The Devil is in the Detail: And the Consequences can be Costly

Emily Pritchard, current as of: 3 November 2021.

A number of recent court cases highlight the importance of paying attention to detail when preparing trust deeds and amendments to trust deeds. The significance of getting these documents right is often overlooked; however, the ramifications of not doing so can be extremely costly, both financially and reputationally.

It’s crucial that the terms of the original trust deed correctly reflect the intention of the parties. It is equally important, when preparing amendments to trust deeds, that the terms of the trust deed are complied with.

If the trust deed dictates that any intended changes require the consent of a certain party, that consent must be obtained. If the trust deed stipulates that the holder of a certain position has the power to do something (e.g. an Appointor), then the person holding that position must be the one to take that action.

It’s a pertinent time to ask who prepares your trust deeds and deeds of amendment.

The Demian Trust Case

The requirements of a trust deed must be complied with when making changes to trustees.

The Facts

  • The Commissioner of Taxation argued that units in a unit trust were held by Advanced Holdings Pty Ltd (the Company) in its own right.
  • The Company argued that it had been appointed as trustee, jointly with an existing trustee, of Demian Trust and therefore held the units in the unit trust in that capacity.
  • The Court was called on to determine whether the Company had been validly appointed as trustee of the Demian Trust.
  • The relevant clause of the trust deed for the Demian Trust read:
    The Principal may at any time by notice in writing to the Trustee remove from office any or all of the Trustees or Trustee for the time being of this Deed and may by Deed appoint a new Trustee in its or their place to be the Trustee hereof…
  • The issue was whether the power to appoint a new trustee under that clause could be exercised without a prior removal of a trustee.

The Decision

  • The Court interpreted the deed literally and found that the power to appoint a trustee could only be exercised after a prior removal of trustee. It was therefore held that the Company had not been validly appointed as trustee of the Demian Trust (because there had been no prior removal of trustee).
  • The outcome for the Company was that its income could only be paid to its shareholders by way of dividend rather than a broad range of discretionary beneficiaries, which would have been the case had the court found it held the units as trustee.
  • A subsequent appeal by the Company was dismissed by the Court.

The Owies Family Trust Case

The amendment power must be broad enough to allow for the intended amendments to a trust deed.

The Facts

  • Siblings in the Owies family were in dispute over the control of a discretionary trust that held assets with an estimated value of $23 million.
  • The trustee had purported to change the identity of the guardian and appointor of the trust, from the parents to one of the children, by amending the trust deed.
  • The Court was called upon to determine whether that amendment was valid.
  • The relevant clause of the trust deed read:
    The Trustees for the time being may at any time and from time to time by deeds with the consent of the Guardian if alive revoke add to or vary all or any of the trusts hereinbefore limited or the trusts limited by any variation or alteration or addition made thereto….

The Decision

  • The Court construed the trust deed strictly and found that the reference to ‘trusts’ must be taken to be a reference to the primary trust created by the deed i.e. the ‘trust’ constituted by the deed, as distinct from any other provisions in the deed.
  • The trustee’s attempt to change the identity of the guardian and appointor by way of amendment therefore failed as it was outside of the scope of the amendment power.

The Benaroon Case

Trust deeds must correctly reflect the intention of the parties.

The Facts

  • Mr Larmar, an accountant, set up a discretionary trust in 1977, but neglected to include himself or his wife as potential beneficiaries.
  • Throughout the life of the trust, substantial distributions were made, invalidly, to Larmar, his former wife and his current wife.
  • Larmar argued that it was always his intention to include himself and his wife as beneficiaries and applied to the Court to make an order that the trust deed should be rectified.

The Decision

  • The Court refused to make the order requested on the basis that there wasn’t sufficient evidence to establish that Mr Larmar’s intention was that he and his spouse would be beneficiaries.
  • The Court noted that Mr Lamar should have read the deed.
  • The decision was upheld on appeal.

These cases clearly demonstrate that it certainly isn’t a case of one-size-fits-all when it comes to preparing trust deeds and deeds of amendment. Care should be taken to ensure that the parties’ intentions are correctly reflected, that any changes are carried out in accordance with the terms of the trust deed, and that those who are preparing these documents are aware of these matters and the potential consequences of getting it wrong.

Don’t hesitate to contact the Acis legal services team with any enquiries.

Notes:

  • Advanced Holdings Pty Limited as Trustee for The Demian Trust v FCT [2021] FCAFC 135
  • Re Owies Family Trust [2020] VSC 716
  • Benaroon Pty Ltd v Larmar & Ors [2020] QCA 62

Acis does not provide advice in relation to commercial law, taxation, duty, company law or any other matter. We do not purport to provide advice nor should you construe anything in any correspondence with us, or material provided by us, as advice of any kind.