Trusts are popular long-term structures to hold capital and through which annual income can be distributed. Discretionary trusts offer flexibility to provide for classes of beneficiaries and, potentially, significant tax minimisation benefits.
However, while a trust structure can offer significant benefits, those benefits are put at risk where a trustee (whether a corporation or an individual) fails to understand the obligations of their role. This risk commonly arises where a trustee:
- conflates having control of assets with a personal entitlement to the benefit of those assets; and
- makes decisions accordingly, despite changing circumstances over time.
Where a trustee fails to discharge their duties, they risk being replaced and losing control of the trust assets.
A dispute over control of a trust can have broad-ranging consequences. In addition to a potential change of trustee, the costs of a dispute can be significant and may ultimately be borne by the trust (to the detriment of beneficiaries) or the trustee personally.
In Cardaci v Cardaci,[1]
the Western Australian Court of Appeal recently re-affirmed key trust principles regarding:
- the obligations owed by a trustee;
- the Court’s power to remove and replace a trustee; and
- situations where a trustee’s legal costs will be borne by the trustee personally (and not by the trust).
Given the scale and cost of that litigation, and the ultimate outcome of the trustee being replaced, the case serves as a reminder to trustees to regularly undertake a ‘trust health check’ and seek advice and guidance on the discharge of their duties.
The Case
- The unanimous decision by the WA Court of Appeal in Cardaci is the latest instalment in a 7-year long dispute between Mae Cardaci and her brother-in-law Philip Cardaci about her late husband Marc Cardaci’s estate and two trusts
- Marc died in late 2015.
- Philip was executor of Marc’s estate, and caused it to be administered in bankruptcy, despite the estate’s solvency remaining a live issue.
- At the time of Marc’s death, he was the trustee of a discretionary family trust. Philip was the guardian and appointor of that trust. Following Marc’s death, Philip appointed a company (that he controlled as director) as trustee of that trust.
- Marc was also the beneficiary of a testamentary trust arising from his mother’s will. Exercising his powers as executors of both their mother’s estate and Marc’s estate, Philip purported to appoint a replacement trustee to that testamentary trust. The new trustee was also a company which Philip solely controlled.
- One of the trusts held a 25% interest in a mining company. Philip was told the trust had a value of $50 million. In May 2016, Philip told Mae that he (as ultimate controller of one of the trusts) would “never” make a distribution to Mae. This was despite Marc stating three years prior to his death in a Memorandum of Wishes that the trustee should pay all income and capital to Mae.[2]
- Having made that statement, Philip later made a “settlement offer” to buy out Mae’s ‘interest’ as a beneficiary for a payment of $2 million and a purported forgiveness of debt. Philip claimed that that the offer was made as an act of “goodwill and benevolence”.[3] Mae had no need for and had not asked for a lump sum payment in lieu of future distributions, and Philip did not provide Mae with adequate information to enable her to assess that offer.[4]
- In late 2021, Justice Le Miere ordered the removal of the trustees controlled by Philip, appointing Mae as trustee, and required the former trustees to reimburse one of the trusts for the costs of defending the proceedings.[5]
- Philip appealed against those orders on numerous grounds. Philip’s appeal was dismissed in its entirety.
- To get to this point, the parties spent over $7 million in the litigation: $4.6 million expensed from the trusts and $2.45 million spent by Mae.
Key Points from Cardaci
- The Supreme Court has broad powers to remove and replace trustees.[6]
- That power is not confined to circumstances in which a trustee is found to have acted in bad faith or with an ‘improper purpose, engaged in misconduct or failed to consider exercising its powers in favour of an eligible beneficiary.
- The Court’s discretion to remove a trustee is to be “exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts, and a faithful and sound exercise of the [trustee’s] powers”.[7]
- A breach of duty may be neither necessary, nor sufficient, for the Court to remove a trustee.
- Trustees must understand their duties and obligations, particularly their minimum
- obligations to act honestly and in good faith for the benefit of the beneficiaries.[9]
- Remarks by or on behalf of a trustee that they will “never” distribute trust property to a beneficiary may demonstrate a failure by a trustee to give “real and genuine consideration” to a beneficiary. Trustees have an obligation to consider whether, and how, they should exercise their powers in favour of beneficiaries.[10]
- A trustee making an offer to ‘buy out’ a beneficiary may reflect the trustee misunderstanding its powers and obligations as a trustee. In Cardaci, the trustee had no power under the trust deed to make such an offer, failed to provide adequate information (as would be expected of a trustee), failed to distinguish between Philip’s personal interests and the trustee’s role, and pressured Mae into accepting the offer by stating that it would never make distributions to her. Together, these factors made it apparent that the trustee did not understand its obligations and ought be removed.[11]
- People who have control over multiple entities and trusts must separate their duties from their personal interests and distinguish between personal and trust assets.[12]
- Trustees and executors should consider obtaining legal advice in relation to significant decisions relating to a trust or estate including whether to seek judicial direction such as defending litigation or putting an estate into bankruptcy.[13]
- A trustee is not always entitled to be indemnified by the trust for their legal costs when defending a claim by a beneficiary. A trustee may not be permitted to pay their legal costs from trust assets where they have acted solely in their own personal interests or where they have otherwise acted unreasonably.[14]
- A trustee should consider obtaining judicial advice on legal action before incurring those costs.[15]
[1] [2023] WASCA 158 (Cardaci).
[2] [64] – [65]
[3] [152]
[4] [135]
[5] [2021] WASC 331 and [2021] WASC 331 (S)
[6] [208]
[7] [199]
[8] [198]
[9] [642]
[10] [227]
[11] [327]
[12] [326]
[13] [510]
[14] [571] – [572].
[15] [577].
The Court may remove a trustee if its confidence in the future administration of the trust is “sufficiently impaired”.[8]