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The Devil is in the Detail When it Comes to Deed Amendments
Stephen Harvey, current as of: 4 February 2016.
Trustees have been put on notice as a result of a recent West Australian case (Mercanti v Mercanti) which highlighted the need to carefully read a deed when a trustee proposes to amend it. Whilst the outcomes in this particular case invalidated a trust amendment, there is a broader message in terms of ensuring we are familiar with all the terms of trust deeds.
What the Mercanti case illustrates is that, whilst a deed may contain a power of amendment, the scope of the power may not be broad enough to authorise the trustee to take its proposed course. It really is a case of reading the provisions carefully to ensure the amendment can validly be made and to avoid potentially disastrous consequences.
Mercanti v Mercanti
In essence, this case involved the amendment of two discretionary trusts to replace an existing Appointor/Guardian. Of course, the Appointor/Guardian objected and the outcome was:
- The first trust permitted the trustee to “vary all or any of the trusts, terms and conditions” in the trust deed, which, according to the court, included the name of the Appointor/Guardian in the Schedule – amendment valid; and
- The second trust permitted the trustee to “vary all or any of the trusts” in the trust deed, which, according to the court, did not include the name of the Appointor/Guardian in the Schedule – amendment invalid.
The decision reinforced an earlier Queensland case (Jenkins v Ellet) where it was found that the amendment power was not broad enough to permit a variation to the schedule in the deed and, accordingly, the change of principal of the trust was ruled invalid.
The down side of amendments
Amending a trust deed can be a difficult and highly technical process, and extends to the exercise of any other power in a trust deed (e.g. the appointment of a new trustee). It is easy to imagine the adverse impact of getting it wrong on the trust, trustee, beneficiaries and third parties involved with the trust.
Compounding the problem is the potential for the invalidity to be discovered only after many years.
- As in the Mercanti case, an invalid appointment of an Appointor would inevitably lead to the invalid appointment of a trustee at a later date. The result would be the invalidity of all actions of the trustee appointed in reliance on that amendment;
- The invalid appointment of a trustee could mean that income or capital distributions by that trustee are invalid, resulting in reassessment of tax and penalties being imposed for all the years after the appointment; and
- Invalidation of the exercise of the powers of the trustee based on an invalid amendment conferring powers on the trustee.
Four tips to avoid disaster
As with any trusts and other business structures, the process of making changes is usually dictated by the provisions of the trust deed or other constituent documents. A failure to observe the formalities of those processes can be disastrous.
Four tips to consider if you’re planning amendments:
- Always read the trust deed or other constituent documents carefully;
- Do not attempt to make the changes if you are unfamiliar with, or do not understand, the process;
- Engage professionals who are familiar with, and understand, the formalities; and
- Do not engage businesses to make changes on behalf of clients if they have not requested or read the trust deed or other constituent documents.
If you are considering making adjustments to your trust deeds and need some clarification, call the Acis team on 1800 773 477.