Legal Tip 336: Tell the Next Appointor that they will be the Appointor

Trusts are private affairs, the trust assets don’t pass via the will, and even the control of the trust doesn’t pass by will (except as a backup mechanism or by poorly drafted trusts).



The most important position in the trust is that of the appointor as it is the appointor that can appoint and replace the trustee. This position can be passed on via deed – sometimes in the trust itself or via a separate deed.



The trouble with this is that the next appointor may not realise that he is she or it is the appointor. The deed may be filed away with trust documents and the new trustee or controller of the trustee usually has access to these documents (or should). If the Appointor is this person then no problems may arise, but if it is a different person then that person may not even know that they have been appointor and therefore have control of the trust. This can go on for years without their knowledge and the trust can be drawn down a path different to what it would have been had they known.



Example

Homer and Marg are spouses and Homer sets up a discretionary trust with a company he controls as trustee. The backup appointor is their son Bart.

Homer dies of Radiation poisoning.

Marg takes control of the trust, but Bart is the new Appointor, therefore Bart is the ultimate controller of the trust as he could sack the trustee controlled by Bart. However Bart has no freakin idea that he is the appointor because no one told him.


Marg goes rogue. She has an affair with Ned Flanders’s the man next door whose wife has died. Pretty soon Ned moves in and they get married. The wording of the trust deed means that Ned is now a beneficiary of the trust and Marg starts showing him some love by distributing all the income of the trust to him.


Bart is over 18 and he is annoyed at this. He asks his mum to stop distributing to Ned but she refuses. This continues for 10 years and Bart finally finds out that he is the Appointor and he immediate sacks the corporate trustee controlled by Marg and appoints a new company which he controls.


Bart could have prevented 10 years of distributions to Ned had he realised that he was the appointor. Marg, naturally perhaps, didn’t tell Bart.


Who is to blame? Well probably the deceased Homer. Bart as a beneficiary could have 7also made enquiries, asked for a copy of the deed.



The tip is to make sure that if you are the appoint that you have a back up appointor and that this person know that they will be the appointor upon your death and/or incapacity. If they don’t know it they will be unable to exercise their powers.

 

Same as guardians / protectors etc who have powers to approve certain acts of a trustee - They may forget which renders asset protection at risk. A useful safeguard at times. They may need to approve certain acts and may be able to assist and intervene. Not so much a issue about making them aware but ensuring they are reminded of their power. I know a law firm that includes a statement of wishes (I think thats its name) attached to a will to provide a copy of the deed and remind such persons and it welcomes them to seek legal advice and instructs them about the trustee succession etc at that time. Assuming they can be contacted.

A guardian power may, for example have originally appointed Apu, Homers friend, to act as an independent person to stop new beneficiaries or a change of trustee or early vesting. Apu's powers would generally be limited to giving approval based upon his understanding of Homer's wishes that the trust benefit the kids, not Marge's new toyboy. Apu may get a reminder of this power on Homer's death as part of the asset protection strategy recommended by Lionel Hutz when the deed was settled.

 

A few trust questions for you Terry, all based on the morbid scenario of death prior to children's adulthood...:

1) When setting up secondary/backup appointers (in case both primary appointers die at the same time!), can you stipulate a time limit on these secondary appointers? i.e. Uncle Tom is appointer until my children reach age 25?

2) If a trust is written to only have beneficiaries that are direct descendents, does this actually prevent trustees from distributing to non-direct descendants in any case? i.e. if an uncle was the secondary appointer in the above situation (both primary appointers die in a car crash), would he be able to change trustee and beneficiaries?

3) What happens to a trust if all beneficiaries in the trust deed (or implied by descent) pass away?

4) If all adult beneficiaries pass away prior to kids reaching 18, would you recommend at this point that the trustee gets legal advice again and perhaps considers a bucket company setup as beneficiary rather than the children being charged tax at kids (ridiculous) rates?

 

1. yes
2. it will depend on the wording.
3. it will depend on the wording - unlikely to happen with most discretionary trusts
4. Yes the trustee should seek advice.