In this particular scenario, a woman lost control of a discretionary trust that she had established more than a decade earlier when her son removed her related company as trustee, and resolved to exclude her as a beneficiary.
In 1998, Monique sought advice from her accountant in order to maximise her pension. She was advised to establish a trust and gift an amount of cash to it, thereby reducing her assets for means testing purposes.
Monique did so, appointing Verhelst Pty Ltd (of which she was sole director) as trustee, and she and her grandchildren as beneficiaries. Her son, Michael, was nominated to act as the Appointor empowered to appoint and dismiss a trustee under the trust deed.
Monique gifted almost $183,000 to the trust. In subsequent years a number of residential units were purchased – one of which Monique lived in, rent free, for several years.
Michael looked after the business affairs of the trust and was a signatory on the trust bank account. Where necessary, Michael “topped up” the trust’s loan payments and paid various expenses on the trust’s behalf from his own wages. By July 2014 Michael calculated that he had advanced a total of $80,000 to the trust.
Michael saw little benefit to him and his children from the trust, whereas Monique was living free of expenses. Monique also failed to cooperate in Michael’s attempts to alleviate the debts of the trust.
In July 2014, Michael transferred $80,000 from the trust to himself. He also removed Verhelst Pty Ltd as trustee of the trust and appointed his related company, Tondeleir Pty Ltd, to act as trustee. Michael then completed documents causing Monique to be excluded as a beneficiary of the trust.
At the time that this was carried out, the trust held seven residential properties with a combined equity of approximately $1.3M.
Monique commenced legal proceedings against Tondeleir Pty Ltd and Michael in February 2015.
Broadly, she sought the following from the Court:
- A declaration that Verhelst Pty Ltd remained the trustee of the trust;
- A declaration that Monique remained a beneficiary of the trust; and
- An order that Michael repay the $80,000 and be restrained from acting in his capacity as Appointor.
The Court found that:
- Michael had acted in good faith when he appointed a new trustee and excluded Monique as a beneficiary as he sincerely believed that Monique, through her control of Verhelst Pty Ltd, was acting contrary to the duties imposed on a trustee and unfairly preferred her interests over those of the other beneficiaries;
- Tondelier Pty Ltd had not “acted in antagonism” against the trust since its incorporation;
- Michael was a signatory to the trust’s bank accounts and had authority to pay its debts (which included the debt owed to himself); and
- Michael should not be restrained from acting as the Appointor.
Monique was unsuccessful on all grounds.
What does this mean for you?
Despite our best intentions, relationships regularly break down – even those of immediate family. In this instance, money and control were two factors that fuelled the breakdown of the relationship between mother and son.
The major lessons for advisers are to:
- Carefully consider the objectives of any arrangement that you are engineering for your client and their family;
- Obtain a detailed understanding of your client’s family dynamics and determine the risks;
- Carefully select the entities that will assume positions of control, and have a detailed understanding of how that control may be wielded. Ask some questions:
- Are specific provisions or agreements required?
- Should joint Appointors/trustees be appointed?
- Are special positions required?
- Know the day-to-day operations, including who must be a signatory on major bank accounts;
- Understand how the structure is likely to fare if family relationships become strained; and
- Conduct regular reviews of the structure to head off potential issues as they arise – don’t allow your client to bury their head in the sand.
If you require any assistance with special purpose structuring please contact us on (07) 3223 6100 or firstname.lastname@example.org.