Jerry Smith was 80 years old and was the owner of a significant amount of property. In January 2020, he heard about COVID-19 and became very fearful and decided that he wanted to transfer some of his property to his loved ones.
In April 2020, Jerry declared himself a trustee of his beneficial interest under the ‘Cube Trust’ for his daughter Alisa Kidder. The Cube Trust holds a valuable share portfolio.
In July 2020, Jerry showed his daughter Alisa a painting which was hanging on the wall of Jerry’s home and told Alisa that this was to be held by Alisa on trust for her son Aaron.
In September 2020, Jerry executed a deed which provided for the appointment of Alisa as trustee requiring her to sell his farm in Kukerin, Western Australia and to distribute the proceeds to ‘such of my nephews as she shall select in her absolute discretion.’ A day later he handed his solicitor the duplicate certificate of title to the farm and a power of attorney and a direction to complete the transfer form but has not yet provided the documents to Alisa.
In October 2020, Jerry generously decided to establish the Lucky Trust with an asset of $1,000,000 for the benefit of Jerry’s sisters Penny and Paula. The trust deed appointed Jerry’s friend Bernard Betton and his daughter Alisa as the initial trustees of the Lucky Trust giving Bernard the power to appoint additional trustees. The trust deed was silent as to the retirement of trustees.
In February 2021, Jerry contracted COVID-19 and he thought he had not long to live and so he wrote to his favourite grandson Aaron: ‘I would like you to have my cottage known as the ‘Lilymount’ when I die. You have been so kind to me, and you have done so much work in helping me to renovate the cottage.’ Jerry then took the title deeds of the ‘Lilymount’ and wrote: ‘These deeds and all that they refer to I give to Aaron Kidder from this time onwards.’ He then put the deeds back in their box which he kept.
Jerry recovered from COVID-19 and was so thrilled about this that in April 2021, he bought ten lotto tickets. He immediately declared himself a trustee of nine of them for Aaron and the remaining one for his girlfriend Jane, but he did not indicate which of the ten was to be held for Jane. The following day, when the draw was made, one of Jerry’s tickets won the top price of $10 million.
In August 2021, Jerry was successful in a legal action and was awarded $500,000 in damages in an action for breach of contract. He wrote to his son Daniel Smith, telling him that he transferred the right to be paid this money and his right to be paid damages in some other pending litigation to Daniel to hold on trust for Daniel’s children, Betty, and Barry Smith.
Also, in August 2021, Jerry paid $40,000 to Perth Grammar School as school fees for his grandchild Barry Smith for 2022. After accepting the money, the heads of the school decided that they would open a new bank account and put Jerry’s money into it. In September 2021, Perth Grammar School went into liquidation. Also in September 2021, Jerry died of a stroke.
Jerrys duly executed will appoints his daughter Alisa Kidder as executor and trustee. In his will, he leaves his estate in equal shares to each of his children, Alisa Kidder, and Daniel Smith.
1. Advice to Alisa Kidder in relation to extent and distribution of Jerry’s Estate
In general terms, a trust is neither a person nor a legal entity, it is a relationship,recognized and enforced by courts. To put in simple words, a trust describes a relationship wherein a person holds property on behalf of or for the benefit of others. An instrument or vehicle through which a trustee can hold a property, by law, for the benefit of others, is known as a trust. A trust separates legal and beneficial/ actual ownership of a property.
A person who creates a trust is known as a settlor, a legal owner of trust property is known as trustee, an appointer is a person who can remove the trustee and appoint new trustees and person for whose benefits the property is held is known as beneficiary. The persons as mentioned earlier are parties to a trust.
A trustee must act in the best interests of beneficiaries following terms of the trust, wherein terms are established through a deed. Given this, it is pertinent to know that the duty between a trustee and a beneficiary is a fiduciary duty, which signifies that beneficiary have a right to expect trustees to act in their benefit and best interests while managing the said trust.
As mentioned above, there is a fiduciary relationship between trustee and beneficiary, so, the trustee is under obligation to administer assets as per terms of the instrument established for trust. Further, it is essential to know that, whilst in possession of estate of a deceased person, an executor holds or carries the same role as a trustee hold in estate for benefit of beneficiaries to the will. Also, an executor is subject to usual obligations and demands of trustees, by provisions of legislation.
To begin with, the relation of Alisa Kidder to the extent of estate of Jerry (deceased father), herein, it is pertinent to get into facts of the situation put forth. In April 2020, Jerry declared himself a trustee of his beneficial interest under the ‘Cube Trust’ for his daughter Alisa Kidder. The Cube Trust holds a valuable share portfolio. However, to create a trust, a settlor needs to indicate the intention to create a trust by words or conduct. However, it is not essential to use word trust. There can be no trust until the trustee holds the trust property. With express inter vivos trusts, it can occur through trustee having property and declaring himself trustee of it for another person, known as trust by declaration, which Jerry, herein, has done in case of Cube Trust and hence, the creation of this trust is valid.
Herein, Jerry was a trustee himself and according to the role of a trustee, discussed in the introduction, Jerry was bound to act in the interests of her daughter Alisa Kidder, herein, the beneficiary. In light of this, it is pertinent to know about the duties of a trustee. A trustee is bound to oblige with aspects mentioned as under-:
In view of the above, during the lifetime of Jerry (trustee of Cube Trust), he was expected to act in the best interest of Alisa (herein, beneficiary). The duties mentioned above impose upon a trustee, wherein, breach of which amounts to making the trustee personally liable for any loss occurred in light of breach. Hence, in the jurisdiction of Western Australia, Act of 1962, and 1903, contain provisions to seek directions from court to take the best course of actions for beneficiaries. However, in present situation, trustee is a deceased, and Jerry in duly executed his will and appointed his daughter as executor, therefore, in the case of Cube Trust, Alisa Kidder is both executor and beneficiary and hence, both rights of a beneficiary and role of executor, needs to be discussed.
In case of a Cube Trust, Alisa can also appoint a new trustee wherein an appointed trustee, either original or substituted, is dead (Jerry in present case). A person nominated to appoint a new trustee by trust instrument can appoint a new trustee and where there is no such person. A personal representative of last surviving trusteemay appoint a person to be trustee. The power to appoint a new trustee under the Trustees Act, 1969, is to be exercised by the executor for time being, of a surviving trustee who has proved will of his testator or by administrator for time being of that trustee.
For an express trust to be valid and enforceable, it must comply with statutory formalities. Application of statutory formalities would depend upon whether trust was established by will or inter vivos. In the present case, trust was established through a will. Trusts created by will comply with the statutory formalities concerning the making of wills. Further, the trusts created by will have their own special formalities, for instance, Section 8 of Wills Act, 1970. Provisions create testamentary trusts in terms of a will. As per Act of 1967, one must file accounts of estate and plan of estate’s distribution, at Supreme Court of Western Australia within 12 months from date of grant.The reason for doing so is that it grants protection offered under the Administration Act, which releases an individual from further responsibility to accounts after an expiry of 3 years. In this regard, essentials of a trust should be known, mentioned as under-:
A. Trustee- To create a trust, an appointment of a trustee is required, including a corporation. A trustee can become one either under an express trust (expressly) or under a resulting trust (implication) or constructive trust, i.e., by operation of law. These appointments are for original trustees. Whereas, for appointment of new trustees, one can be appointed through express power contained in the trust instrument or under statutory power as laid down under the act and also through court under its inherent jurisdiction or the Act, 1962. An express trust can be created in two ways, namely, by transfer or by declaration. There has to be a certainty of intention on the part of the settlor. He must have indicated the creation of trust through words or conduct that they intended to create a trust. The court construes the language of a settlor in the context of an instrument of trust as a whole. However, the word ‘trust’ doesn’t need to be necessarily included by the settlor. Although, the use of words mentioned above could be considered an indicator. The onus of proving that settlor intends to create a trust lies on person propounding the trust.
B. Trust Property- second essential aspect for valid enforcement of a trust is existence of a property that may be subject of a trust. Here, property includes both real and personal property and includes any estate, share and interest in any property. Herein, there is an equitable interest as trustee’s title to property is impressed with interest of beneficiaries.
C. Beneficiaries- A trust must have individual beneficiaries unlesscharitable trust is referred to as beneficiary principle. A trustee cannot be the only beneficiary and involves merger of legal and equitable interests.
D. Equitable Obligation- A trustee has an equitable obligation to deal with trust property for the benefit of beneficiaries.
In view of the provisions stated above, Alisa is eligible to have a share in the Cube Trust created by her father Jerry (herein, trustee).
Further, in September 2020, Jerry executed a deed which provided for the appointment of Alisa as trustee requiring her to sell his farm in Kukerin, Western Australia and to distribute the proceeds to ‘such of my nephews as she shall select in her absolute discretion.’ A day later, he handed his solicitor the duplicate certificate of title to the farm, a power of attorney, and a direction to complete the transfer form but has not yet provided the documents to Alisa.
Here, it is pertinent to highlight upon creation of instrument for trust, which is deed, in present case. Adeclaration of trust respecting any land or any interest therein shall be manifested and proved by writing signed by a person who is able to declare the trust or by his will, as provided under the Act. Wherein, a personal orally promises to hold on himself and for his beneficiaries, then it becomes difficult for beneficiary to claim interest in the land under a trust as per provision of law. In the present case, it is clearly mentioned that Jerry handed over duplicate certificate of title to the farm, to his solicitor with a direction to complete the transfer form, which implies the intention of settlor and also that the instrument is in writing. After the demise of Jerry, Alisa, as trustee can distribute the property, keeping in mind best interests of the beneficiaries, i.e., Jerry’s Nephews, because as a trustee she is obliged to administer the assets of the trust in accordance with the terms of the trust instrument and for the benefit of the beneficiaries. The instrument must have included that Alisa as a trustee shall have discretion to select the portion of share each nephew shall hold. The instrument would include aforementioned discretion clause, extending authority to her as, same had been executed in the deed by Jerry. Here, there were four nephews and Alisa decided to sell the farm in Kurerin, and divide income amongst only two Nephews, namely, Sam and Steve as they used to work on the farm. As per the general powers of trustees, provided under the Act, every trustee, in respect of any property for the time being vested in him, may sell the property and thus, Alisa is within her legal rights to sell the farm. A trustee may rescind, cancel, modify or vary any agreement concerning sale of any land by conditions he thinks to be proper. Further, the deed clearly mentions about absolute discretion of Alisa in context of distribution of said farm. In this regard, it is important to understand the meaning and nature of a discretionary trust. Under the trust as mentioned above, the trustee is given a discretion to select among the beneficiaries what they will receive under the trust to which they are entitled. This implies that, beneficiaries of a discretionary trust have no interest in the trustproperty unless and until the trustees elect to exercise a discretion intheir favor.
Giventhe above, it is correct to say that their interest is a mere expectancy. These potential beneficiaries of a discretionary trust are better described as ‘objects’ of the said trust. However, the ambit of a right of such beneficiaries under a said trust are restricted to the right to be considered and to compel the trustee to properly administer the funds of the trust and at the same time are also entitled to seek information of the trust in which their interest lies. This kind of discretionary trust also obliges the trustee to manage the trust.
A trustee needsto be able to make ‘a list’ of thenames of the beneficiaries for distribution of properties to themotherwise, the trustwill fail. In the case of a discretionary trust, there is a criterion for certainty. A court must determine whether a person is within the class of objects described in theprovision or not. There are two types of certainties-:
In the former category, there can be use of unclear words or words can subjective. An example of subjective words could be, a trust to distribute among a class described as ‘my old friends.’ In case of evidence uncertainty,Re Baden’s Deed Trusts, the case can be referred. The facts of case provide that a trust deed granted the trustees the power to applythe income of the fund in their absolute discretion ‘to orfor the benefit of any of the officers and employees orex-officers or ex-employees of the company or to anyrelatives or dependents of any such persons.’In this case it was held that, terms of trust were sufficiently certain, and it was a question of fact to be determined on evidence as to who fell within it. A discretionary trust couples an obligation to perform with a power or discretion as to the manner of performance. However, a mere power carries with it noform of obligation. The holder of mere power is empowered to act in a certain way but is under no obligation to act in a certain way. The language used by testator or settlor is relevant. Mandatory language suggests an obligation is being imposed and permissive language indicates discretion. Nevertheless, this is not determinative, and the court held that the term ‘shall’ was interpreted as meaning ‘may.’ On the other hand, trust power is only applicable or valid if the class described is a special class. Trust powers impose an obligation on the trustee that trust power must be exercised and exercised properly. Here, mere powers are applicable and accordingly, Alisa had discretion to grant share of farm sold to the two nephews only, in the best of their interests.
However, the act empowers trustees or persons with a beneficial interest in trust to seek directions from the Supreme Court regarding matters concerning the trust property, management or administration or the trust, or the exercise of any power or discretion vested in the trustee. This provision aims to enable a trustee seek advice before taking any action. Thus, Alisa can also move to the court and seek advice to distribute Jerry’s estate. Alisa can seek directions from court by applying for the same for management or administration of that property or respecting the exercise of any power or discretion vested in the trustee. Every application made under the said provision shall be served upon. The hearing may be attended byall persons interested in the application or such of them as the Court thinks expedient.
Since Jerry made Alisa both trustee and executor, thus it is crucial to understand role and rights of an executor. The duties of an executor stems from the obligation to wind up the estate while the role of trustee is already going on. An executor is the full owner of the property (until the estate is fully administered and residuary beneficiaries do not hold beneficial interest in any assets of the estate). On the other hand, trustee is vested with legal ownership of trust property. An executor can bind the estate of the testator and they may nit retire or appoint successors in place of them during administration. Lastly, in case of share of Aaron, who can be considered a minor, then certain provisions of the act can apply to him for having interest in Lilymount. In accordance with act, where trustee holds any property in trust for such a person (beneficiary), during the person is an infant, if his interest so long continues, the trustee may, at his sole discretion pay to his parent or guardian or can also apply towards education/maintenance or for his advancement and benefit, the whole or part of the income ofsaid propertyin question and should be in a reasonable manner. Thus, in this case, Alisa being an executor, a trustee and a mother is required to keep her son’s share with herself for the benefit of her son and act accordingly as an executor and a trustee.
2. Alisa informs you that Jerry has four nephews but that she was intending to sell the farm in Kukerin and divide the income between only two of them (Sam and Steve) as they used to work on the farm. However, Jerry’s other nephews, Terrence and Tom, are concerned that they will not receive any income from the trust and have told Alisa that if she does not distribute any of the proceeds to them, they would like to know her reasons for not doing so. Advise Alisa.
Alisa was appointed as a trustee with discretionary power to divide the farm by her absolute discretion in the present situation. Accordingly, Alisa intended to sell the farm in Kukerin and divide the income between only two nephews, Sam, and Steve, as they used to work on the farm. However, Jerry’s other nephews, Terrence, and Tom, are concerned that they will not receive any income from the trust and have told Alisa that if she does not distribute any of the proceeds to them, they would like to know her reasons for not doing so. In this regard, it is pertinent to know that it is a long-standing principle that trustees who exercise discretionary power are not bound to disclose the reasons to their beneficiaries for reaching out to a particular decision. In this regard, if a trustee does not disclose substantial reasons for its decisions and the beneficiary, it establishes a prime facie case. The court can assume that no substantial material would have assisted the trustee. If reasons are absent, then a court may examine the material which is available with the trustee in order to determine whether a matter needs to be taken into consideration and if trustee can give reasons then court can consider their soundness. In view of the provisions stated above, Alisa is not bound to provide reasons to Terrence and Tom regarding decisions taken by her for distribution of property. After the demise of Jerry, Alisa, as trustee can distribute the property, keeping in mind best interests of the beneficiaries, i.e., Jerry’s Nephews, because as a trustee she is obliged to administer the assets of the trust in accordance with the terms of the trust instrument and for the benefit of the beneficiaries. The instrument must have included that Alisa as a trustee shall have discretion to select the portion of share each nephew shall hold. Thus, Alisa has been statutory correct.
Furthermore, the act provides that, any person who has interest in trust property, whether, directly or indirectly, and who is aggrieved by any act, omission or decision of a trustee in the exercise of any power conferred by this Act or who has reasonable grounds to apprehend any such act or decision of a trustee, because of which such person will be aggrieved, may apply to the court review the act, omission or decision, or to give directions in respect of the apprehended act, omission or decision. Because of above, the court may require the trustee to appear before the Hon’ble Court and can require such a trustee to substantiate and uphold the grounds for taking the decision that has aggrieved such person who has interest in said trust property. In light of this, the court may make such order as would be necessary and required in light of circumstances. Thus, the aforementioned provisions provide that Jerry’s nephews, namely, Terrence and Tom, can move to the court if they are aggrieved by Alisa’s decision. Furthermore, any decision taken by court under section 92 of the Trustees Act, 1962, shall notdisturb any distribution of the trust property, made without breach of trust, before the trustee became aware of the making of the application to the Court, before the trustee became aware of the making of the application to the Court. Furthermore, no such court order shall affect any right acquired by any person in good faith and for valuable consideration.
3. Alisa also tells you that Bernard has died and she wants to know what the consequences are of Bernard’s death for the Lucky Trust and whether she can appoint another friend of Jerry’s, Robert, as trustee to replace Bernard. Advise Alisa
In the situation put forth, Bernard has died, and Alisa wants to know the consequences of Bernard’s death for the Lucky Trust and whether she can appoint another friend of Jerry’s, Robert, as trustee to replace Bernard. In October 2020, Jerry decided to establish the Lucky Trust with an asset of $1,000,000 for the benefit of Jerry’s sisters Penny and Paula. The trust deed appointed Jerry’s friend Bernard Betton and his daughter Alisa as the initial trustees of the Lucky Trust giving Bernard the power to appoint additional trustees. Here, Jerry appointed the aforementioned persons as initial trustees for Luck Trust. Accordingly, as trustees, they are obliged to distribute property amongst beneficiaries in view of the provisions stated in question one.
Furthermore, even though Bernard was given power to appoint additional trustees, since Bernard has died, only original trustee left is Alisa. An application in this regard, can be made by Alisa, to the court, for appointment of a new trustee, subject to the trust, herein, Lucky Trust. Thus, there are no consequences of Bernard’s death on trust property and accordingly, it shall be distributing the property, to the beneficiaries.