Trusts in operation – benefits and burdens

Trusts have well documented benefits including asset protection and tax minimisation opportunities. However, the relationships created by those trusts result in trustees being burdened by their complex legal and fiduciary obligations to beneficiaries and by their obligations to third parties. This bulletin briefly examines some statistics produced by the Society of Trust and Estate Practitioners (STEP) on the use of trusts and looks at some recent case law examples of the benefits and burdens of trusts.

Use of Trusts

Private family trusts are used today for lifetime wealth accumulation, tax benefits and asset protection. Testamentary trusts (Will trusts) are often used for post death asset protection and tax minimisation opportunities for surviving family members. Charitable trusts are utilised for long term philanthropy objectives. Commercial trusts are used by companies to support and protect businesses, employees and business owners. Superannuation trusts are also prominent and affect most working adult Australians.

It is difficult to obtain an accurate assessment of the use of trusts worldwide. A trust is a legal relationship. A trust is not a legal entity. Therefore, there is no worldwide universally agreed obligation to report the number and value of trusts currently operating.

Statistics from the 2021 STEP report “Social and Economic Benefits of Trusts” indicate the following:

• In Australia, in 2016 -2017 the ATO estimated there were 850,000 trusts operating in Australia with assets having an estimated value of AUD$385.7 billion.

• In New Zealand in 2016, there were 11,671 foreign registered trusts. It has been estimated that there are between 300,000 and 500,000 trusts operating in New Zealand.

• In the UK, recent estimates suggest there may be over 2 million personal trusts operating, leaving aside the many commercial trusts.[1]

Benefits

Judicial Advice

Section 63 of the Trustee Act 1925 (NSW) provides trustees with a statutory right to apply for the opinion, advice or direction of the court on any question in respect of the management or administration of trust property or in respect of the interpretation of the trust instrument. This statutory right will be referred to by the term ‘judicial advice’.

The reasons for the statutory right for trustees to seek judicial advice can be ascertained from the stated purposes of s 63 and the judicial advice procedure itself.

The Court’s jurisdiction to give directions and advice is an exception to the usual function of the Court to decide disputes between competing parties. [2] This exceptional jurisdiction for the Court stems from: ‘The pre-occupation of the court … with those who have the stewardship of property for the benefit of others.’ [3] Traditionally, courts exercising their equitable jurisdiction have supervised trusts and trustees to ensure the interests of the trust are protected.

The High Court in The Macedonian Church case stated that a statutory right for trustees to seek judicial advice was to ensure the protection of the trust and the personal protection of the trustee. [4] As Kiefel J noted:

In exercising the discretion the Court should be guided by the scope and purposes of the section [63]. The principal purpose of the section, and the opinion, advice or direction given under it, is the protection of the trust. Another purpose is the protection of a trustee who is acting in that regard and upon advice. [See Trustee Act, s 85(1) and (2)] Securing the latter may ensure the attainment of the principal purpose, by removing the concern of a trustee about exposure beyond their usual indemnity. ^[5]

The summary nature of the judicial advice procedure itself also assists to explain its purpose. Section 63 proceedings are intended to provide trustees with a simple and inexpensive means of obtaining judicial advice. This streamlined procedure was originally designed to avoid the cumbersome and expensive exercise for trustees of commencing a general administration suit.[6]

Under s 63(2) a trustee will be legally protected from a breach of trust claim and be able to rely on the judicial advice obtained if the trustee acts in accordance with that advice and, provided the trustee has not been ‘guilty of any fraud or wilful concealment or misrepresentation’ in obtaining the advice. In order for the trustee to be fully protected by the order, the trustee must ensure there is full disclosure of all relevant matters. [7]

The form of application for judicial advice is governed by s 63(3) and the procedural rules in Part 55 of the NSW Uniform Civil Procedure Rules 2005 (‘UCPR’).[8] The trustee’s evidence is usually given by written statement of facts. The usual form of order for judicial advice is that the trustee ‘would be justified’ in taking a certain course of action.

Ambiguous Will Gift

The benefits of the availability of judicial advice for trustees are clear from the Court decision in Re estate of the late Stasha Berger where there was ambiguity in the wording of a Will gift.[9] 

The executors of the estate (who by statutory definition are trustees) made a judicial advice application pursuant to s 63 as to whether they would be justified in paying 80% of the remainder of the deceased’s estate to The Trustees of the Order of the Capuchin Friars Minor by depositing the funds into a nominated bank account in the name of Capuchin Franciscan Friars. The relevant Will gift had an estimated value of $7,500,000. 

The evidence and the confirmation from The Trustees of the Order of the Capuchin Friars Minor that the funds would be used for the purpose referred to in the deceased’s Will allowed the Court to hold that the executors were justified in taking the stated action. The executors also received their full legal costs of their judicial advice application from the deceased’s estate.

Lost Trust Deed

A corporate trustee of a family trust was able to use judicial advice to assist where the original executed trust deed could not be located. In The application of M & L Richardson Pty Limited the trustee sought judicial advice that it was justified in administering the family trust in accordance with the unexecuted copy of the trust deed.[10]

It was noted by the Court that in such cases two matters must be established by clear and convincing evidence to the standard that would be required to make out an entitlement for rectification of a written document. The first was that the executed trust deed actually existed to establish the trust. The second was that there is secondary evidence of the terms of the trust deed. Both matters were established to the satisfaction of the Court and the trustee received the requested judicial advice and its full legal costs for the application from the trust fund.[11]

Burdens

Beneficiaries

Trustees are often burdened by beneficiaries or potential beneficiaries demanding information and trust documentation relating to trusts. The recent Court decision in Jordan v Goldspring is an example of such a case.[12]

The case involved three children of two deceased parents who commenced legal proceedings wanting to see documents and financial records relating to a number of trusts created by their parents during the lifetime of the parents. The three children did not know whether they were beneficiaries of any of the trusts.

The Court focussed on the secret way the trusts were being administered without any supervision and accountability. Also relevant was the use of the word ‘Family’ in the name of some of the trusts. In relation to those ‘Family’ trusts, the Court ordered that the trustees permit inspection by the three children of the relevant trust deeds and deeds of variation of those trusts (but not the financial records). [13]

The numerous sets of legal proceedings relating to the Hope Margaret Hancock Trust and the Rinehart family members have been well publicised. They have resulted in a trustee being replaced and still occupy Court time dealing with issues relating to the administration of the Trust.[14]

Legal Proceedings

Legal proceedings relating to trusts risk the trust fund and are a burden for trustees. The trust fund does not belong to the trustees as it is held for the beneficiaries. Trustees have a duty not to waste the trust fund. Incurring legal costs in relation to Court proceedings that were not prudent may leave trustees open to a breach of trust claim by the beneficiaries. A successful breach of trust claim may leave the trustees personally liable to make good the loss to the trust fund.

A trustee contemplating commencing or defending legal proceedings is best advised to obtain judicial advice before taking steps in the proceedings. Taking this step will protect the trust fund (and the beneficiaries) and protect the trustee’s right of indemnity from the trust fund.

The recent Court decision in John Campbell Nominees Pty Ltd ACN 646 545 262 is an example of a trustee prudently seeking judicial advice when faced with legal proceedings. The legal proceedings involved whether a farming property was beneficially owned by the Campbell Family Trust.[15]

Judicial advice was given to the trustee to defend the claims relating to the trust property, and to proceed with a cross-claim if the parties in their proceedings do not succeed in its claim concerning the trust property.[16]

Issues with Trusts

If you have read this article and think that you may need assistance with trusts legal issues that affect you, please feel free to contact the author or anyone in our private clients team for advice and assistance.

Author: Gerard Basha

 

[1] STEP report “Social and Economic Benefits of Trusts” 2021 p 10

[2] Palmer J in Application of Macedonian Orthodox Community Church St Petka Incorporated (No 2) [2005] NSWSC 558 [23].

[3] Application of Gnitekram Marketing Pty Limited [2010] NSWSC 1328 [12] (Hallen AsJ) quoting Australian Pipeline Limited [2006] NSWSC 1316 [23] (Barrett J).

[4] Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42 [71]-[72].

[5] Ibid [196].

[6] See, eg, The Macedonian Church [2008] HCA 42 [61]-[63]; Application of Macedonian Church (No 2) [2005] NSWSC 558 [20] – [21]; Young CJ in Eq in Application of Macedonian Orthodox Community Church St Petka Incorporated [2006] NSWSC 392 [12]-[13].

[7] Application of Gnitekram Marketing Pty Limited [2010] NSWSC 1328 [17] (Hallen AsJ).

[8] Applications are by way of summons filed in the Equity Division of the Supreme Court, and usually supported by a written statement by the trustee or the trustee’s Australian legal practitioner.

[9] [2020] NSWSC 750.

[10] [2021] NSWSC 105.

[11] Ibid [4].

[12] [2021] NSWSC 7.

[13] Ibid.

[14] See, for example, Application of Rinehart [2020] NSWSC 1624.

[15] John Campbell Nominees Pty Ltd ACN 646 545 262 [2021] NSWSC 233.

[16] Ibid [42].