Family Trusts – Control and Succession
Posted on August 01, 2018
The recent case of Mercanti v Mercanti decided by the Court of Appeal of Western Australia in December 2016 is a very helpful illustration of the validity of amendments to discretionary family trust deeds and provisions for succession and control of family trusts.
The Basic Facts
In the early 60s Michael Mercanti commenced a retail shoe repair business, which became very successful and valuable. In 1979 he established the M Mercanti Family Trust which took on the business. A company called Slondia Pty Ltd was appointed the trustee of the trust. Michael was the initial guardian and appointor. The trust also became the owner of 4 pieces of real estate. Michael and his wife Yvonne were the directors and shareholders of Slondia. Michael and Yvonne had four sons.
Tyrone was the “golden haired” son and was appointed a director of Slondia from 2001. In 2004 Michael and Yvonne arranged Slondia to amend the trust deed to appoint Tyrone as the guardian and appointor instead of Michael. By this stage Michael’s involvement in the business had diminished to a part time basis and Tyrone was appointed managing director. Tyrone got on well with his parents until 2012 when their relationship broke down. Apparently this arose out of Tyrone not paying Michael as much income out of the trust as he wanted. In 2013, while Tyrone was in China, Michael and Yvonne as shareholders of Slondia removed Tyrone as a director without notice and took over control of the business premises and business operations. On Tyrone’s return, Tyrone exercised notices removing Slondia as trustee of the trust and appointed his own company as trustee. He did this by exercising his powers as appointor of the trust.
Michael took court proceedings to challenge Tyrone’s actions.
The Decision
The trial judge and the Court of Appeal found in favour of Tyrone. They decided that:
- the Trust Deed allowed the variation to replace the guardian and appointor and that it was validly done.
- Michael, as guardian, consented to that variation and that there was no fraud or undue influence by Tyrone.
- the removal of Slondia as trustee and appointment of Tyrone’s company as trustee was valid.
Further, the Court said that the effect of Tyrone exercising his powers of appointor to remove Slondia as trustee was consistent with the purpose of the power in the trust deed. The deed of variation had the effect of transferring effective control of the trust and its business to Tyrone immediately. Tyrone’s actions in preserving the status quo were not improper. He was not acting dishonestly or in bad faith or for any extraneous or ulterior purpose.
The key things highlighted by this case are:
- the ability to amend a trust deed depends strictly on the wording of the power of amendment in the deed;
- the procedures in the power of amendment in the deed must be followed carefully;
- the use of a power requires analysis of the proper purpose of the power in the context of the entire deed.
Overview and conclusion
The upshot of the decision is that Tyrone was left in control of the Trust. Michael and Yvonne wanted to give the real estate assets owned by the trust to their other sons. Unfortunately, they did not put in place necessary arrangements before giving control of the trust to Tyrone.
Sadly, family members often do not get on, or fall out with each other. The case illustrates the need for careful estate planning and strategies for effective control and succession of family trusts. Depending on the circumstances and requirements, there are a range of strategies that could be used, such as:
- appointment of independent appointors and guardians with non-binding “instructions”
- restrictions on amendments to the trust deed
- restrictions on trustee’s powers requiring the consent of a guardian
- binding will directions
- use of property appointor’s rights
- use of guardian’s distributor rights
- trust splitting
- transfers of property
Our standard modern Shelfdocs trust deed includes mechanisms to employ these strategies. In most cases, existing trust deeds can be updated with our modern deed that includes these mechanisms.
Our wills and estates team are experienced in advising on trust successions matters.
