Tara (00:51):
Thank you so much for tuning in to the Art of Estate Planning podcast. It's Tara here and this episode I want to shift gears.
(01:01):
So last week's episode was a very practical, not technical episode, and in this one I actually want to get really technical and talk to you about a couple of cases I've been reading lately that have really piqued my interest. We're going to focus on the question of can the trustee of a trust vary the deed to remove the appointor? So we've had a couple of interesting cases come out over the years and one in particular from Queensland Court of Appeal earlier in early mid 2025. So I want to talk to you about it because I've been reading about it. I've also been talking about it in the weekly hot seats with the TT precedents club, and I wanted to give you a little taste of the kinds of things we talk about in the TT precedents club. So let's actually go all the way back first to 2007 with the decision of Jenkins and Ellet from the Queensland Supreme Court.
(02:09):
Now don't worry, I'll put the case citations in the user notes so you can just go and have a look there. So don't stress about trying to have trouble finding, just have a look in the user notes. So Jenkins and Ellet really was my introduction personally to the concept of a trust having a substratum. And I really remember this case because in 2007 I was a graduate lawyer, so the old I was in an article clerk that had phased out. I was the graduate lawyer learning about everything. And I remember in one of our lunch and learns at the law firm I was working at that this case was discussed and there was a debate and a conversation around it and it really also informed the practise that we as a firm took when we were preparing Des a variation for trust. So it's really like sead in the back of my brain and it was probably like the first big trust case that I was learning in real time and then adapting practise too.
(03:19):
Also, I'm a Queensland practitioner, it's a Queensland Supreme court case, so was on our radar. Now let's talk you through the family scenario. So we started with a family trust and we had two trustees, George and Luciano. George was the principal of the trust. So let's just quickly deviate, do a little sidebar. So the role of appointor and principal, if you don't know, obviously it will depend on what's set out in the trust, but generally speaking, the role of principal or appointor will be to hire and fire the trustee. So they have unilateral power to remove the trustee and appoint a replacement. They might also have power to consent to things like variation of the trustee and other trustee powers that will depend on what's in the trustee deed. So in this case, George, as the principal had power to change the trustees. So in our scenario in Jenkins and Ellet George as the principal purported to remove Luciano as the co-trustee and to replace Luciano, he appointed Joyce as his co-trustee.
(04:36):
So then we had George and Joyce as the new trustees. They purported by deed of variation to remove George as the principal and appoint Joyce as the principal. Now they did this not by George simply removing himself, executing a deed of retirement and appointing a replacement being Joyce. What they did instead of that is varied the deed for the trust to put Joyce's name in as pointer instead of George. And in this particular trust deed that was set out in the schedule, so there was a schedule to the trust deed which had who the trustees were the beneficiaries, and importantly the principal. Now this case concerns a couple of issues. There is an interpretation of the variation power, which I'll touch on. And then there's also the issue about can a trustee change the appointor? So I'll just touch on the variation power. It's really helpful I think if you can just go and pull up the decision while you're listening to this because it sets out what the variation power is in clause 11.
(05:55):
But basically it says the trustee, the trustee may by deed, revoke add to release or vary all or any of the trusts declared or any trust declared by any variation, alteration or addition made from time to time and can declare any new or other trusts or powers concerning the trust fund, blah, blah, blah. The settler can't benefit all of that. So there's a really interesting question here about the scope of the variation power. I want to just do a little lesson in what trust powers and mere powers are. A lot of people may not have come across this before, especially if you haven't sort of dived into the cases. But it is important when we're interpreting a trust deed. So there's two types of powers in a deed, a trust power and a mere power. And we can look at the decision of Lutheran Church of Australia, South Australia district incorporated in the farmers' cooperative executors and trustees from 1970.
(07:02):
Again, I'll put the citation in the show notes. So that decision states the basic difference between a mere power and a trust power is that in the first case, ie for a mere power trustees owe no duty to exercise it. Whereas in the second case, for a trust power, the trustees must exercise the power. And in default of exercise the court will and it is a matter of construction whether the power is a mere power or a trust power. So an example of a trust power, there's actually very few trust powers that you would typically find in a discretionary trust deed. But an example of a trust power is that on the vesting date, the trustee must pay the capital to the default capital beneficiaries if they have not exercised their discretion, whereas nearly all the other powers including to distribute the income of the trust in each financial year would be a mere power because the trustee is not under a duty to exercise it.
(08:11):
You can't go to court and have that enforced. So back to Jenkins and Ellett, when we're interpreting the variation power, the use of the language that's in clause 11, you can revoke add to release or vary all or any of the trust declared. They're saying, well does that refer to the trust powers or the mere powers? So there's a question there around the scope of the variation power, and if you have a look, they actually look at where else is trusts used throughout the deed. It's used in clause two declaring that the trustee holds the trust fund upon the trust subject, the powers and provisions contained in this trust. So it really came down to looking at the language and working out how the variation power is it referring to mere powers or trust powers. And they're saying it would've been easy for the draught of the deed to provide the trustee with a broad power of amendment of this trust, which means the trust constituted by and comprised in this deed and the schedule or to clarify that the schedule and the deed are a complete document.
(09:28):
They're also saying is the schedule part of the trusts? Is the schedule even part of the deed? And in Jenkins and Ellet, they actually decided the schedule was not part of the deed. So the variation power didn't allow the trustee to vary the schedule. There was also a second limb of the argument that the purported change of principle by varying the schedule was invalid because of the inherent role of the principal to be a check and balance of the trustee. And this is the one I'm particularly interested about because of this new decision that's come out recently. So in Jenkins and Ellett, they said the principal's ability to remove and replace a trustee seems to me to be one of the fundamental features of the structure of this deed. One, setting up a family discretionary trust. The maintenance of that power is obviously designed to ensure that the control of the trust will remain with the significant intended beneficiary here being George.
(10:41):
And after him, his spouse's executor as follows from the definition of the principle in the schedule to allow the power in clause 12 to be subverted by the trustee that it was designed to supervise purporting to use the variation power to amend the deed rather than the trust declared by this deed is not in my view permissible it is akin to destroying the substratum of the deed. So what they're saying is if the role of the principal is to supervise the trustee and to be able to be the ultimate controller of the trust and to ultimately remove the trustee, then that is completely undermined by the trustee being able to remove and change the appointor. And we actually almost have this circularity of if the principal changes the trustee but then the trustee can change the principal, then the principal really cannot supervise and be the ultimate controller of the trust.
(11:48):
So that's Jenkins and Ellett, which really stuck with for a long time if you've bought our family trust succession, a precedent de of variation template. And also we've got a detailed training. And in that training we sort of caution you firstly not to vary anything in a schedule unless you're a hundred percent confident the variation, power permits, variation of the schedule, but also don't use the variation to change the appointor or the principal or the guardian unless you get their consent to the change. Now let's fast forward to 2025. So that's 2007, which is more years ago than I care to admit actually. So 2025 we've got Staley and Hill Family Holdings Proprietary Limited and actually we had a preliminary decision from the Supreme Court in Queensland in 2024 and now we've got the Queensland Court of Appeal decision. So let's look at the two decisions as a whole in this scenario.
(12:54):
We've got another family trust, the Hill Family Trust, there's a corporate Trustee Hill Family Holdings Proprietary Limited. Now there's Karen who is the daughter of the parents who set up this trust. She had a sister Paula, but Paula is deceased Paula's daughter. Brody is the sole director of the corporate Trustee Hill Family Holdings. But Karen Brody's aunt and the original daughter is the sole appointor. So you can probably almost in my mind I sort of, this was initially intended to be two sisters, Karen and Paula, but Paula passed away. So Brody is taking Paula's role. So we've got an aunt and a niece. Now they obviously weren't seeing Eye to Eye. Brody as the sole director of the corporate Trustee Hill Family Holdings Proprietary Limited executed a deed of variation in March, 2024, purporting to remove Karen as the appointor of the trust. Karen, three months later in 19 June, 2024, acting as the appointor still removed Hill Family Holdings as trustee.
(14:17):
So remember that company was controlled by Brody. Kerry removed that company as trustee and appointed Staley Management Proprietary Limited, which Karen controlled to be the new trustee. So which step was effective? Is Kerry the appointor? Is Hill Family Holdings the trustee or is Staley Management proprietary limited the trustee? We need some clarity. So again, the definition of the appointor was set out in the second schedule. We've also got a variation power where the trustee may revoke add to release, delete or vary all or any of the trust powers or provisions declared or included in this deed. And we have a couple of issues. So does the power to vary the terms of the trust deed include a power to change the appointor in schedule two or amend the deed to allow that to happen and is interpreting the variation power to allow the trustee to change the appointor inconsistent with the fundamental feature of the trust deed by which the appointor is empowered to remove and replace the trustee such as to destroy the substratum of the trust deed.
(15:35):
So they're obviously pushing the Jenkins and Ellet line of argument, which to be honest, when I first saw the Supreme Court decision, I went, how is this going to get up? We've got clear authority in Jenkins and Ellet. So let's have a look at what happened. The Queensland Supreme Court single judge said Brody's deed of variation by the trustee was valid and effective. They distinguished this situation from Jenkins and Ellet and expressly because the variation power here was a lot broader than what was in Jenkins and Ellet. So I would encourage you to get out the two judgments and just compare the variation power and the language. I know when you're reading a trust, it's easy to almost gloss over the different terms and language, but as you can see from these decisions, the particular terms is absolutely critical. So yeah, the Queensland Supreme Court said as long as the appointor role remains, the individual holding that role is not important.
(16:42):
So this was appealed. The appeal was dismissed by the Court of appeal and they agreed with the Supreme Court, they rejected the argument about the need for there to be a circuit breaker to avoid the circularity of the trustee and the appointor repeatedly replacing each other. And I just wanted to comment on a couple of the statements or I'll just repeat a few of the key statements from the Supreme Court and Court of Appeal decision. So in the Queensland Supreme Court they said there is no obvious reason why the personal identity of the appointor rather than the existence of an appointor is central in that way. The definition of appointor includes one of the trust deed is the person named in part four of the second schedule and any other person's authorised to exercise the power of appointor in accordance with the deed. And so it follows that the definition of appointor is not specifically tied or limited to the people described in clause 22.
(17:47):
They specifically say that in Jenkins, the principal's ability to remove and replace a trustee was held to be a fundamental feature of the structure of the deed. But I can see no basis for that conclusion in this case. The court of appeals said the appellants needed to persuade the court that the substratum of the Hill family trust includes supremacy of the appointee's role. Why that would be so is not apparent. It does not follow that whilst the office of Appointor might arguably form part of the substratum of the trust, the supremacy of the appointee's role is also part of it. In any event, the data variation neither abolish the office of appointor nor limited the pointer's power. So I think that's really curious. I would not have personally decided the case that way, but it seems that we don't necessarily need to be held by such a strict interpretation.
(18:48):
There has been another decision of MCC from 2015 and you probably have heard of McCann and McCann before. There's quite a few issues out of that case. It is again another case about interpreting the variation power. So in that case there was a family, Michael and Yvonne, they had a family business, four children and one of their sons was Tyrone. So Michael and Yvonne decided to hand over control of two of their trading trusts to Tyrone. They did this by deeds of variation back in 2004. And interestingly this decision is from the western Australian Supreme Court in 2015. So a long time after their deeds of variation were prepared. So in the deeds of variation there they deleted the definitions of a appointor and guardian that were contained in the schedule and put in a replacement definition naming Tyrone as a pointer and guardian. There were other issues like the trustee didn't prepare any resolutions documenting their decision to enter the deed of variation.
(19:59):
Interestingly, Michael and Yvonne remained as the shareholders of the corporate trustee in 2012, like eight years later, Michael and Tyrone had a dispute about the trusts. So Michael and Yvonne decided to take back control of the businesses through those trading trusts and they exercise their powers as shareholders to remove Tyrone as a director of the corporate trustees. But then as the appointor, Tyrone removed those companies as trustees and appointed companies that he controlled. So again, we've got an issue of who is in control of the trust was that change of trustee effective Michael And Yvonne actually went back and said, well, our decision to vary the schedule to change the appointer was invalid and Tyrone actually wasn't even the appointor even though for the last eight years we've treated him as the appointor. So in McCarty they again said the variation to the schedule was not effective.
(21:07):
And looking at the language they talked about the trusts herein before declared. Now you've got to be really careful when you see herein before. So in McCann, in those trust deeds, the variation power is in clause 14. If you see the trustee may vary the trust herein before declared. That means you actually can only vary clauses up to clause 14. You can't vary after clause 14. So a lot of people get confused by that. In any event, you can't vary the schedule because that comes after clause 14. And is the identity of the appointor a trust power? No. So they actually had real concerns about the validity and held that Tyrone wasn't the appointor. They also discussed the concept of substratum of the trust as well. But they said, I'm of the opinion that the deed of variation did not alter the substratum of the trust.
(22:11):
The determination of the substratum of a family trust is not without difficulty and that is especially so where as in the present case, the trust is drafted to confirm maximum flexibility in relation to the beneficiaries of the trust, the distribution or accumulation of capital and income and the management and control of the trust. I consider that on the proper construction of the trust as a whole in the context of a trust which may not vest until the vesting day, namely 30 June, 2055. The substratum of the trust was the conferral of benefits from time to time on one or more of the beneficiaries for the time being of the trust as determined from time to time by the trustee for the time being subject to the provisions of the trust deed, including any consent required from the guardian for the time being of the trust. The substratum was not to be ascertained or defined by reference to the identity of the persons or entities who at the date of execution of the deed held the officers of trustee, guardian or appointor.
(23:16):
So I think now we've got two more recent decisions than Jenkins and Ellet, which really point to the concept of the person holding the particular role of appointor is not part of the substratum of the trust. And it actually almost in my mind is very similar to the decision that we've got about trust resettlements now. So now we've got two more recent decisions than Jenkins and Ellet confirming that the particular person holding the role of the appointor or principal or guardian is not part of the substratum of the trust deed. And in fact, Staley and Hill Family Holdings is almost reminiscent of the Clark decision which concerns resettlement of trust where they basically held, look, as long as you've got continuity of trust terms, trust, property and beneficiaries, we don't actually care what those particular beneficiaries trust property or terms are, as long as there's some kind of continuity they can change as much as you like.
(24:32):
You don't have a resettlement of the trust. So I think that is actually quite helpful to us as practitioners. One thing that I am making sure to do in our testamentary trust precedents, we've already done this anyway, but it really just reinforces the importance of it, is to make sure that if you want supremacy of the appointor role, that the appointor must consent to any exercise of the variation power. I think that's really critical if you want to maintain that role as a supervision role and perhaps I think on an interpretation of limiting the trustee's exercise of power. Well obviously it's not a valid exercise of power if the trustee does it without the appointee's consent and maybe even having it in there would lean towards an argument that it is part of the substratum of the trustee deed. So look, we've still got the ongoing trustee duties.
(25:32):
The trustee has to exercise their powers in the best interests of the beneficiaries. But I do think the lessons coming out of this are appoint or consent to the variation. Power is really important if you want them to have the supreme role. The scope of the variation power and understanding the language and the specific terms you are working with when you're varying a deed remains absolutely critical to understand. I still would make sure that I would get consent even if the variation power didn't require it, if I was trying to vary something like that in Jenkins and Ellett. The whole thing is just, it's a bit silly that it even got to that point because I just don't know why they didn't change the principal role by doing a deed of retirement and appointment that would've sidestepped this whole issue in the first place. So think about where you've placed with two mechanisms to implement a change.
(26:36):
Are you better off doing it by a deed of retirement and appointment instead of relying on the variation power? So I hope that's of interest to you for anyone with a little niche interest in doing deeds of variation. If you're doing a lot of deeds of variation, these cases are really important to understand and read. I would encourage you to print them out, get the full judgement , read through it just so you can see there's a differences, especially then when you can identify if you've got a client deed, have you got a narrow or broad variation power so you can build that into the way you craft your documents and recommendations. I will just give a little plug to our family trust succession precedent pack. By the way, if you do have to make changes to controllers and build out a succession plan for the control roles in the family trust, that's an incredible resource.
(27:30):
We've got training in there to help you do it. We point out all of these issues and rules so that you're not caught with any issue and that your documents are effective. And by the way, we do also have another podcast episode that is worth looking at in terms of why do you have to do a deed of successor and as a separate document and not in dealing with it as part of the will. And that episode is episode 35, so you can go back and listen to that as well.
(28:05):
Thank you so much for tuning in. It's been great to go through this case note as something different. If you like that format, do let me know. It's the first one we've done it and yeah, I'd love to hear post it in the Art of Estate Planning Facebook group if you've got any feedback.
(28:21):
See you next week.
