An increasingly common succession planning strategy is to incorporate a company to act as appointor of a family discretionary trust (in addition to a company being appointed as trustee of that trust).

A corporate appointor is usually only appropriate where the underlying family has sophisticated succession planning objectives, such as a desire to pass control of the trust to multiple people.

Unlike corporate trustees, a corporate appointor does not usually create any administrative simplicity, as the appointor does not own any assets and changing an appointor is a relatively straight forward exercise.

The use of a corporate appointor also means that a company must be established for that purpose, despite the likelihood that it will not be required to undertake any day to day activities and may remain largely dormant until an unspecified point in the future (such as the death of a key family member).

As a result, an alternative to corporate appointors is to establish a trust with a corporate trustee and no appointor role at all.

The trust would be established with provisions allowing the trustee to resign and appoint a replacement at any point in time.

The succession planning provisions would then be embedded within the constitution for the trustee company.

By way of example, the constitution for the trustee company may contain the following provisions:

• Any resolution to amend the constitution requires the unanimous consent of the members
• Similarly, any resolution to remove the company as trustee of the trust would require the unanimous consent of the members (as this would effectively unwind the rules set out in the constitution, by allowing a new company with a different constitution to act as trustee of the trust)
• Limitations may be inserted specifying that only lineal descendants of the family matriarch and patriarch can hold shares or be directors of the trustee company
• Alternatively, provisions may be inserted requiring one or more independent directors to be appointed at all times
• Specific voting rights would be inserted, depending on the family structure and role of any independent directors. For instance, a higher voting threshold may apply to decisions in relation to the distribution of any income by the trustee, compared to other day-to-day decisions of the trustee.

Any tailored provisions which are inserted into the trust deed or company constitution need to be drafted with reference to the rule against fettering a trustee’s discretion.

Put simply, this rule means a trustee’s discretion to determine when and how to make distributions of income or capital to a beneficiary are governed by the trust deed and a trustee generally cannot contractually agree to make distributions in a particular manner.

As a result, the tailored provisions should typically focus on how a decision is to be made by the trustee company (i.e. what voting thresholds apply) as opposed to mandating what decision must be made.

While there are some limited exceptions to the rule against fettering a trustee’s discretion (see for instance, Dagenmont v Lugton [2007] QSC 272, where the Court enforced an agreement between a trustee and a beneficiary which mandated that a certain percentage of all trust distributions be made to that beneficiary, largely on the basis that all parties had obtained independent legal advice), it is ill advised to deliberately breach the rule.

For further information, please contact Patrick Ellwood on 0400 503 111 or patrick@cloverlaw.com.au.

• Asset Protection
• corporate appointor
• corporate trustee
• readthedeed
• succession
• Trusts