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5. Discretionary trusts and powers
5. Discretionary trusts and powers

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Queensland University of Technology

D ISCRETIONARY T RUSTS —Liability of Beneficiaries Types of Trust Fixed Trust • Terms of the trust are in the grant o The interests of the beneficiaries determined by the settlor or testator (not dependant upon the discretion of the trustees) o Each of the beneficiaries have fixed entitlements under the trust o Requires list certainty: McPhail v Doulton  ← each person has to be able to include everyone who is entitled to be a beneficiary on a list: Broadway v Cottages Discretionary trusts • Trustees have discretion in relation to beneficiaries’ entitlements to the trust property • Trustees must act bona fide in the interests of the trust: Karger v Paul [1984] o ← must not commit fraud, act irresponsibly, wantonly, or capriciously in the performance of the office o Difficult to police—not required to disclose reasons: Hartican Nominees v Rydge o Remedy: removal under the Trusts Act • Piercing the trust veil: o Traditionally—beneficiaries thought to have a mere expectancy or hope in the trust: Gartside v IRS [1968] (money in discretionary trust for grandsons when turned 18 —one died at 17  beneficiary had ‘interest in expectancy’ not ‘interest in possession’ → cannot be claimed as of right → tax department could not claim estate duty)  Right to be considered by the trustee • Similar to interest of a residuary beneficiary in an unadministered estate  Equitable chose in action—intangible right for due administration o Currently—may have a contingent proprietary interest in the trust property  Beneficiary has control of trustee—trustee is in truth the alter ego of the beneficiary: Re Richstar Enterprises Pty Ltd; ASIC v Carey (No 6) (2006) 233 ALR 475 (D goes bankrupt—assets in discretionary trust  trustee was in truth the alter ego of D (beneficiary) → interest in trust could be used to satisfy creditors)  Beneficiary has partial control of trustee: C v B & W (2006) (associates of D as trustees | D a discretionary beneficiary  property considered in de facto separation)  Trustee has control of the property: Kennon v Spry (2008) (husband trustee & discretionary beneficiary of family trust—before divorce, holds as trustee for daughters | no longer a beneficiary  court still defines as matrimonial property) o May be confined to cases involving legislation with expansive definitions of property  Matrimonial property: C v B&W; Kennon v Spry  Corporations Act: Re Richstar Enterprises Andrew Trotter LWB241 Trusts D ISCRETIONARY T RUSTS —Extent of Discretion of Trustees Discretionary trust—testator (donor) may give a person (donee) a power of appointment, to dispose of the beneficial interest of the property (= to decide beneficiaries at their discretion, within certain limits) o may be a non-trustee “to A for life and after his death to such of our children as he may by will appoint.” o may be a discretionary trustee “For my trustee A to hold for such of our children in such amounts as she in her absolute discretion shall select” Classification of powers • General powers: to appoint to anyone including the donee = “For such persons as Barbara shall select.” ← In reality an absolute gift (the donee can give the property to themselves) • Special powers: to appoint to selected persons or defined classes = “for such of my grandchildren as Barbara shall select.” • Hybrid powers: to appoint to a class, subject to exclusions. = “to anyone my trustee shall select except my wife and sons”: Horan v James (struck down for other reasons) = “To those who attended by funeral except my relatives”: Prosper v Mojtowicz [2005] General powers o no trust-like duties arising ← the object is the whole world potentially and no specific persons can enforce the gift o The donee is taken to be the beneficial owner, as there is power to appoint themselves: Tatham v Huxtable (1950) (grant of residue of estate to testator to those in will / others  essentially giving the property to the donee to distribute as he wishes) o If person subject to a fiduciary obligation → cannot exercise it in favour of himself → special or hybrid power: Horan v James (1982) Special & Hybrid Powers • Either— o mere power (holds no obligation); or o trust power (purports an obligation) Classification • If created under a will → CL cf. s33R SA  • Look to intention of the donor to impose an obligation on the donee to make a selection so that some of the class would benefit in any event: re Scarisbrook’s Will Trusts [1951] Ch 622; Re Combe [1925] Ch 210 o Use of the word ‘trust’ → trust relationship o Use of imperative words such as “shall”, “must” or “will” → trust power  cf words such as “may”, “wish” o Gift over in default → mere power Re Himmelhock (“to children and to such siblings of any children deceased without living issue as they may appoint”—no gift over  trust power) = “to D’s children as she may appoint; to A&B in default of appointment”  ← Intention that certain parties benefit in any event • None of these factors determinative—depends on all circumstances: Re Combe [1925] (“in trust for such persons as my son shall appoint such persons being confined to any relation Andrew Trotter LWB241 Trusts of mine of the whole or half blood” ← using word ‘trust | imperative words | no gift over clause  but still a mere power) • Beneficiary of full age & capacity & absolutely entitled to property can demand transfer:
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