously
3.31
Where there is more than one trustee, decisions must be reached jointly and unanimously.
3.32
It is a breach of this duty for a trustee to refuse to cooperate with his or her co-trustees,22 to
leave co-trustees uninformed,23 and to leave control of trust property in the hands of cotrustees.24
3.33
In Cock & Howden (Trustee of Cock) v Smith (1909) 9 CLR 773, Griffith CJ held that trustees had
failed to exercise a discretion where one of the trustees failed to give his mind to the issue under
the mistaken belief that he was bound by the decision of the majority.
" """ """ ""
18 Re Steed’s Will Trusts[1960] CH407, 417-418
19 Wilson v Wilson (1951) 51SR (NSW) 91, 94
20
21
22
23
24
Application of Perpetual Trustee Co (unreported, Supreme Court of New South Wales, No. 3276/96, 21 April 1997)
Re King (1902) 29 VLR 793, 796 per Holroyd J
Hughes v Key (1855) 52 ER 655.
Fales v Canada Permanent Trust Co [1977] 2 SCR 302.
Hanbury v Kirkland (1829) 57 ER 998.
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3.34
A consequence of the duty to act jointly and unanimously is that where trustees cannot agree on
what course of action to take, the status quo prevails. The court cannot intervene to decide the
issue merely because the trustees cannot agree. However, the court may intervene if the
inability of the trustees to agree results in inactivity which becomes so serious as to constitute a
breach of trust.
4
Remedies for breach of duty
Overview
4.1
There are a range of remedies available for breaches of duty by trustees. These remedies can be
divided into four categories:
(a)
remedies to prevent a breach of trust before it occurs;
(b)
remedies in respect of breaches of trust causing loss;
(c)
remedies in respect of breaches of trust resulting in unauthorised gain; and
(d)
remedies involving the tracing of trust property paid away in breach of trust.
Remedies to prevent breaches of trust
4.2
Arguably the simplest remedy for the prevention of a breach of trust is an application to the court
by the trustees themselves. Where there is any doubt as to whether any particular course of
action is within the bounds of the trust instrument, the trustees have the right to apply to the
court for advice and directions as to what to do. 25 Issues on which trustees have sought the
advice and directions of the courts include:
(a)
transactions involving trust property, such as sales, purchases or leases;
(b)
the proper construction of the trust instrument;
(c)
accounting issues; and
(d)
whether to commence or defend litigation.
4.3
In situations where there is some benefit to the beneficiaries from a particular course of action,
but that action would or may constitute a breach of trust, it is possible for the trustees to apply
to the court for permission to depart from the terms of the trust. 26
4.4
But what of situations where trustees do not seek the advice of the court, whether through
negligence or as part of a deliberate attempt to use their position for some improper purpose? In
such a situation, it is open to a beneficiary to apply to the court for any of the following remedies
to prevent a breach of trust:
(a)
a declaration;
(b)
a vesting order; or
(c)
an injunction.
" """ """ ""
25
26
See sections 96 and 97 Trusts Act 1973 (Qld).
See section 94 Trusts Act 1973 (Qld).
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4.5
A detailed consideration of each of these remedies is beyond the scope of this paper. However,
useful commentary is provided in Ford and Lee.27
4.6
It is also worth noting that it is possible for a beneficiary under a FDT or TDT to enter a caveat
against the registered title to real property subject to the trust to secure temporary protection of
his or her rights.28
Remedies for breaches of trust causing loss
4.7
Where a trustee commits a breach of trust that results in loss to the trust estate, the remedy is
an action for equitable compensation.29 This provides a judgment for a money sum which is
designed to make good the loss caused by the breach of trust.
4.8
It is important to note that many modern trust deeds contain clause excusing trustees from
liability for losses caused by negligence. The touchstone of liability under such clauses is
generally wilful or deliberate default. Accordingly, there can be problems in obtaining equitable
compensation from a trustee for a negligent breach of trust.
Remedies for breaches of trust resulting in unauthorised gain
4.9
In some cases, a trustee may commit a breach of trust that actually results in gain. In such a
case, the breach may be innocent. Irrespective of whether the breach was innocent or
deliberate, the trustee must account for any profit made as a result of the breach, as a corollary
of the trustee’s duty not to profit from his or her fiduciary position.
Tracing of trust property paid away in breach of trust
4.10
In some situations, it may be possible to trace an item of trust property that has been paid away
in breach of trust into the hands of the trustee or a third party. The property in the hands of the
trustee or the third party may not be the same in nature as the original property – it may have
been converted into a different form. For example, a trustee may pay trust money away in
breach of trust, and that money may be used to purchase other property, such as land, a car or
shares. In such a case, if a causal link can be established between the breach of trust and the
acquisition of the new asset, then that asset can be made subject to an order that it be restored
to the trust or charged with the payment of any money judgment.
4.11
Tracing is considered in detail in Ford and Lee.30
Removal of trustee for breach of trust
4.12
Trustees have a duty to act in good faith and as a part of that duty, trustees will have a duty to,
where possible, act in the best interests of the beneficiaries. There must not be any decisions
made by a trustee which might benefit themselves at the expense of the beneficiaries nor may
they enter into a transaction which will create an actual conflict of interest.
4.13
In Monte Financial Services Limited & Anor v Delmo (1996) 1 VR 65, the testator died on 7
January 1992, leaving a will dated 30 November 1987 by which she appointed her son and her
daughter as her executors and trustees. The primary beneficiaries of the will were the son and
daughter. The daughter renounced her right to the executorship as she was bankrupt. Probate
was granted to the son.
" """ """ ""
27
28
29
30
See Ford & Lee, Principles of the Law of Trusts, Thompson Lawbook Co, 1995, 3rd edition, [17.110] – [17.900].
Butler v Fairclough (1917) 23 CLR 78, 91.
See Ford & Lee, Principles of the Law of Trusts, Thompson Lawbook Co, 1995, 3rd edition, [17.1610] – [17.2400].
See Ford & Lee, Principles of the Law of Trusts, Thompson Lawbook Co, 1995, 3rd edition, [17.4010] – [ 17.7050].
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4.14
Shortly after the grant was issued, the son claimed that his mother owed him approximately
$280,000, which he intended to repay to himself from the estate funds. Monty Financial Services
Limited objected to the son’s claim, as it was a creditor of the daughter, who was at that time
bankrupt. Monty Financial Services claimed that, if and when the son proceeded with the
administration of the estate, he would be faced with and obliged to resolve a conflict of duty and
personal interest concerning the debt which he claimed was due to him by the estate.
4.15
Justice Ashley held that the son should be removed as executor, and appointed an independent
trustee company as the administrator of the estate. In coming to this conclusion, His Honour
made the following observation:
’It is not every conflict of duty and interest which should result in the removal of an executor.
The intention of the testator that the executor be a particular person should not lightly be set
aside – whether before or after grant. Again, the will itself may show that the testator was
aware that his or her executor would face a potential conflict of duty and interest. In such a case
– as may arise, for example, where an executor is also one of the beneficiaries – it would not be
right, without more, to remove the executor.’
4.16
Justice Ashley also held that:
’It may be observed that the position with respect to removal and appointment of trustees differs
from that with respect to executors in a number of ways. First, there has never been an inherent
jurisdiction to remove an executor at least for misconduct or neglect or duty. If an executor has
been removed in the exercise of an inherent jurisdiction, it has not been as executor but rather in
the role of trustee. Secondly, there is no statutory power for removal or appointment of an
executor by private out of Court act. Thirdly, the statutory power of removal of an executor by
the Court is not dependant upon the willingness of the executors to be removed.
4.17
The case is useful authority for examining the potential removal of an executor or trustee where
conflicts of interest arise in relation to a trustee’s duty to the beneficiaries as compared with their
own personal interest in the estate or trust as a beneficiary or creditor. Justice Ashley’s
comments that proof of actual misconduct is not necessarily required for the removal of a trustee
and that a conflict of interest in duty may suffice, are also of interest.
4.18
Sections 8 and 80 of the Trusts Act 1973 (Qld) are the most appropriate sections to use when
considering the removal of a trustee.
5
Case Summary - Burns v Burns and Anor [2008] QSC 173
5.1
The late Mary Burns died leaving a will which established 4 Testamentary Discretionary trusts
(TDTs) for the benefit of her 4 sons, Duncan, Adrian, Roderick and Ian. Each son effectively had
a trust for their benefit, as well as their children and grandchildren. The trustees were, in the
case of each trust, two of her sons.
5.2
The TDT in dispute is the Adrian Ormond Burns TDT. It appointed Adrian and Duncan as
trustees.
5.3
Adrian was not happy with being left his money in a TDT. He intercepted 2 cheques drawn in
favour of the trustees of Adrian’s TDT and deposited them to the credit of his own personal bank
account. He then drew 2 cheques of $90,000 and $100,00 out of his account and deposited
them in an account in the name of Zafron (a company), of which he was sole director and
shareholder.
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5.4
Adrian died in November 2007. His will appointed the Public Trustee of Queensland executor and
trustee of his estate. The whole of the estate was bequeathed to his brother Ian, including
Adrian’s shares in Zafron (which contained the misappropriated funds from the TDT).
5.5
Since his death, Duncan was the sole trustee of the trust and he proposed to distribute the assets
of the trust equally between the trustees of the other 3 remaining TDTs. Ian objected to this
proposal. He preferred Duncan distribute the trust’s assets to him in accordance with Adrian’s
wishes as expressed by his will.
5.6
Ian sought the following orders:
pursuant to s8 of the Trusts Act 1973 (the Act) the Court review and order Duncan to
justify the following decisions made by him as trustee of the trust:
(a)
(i)
The refusal to appoint a 2nd trustee;
(ii)
a decision to pursue recovery of $190,000 paid to Zafron; and
(iii)
a decision to distribute to the Trusts of Ian, Duncan, and Roderick rather than to
the estate of the late Adrian Burns.
(b)
Further or in the alternative, an order pursuant to s80 of the Act appointing Ian or such
other person as a second trustee; and
(c)
directions between the applicant and the first respondent in their capacities as coexecutors for the final administration of the estate of the late Mary Burns.
Refusal to appoint second trustee
5.7
There is no ‘strict legal requirement’ that a 2nd trustee be appointed under section 16 of the Act,
which allows a sole surviving trustee to exercise the powers given to 2 or more trustees.
Nevertheless it was submitted that the law’s preferred position is that there be more than one
trustee, principally, it seems, to lessen the temptation a trustee might experience when dealing
with trust property.
5.8
Duncan explained in evidence that he didn’t appoint a 2nd trustee as he was planning on
distributing the assets and winding up the trust as soon as possible. Duncan submitted that Ian’s
true desire in bringing the action was to be appointed a trustee, which Duncan did not consider
as it would have automatically brought about a deadlock between the trustees in the exercise of
their powers and would put Ian in an immediate position of conflict between his interest in
promoting the effectuation of Adrian’s testamentary wishes and his duty to exercise the trustees’
powers impartially as between beneficiaries. Therefore it is inappropriate to appoint him as a
trustee.
A decision to distribute to the remaining 3 TDTs
5.9
On 3 February 2008, Duncan wrote to his brothers expressing that there were 3 options available
in distributing Adrian’s TDT:
(a)
as Adrian left no children, distribute equally between the 3 surviving brothers’ TDTs;
(b)
use the money to benefit a worthy cause; or
(c)
declare the trust monies to be part of Adrian’s estate and pass the funds to Ian as the
sole beneficiary.
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5.10
Duncan stated that he believed from the wording of the TDT’s that their mother and father would
want their children to benefit and that the monies should be distributed to the remaining
brother’s TDTs.
5.11
Adrian’s trust was discretionary and quite wide. Duncan had not acted in bad faith or other than
diligently and conscientiously in the exercise of the discretion conferred on him by the will and
Ian’s complaint centred on the manner in which Duncan proposed to exercise his discretion. This
complaint by Ian falls squarely within the class of case in which it is said the trustee’s decision
was unfair, or unreasonable, or unwise. These issues are beyond the review of the courts and
Ian’s complaint could not be accepted. Duncan’s decision to divide the trust property equally
between the beneficiaries of the other 3 TDTs was held to be eminently fair. ‘Equality in equity’
as the maxim puts it.
5.12
It is important to note that Chesterman J stated that if Duncan had decided otherwise and
proposed to distribute the estate as Adrian apparently wished, this decision too would have been
rational, reasonable and sensible.
5.13
The only other basis for Ian’s case was that the proposed exercise of discretion was said to be
contrary to an instruction (a letter) penned by the testatrix when she executed her will. The
letter stated that the primary beneficiary of Adrian’s TDT was Adrian, his children and
grandchildren and that his wishes are to be adhered to in administering the Trust and all other
beneficiaries are only to receive capital upon the death of the primary beneficiaries. Ian tried to
argue that Adrian’s wishes should be adhered to in that he wanted the trust to form part of his
residuary estate and therefore be gifted to Ian.
5.14
Chesterman J found that this did not assist the applicant as the main concern of the letter was to
benefit Adrian and his descendants, according to his wishes, as Adrian died childless there are no
longer any beneficiaries with respect to whom the instruction could apply.
Recovering from Zafron
5.15
Chesterman J found that Ian’s wish to have Duncan explain why he would pursue recovery of the
money from Zafron is extraordinary and impudent. It had no basis other than Ian’s self-interest
in obtaining the benefit of Adrian’s breach of trust through his succession to Adrian’s shares in
Zafron. Duncan as trustee had a duty to recover the misappropriated trust property for the
benefit of the beneficiaries.
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Conclusion – protecting the plan
6.1
Given the above duties of trustees and the remedies available for breach of those duties, getting
the succession planning right at the outset is not negotiable. When advising the client on how
best to achieve their objectives and ensure that disputes are minimised, we need to work
through some basic steps for the client:
(a)
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What does the trust deed say? Is there a danger of:
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(i)
control passing to an unintended party;
(ii)
decisions being made by the trustee which are not provided for by the deed,
especially when distributing the income and or capital;
(iii)
the trustees having too much discretion; or
(iv)
certain beneficiaries or classes of beneficiaries being given priority.
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(b)
Who is the most appropriate person or entity to act as trustee? Has too much control
been relinquished due to concern over:
(c)
6.2
(i)
protection from creditors;
(ii)
protection from the Family Court;
(iii)
spouses of children; and
(iv)
spendthrift family members.
In a business context, has enough thought been given to:
(i)
exposure to related entities and persons;
(ii)
obnoxious beneficiaries;
(iii)
beneficiary/loan accounts; and
(iv)
who is there to keep the business open if the trustees are not available.
The choice of trustee is important, but just as important is appropriately addressing the passing
of control to future trustees. The use of co-trustees and independent trustees will be a solution
for many, but will those future trustees act in the best interests of all beneficiaries and will they
act efficiently and effectively throughout the course of their trusteeship?
Many thanks to Geoff Cameron and Kimberley Davis of McCullough Robertson for their assistance with
the preparation of this paper.
Contact details
Writer:
Scott Whitla
Direct line:
3233 8778
Email:
swhitla@mccullough.com.au
Disclaimer
This paper covers legal and technical issues in a general way. It is not designed to express opinions on
specific cases. This paper is intended for information purposes only and should not be regarded as legal
advice. Further advice should be obtained before taking action on any issue dealt with in this publication.
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