Greg Russo, Partner at Featherbys Barristers and Solicitors, shares his insights into estate planning and inter vivos trustee discretion. He will delve further into this topic at the upcoming Wills and Estates Symposium 2021 on Wednesday 3 March 2021.
Introduction
John D. Rockefeller, the American businessman and philanthropist, is often quoted as saying:
“Own nothing, but control everything”.
That sentiment, and the ability of Trusts to separate legal control and beneficial ownership is one of the reasons for their widespread use.
In this article I consider some of the challenges that Trusts create in the formulation of an effective estate plan by a testator Trust controller. I limit the consideration to discretionary trusts that grant Trustees unfettered discretion in the distribution of income and capital (referred to in this article simply as “Trusts”).
Some reasons for using Trusts.
The flexibility of Trusts allows a Trustee to allocate capital and income in a flexible and tax effective manner between a number of beneficiaries.
Trusts can also offer protection against insolvency of a Trustee[1], Beneficiary[2] or Appointor.[3]
Trusts may also protect a beneficiary from the financial consequences of their poor decision making, by removing their ability to make decisions in respect of Trust assets.
Trusts and estate planning.
Generally
Assets that are owned personally will pass to a testator’s estate and be distributed pursuant to the provisions of a Will – because an executor “steps into the shoes” of a testator. That is generally not possible with assets owned within a Trust structure because, subject to any specific provisions in a trust deed, the Trust will continue beyond the death of the testator.
Accordingly, in the context of estate planning, the existence of Trusts generally requires a more complex estate plan to be formulated and may also result in an estate plan that sacrifices certainty of outcome.
It is the separation of control and beneficial ownership in assets owned by a Trustee (as distinct from a testator personally) that is both the strength of Trusts and the feature that creates challenges for the estate planner.
Two major limitations to be considered in estate planning with Trusts are:
- the nature of Trustee absolute discretion; and
- the Trustee’s obligation to adhere to the terms of the Trust rather than the provisions in a Will or the testator’s expressed wishes during lifetime.
Trustee discretion
Where a Trust grants a Trustee absolute and unfettered discretion – for example in the distribution of income and capital – it has been held that:
- a Trustee is not obliged to give reasons for their decisions and where reasons are not given, the exercise of a discretion may only be examined as to good faith, real and genuine consideration, and the absence of an ulterior (or improper) purpose – Karger v Paul[4]
- no adverse inferences may be drawn from a failure by a Trustee to give reasons for the exercise of their discretion[5]
- where it is sought to impugn a Trustee’s decision – for example, on the basis of an improper purpose – probative evidence must be available, and regard must be had to the Briginshaw Principle;[6]
Recent Victorian decisions, such Mandie v Memart Nominees Pty Ltd[7], Re Marsella; Marsella v Wareham (No 2),[8] and Wareham v Marsella[9] have endorsed the long-held principles in Karger v Paul:
- It is open to the Court to examine the evidence to decide whether there has been a failure by the Trustee to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred.
- The Court examines whether the discretion was exercised but does not examine how it was exercised – while not bound to exercise the discretion, Trustees are bound to consider whether it ought in their judgement be exercised.
- The outcome of the exercise of discretion is relevant to the question whether the exercise of discretion ought to be impugned. A grotesquely unreasonable result may be evidence of a miscarriage of duty.
Whilst the cases confirm that the Court will review Trustee decisions in certain circumstances:
- the ability to challenge a Trustee decision is legalistic, the cases are expensive and the outcome invariably uncertain.
- furthermore, the Court will review a Trustee decision with reference to the trust deed construed objectively, possibly without regard to the testator’s subsequent objectives or the contents of a Will.
all of which highlight the difficulty, at the estate planning stage, in formulating a process to control future Trust administration.
Trustee obligations to the terms of the Trust
Trustees are fiduciaries, and their obligations are determined with reference to the relevant Trust provisions (such as those found in a trust deed) determined objectively, on the same basis as contract law, subject to some limited exceptions.[10] Importantly notwithstanding that a testator may appoint a person or entity as controller of a Trust after their (the testator’s) death, the intentions of the testator regarding the administration of the Trust after their death may not be binding on that future Trust controller.
Accordingly, after the death of a testator Trust controller a Trust may be administered in a manner inconsistent with, and independent of, the administration of estate assets under a Will – unless, for example, a statement of the Trust Settlor’s intentions forms part of the trust deed – which is uncommon in existing Trusts and may not be possible to include as a Trust amendment either at all or without resettling the Trust.
In my experience many clients do not understand that their Family Trust may be administered in a manner inconsistent with the provisions of their Will after their death.
Who controls a Trust?
Generally
It is important therefore to consider how (and to what extent) succession of control of a Trust can be achieved in each case. Is it possible for a testator, who controls a Trust during lifetime, to create an effective succession of Trust control beyond their death?
There are a variety of ways to try to achieve succession of control in a Trust. In each case it is essential to review the relevant trust deed and have regard to the provisions of the relevant state legislation governing Trustees and Trusts.
Whilst Trust control is generally managed on a day-to-day basis by a Trustee, the real control of a Trust resides in the Appointor or Guardian.
Succession of control
Succession of Trust control may be able to be addressed by providing for the succession of Appointors or Guardians by Deed or by Will, depending on the provisions of the trust deed.
Consideration must also be given, if the succession of control of the Trust requires an amendment to the trust deed, to whether a resettlement of the Trust will occur.
Trust Control Succession limitations in estate planning
Having determined if succession of Trust control can be achieved, and on the presumption that an assessment is made that it can be done on a tax effective basis, consideration should then be given to the limitations of Trust control succession in an estate planning context.
That is, assuming that Trust control succession can be achieved, if the testator desires a Trust to be administered in a particular way after their death in order for an estate plan to be effective – for example, in favour of estate minor beneficiaries by an independent executor – there are likely to be limitations on the certainty of that outcome, because of the nature of Trustee discretion and the range of possible beneficiaries. Those limitations should be identified and addressed.
Ultimately therefore whilst succession of Trust control may be able to be achieved, a more bespoke approach may be required if the testator is motivated to ensure that a Trust be administered in a particular way or with regard to particular values after his or her death. Examples will be provided at the Wills and Estates Symposium, and include (always subject to resettlement considerations):
- altering the definition of Trust beneficiaries to limit it to the estate beneficiaries on the death of the testator; or
- imposing a default distribution of Trust assets and a wind up of the Trust on the death of the testator.
- the utilisation of an adjustment clause in the Will – sometimes called a hotchpot clause.
Conclusion
When providing estate planning advice to a testator whose financial position includes one or more Trusts, I recommend that the estate planner do three things:
- firstly, identify how succession of control may be achieved within each of the Trusts.
- secondly identify limitations associated with those succession of control measures; and
- thirdly formulate an estate plan with regard to both of the above.
As with all areas of the law a bespoke, approach is best, coupled with a thorough knowledge of Trust law and Trustee discretion.
[1] S 116(2) Bankruptcy Act 1966 (Cth), Dwyer v Ross (1992) 34 FCR 463
[2] Fordyce v Ryan and Anor, Fordyce v Quinn and Anor, [2016] QSC 307, paragraph 41
[3] Re Burton, Re Wily v Burton and Ors, (1994) ALR 557
[4] Karger v Paul [1984] VR 161
[5] Jones v Dunkel [1959] HCA 8
[6] The more serious the allegation, the more serious should be the consideration given by the decision maker.
[7] [2020] VSCA 281
[8] [2019] VSC 65
[9] [2020] VSCA 92 (appeal)
[10] See for example Karger v Paul [1984] VR 161; Byrnes v Kendle (2011) 243 CLR 253
Greg Russo is a partner at Featherbys Barristers and Solicitors. He is a member of STEP, a LIV Wills and Estates Accredited Specialist and a Member of the LIV Specialist Accreditation Education Advisory Committee and the joint chair of the LIV Wills and Estates Advisory Committee. He has a particular interest in complex estate planning, superannuation and trust succession and associated taxation issues. He is recognised in Doyles as both a Leading Wills and Estates Litigation Lawyer and a Recommended Wills, Estate and Succession Planning Lawyer in Victoria. He regularly organises, chairs, moderates and presents CPD events for the LIV. Legalwise and other CPD event providers, in the area of Wills and Estates. Greg holds a Bachelor of Laws from Monash and a Science degree (Pure Mathematics) from Monash University. Connect with Greg via email or LinkedIn 
The information given by Greg Russo and Featherbys Lawyers in this document is given in good faith but is of a general nature only. It is not intended that the Information will be acted or relied upon. Each person’s requirements and circumstances will be different and accordingly, each person should engage professional assistance according to their own particular needs. Neither Greg Russo nor Featherbys Lawyers warrant or represent that the Information is accurate, reliable, complete or free from error or omissions. None of the Information should be taken as legal or accounting advice. Subject to any law which cannot be excluded Greg Russo and Featherbys Lawyers do not accept any responsibility for errors in or omissions contained in the information. Extracts of sample clauses are provided in the text where possible for illustrative purposes. In the interests of brevity, only portions of clauses have generally been included, and accordingly, the sample clauses are not intended to be relied upon by practitioners in the absence of review and assessment.
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