The trustee of a trust or superannuation fund must document certain decisions. This obligation arises under their trust or superannuation fund deed, or because of trust, superannuation or tax legislation.
Unfortunately, it is often the case that even basic decisions are not appropriately documented. This can have disastrous legal and financial consequences that are not always capable of being fixed at a later stage.
Exercising powers – how does a trustee record decisions?
Each trust deed should prescribe methods in which the trustees may record their decisions and exercise their powers. Most commonly, this is by way of a minutes of meeting or trustee resolution. Modern trust deeds also often allow a number of more convenient ways for multiple trustees to make decisions, such as by a trustee resolution that is circulated electronically, and signed separately by all trustees.
Regardless of how flexible or inflexible a trust deed is, it is imperative that a trustee follows the deed’s prescribed methods of recording its decision. The decision may otherwise be legally ineffective.
Trustee powers – what can a trustee do?
A good trust deed will provide a trustee with a broad range of powers. Trustees are also provided basic powers under the Trusts Act. These powers allow a trustee to effectively manage the assets and investments of a trust, and may include powers such as:
- Taking out loans and granting security over assets.
- Entering into certain types of transactions.
- Making certain types of distributions or classifying certain types of income.
Even if a trustee appropriately documents a decision, that decision will be ineffective if it is not authorised under the trust deed, legislation or under common law. Legal advice should always be sought if you are not confident that the trust deed adequately provides a trustee with power to make a decision.
So what can happen when it all goes wrong?
A High Court case from earlier in the year highlighted the importance of trustees ensuring that their decisions are accurately documented and made in accordance with powers granted to the trustee under the trust deed.
The case – Fischer v Nemeske Pty Ltd
This case revolved around technical issues regarding the trust powers and trustee decisions. It arose years after the trustees had made and documented the relevant decision, at which point both trustees were deceased. In summary:
- In 1994, the trustee entered into a transaction which it believed to be in accordance with powers granted under the trust deed. The transaction involved revaluing shares owned by the trust and making a capital distribution to the beneficiaries, although no distribution was actually made and instead the beneficiaries loaned the ‘distributed’ amount back to the trust. This loan was for $3,904,300.00.
- In 2010 the first beneficiary died, and in 2011 the second beneficiary died.
- Under the second beneficiaries’ will, it was stated that all assets of the trust would go to the Fischers, with the balance of his estate going to other beneficiaries under the will (“the Estate Beneficiaries”).
- The Fischers claimed that the 1994 trustee resolution was ineffective, and that the trust did not have to repay the loan to the estate.
- The court determined, by a 3-2 margin, that the trustee resolution in this case was effective. Issues that raised significant uncertainty for the court were whether the trust deed had an appropriate power for the transaction, and whether the trustee resolution clearly documented the transaction.
Had the 1994 trustee resolution been determined to be ineffective, it would mean that the trust would not have had to repay the loan to the beneficiaries. In turn that the Estate Beneficiaries would share in a significantly reduced amount under the second beneficiaries’ will. This is obviously a significant financial consequence, that was likely unforeseen by the trustees at the time they made their resolution so many years before.
How does this affect you?
If you are a trustee, you should ensure that you and your advisors are familiar with your trust deed and that any decisions made are appropriately documented. By the same token, advisors should always consider whether a trustee has appropriate power to enter into a proposed transaction. Just because there is no immediate risk of a trustee’s decision being challenged or reviewed does not mean it will not face tough scrutiny in the future.
This article is intended to provide general information only, and should not be relied upon as legal advice. If you have concerns about any trusts matter you should obtain legal advice, having regard to your specific circumstances. Please contact Tom Wood or Nick Casey if you require any assistance in this regard.