Trust deeds: Guardian by name or Guardian by nature?

The Western Australian Supreme Court of Appeal recently considered two important issues¹ in relation to Guardians:

1. whether a Guardian of a discretionary trust is a fiduciary; and
2. the nature of the Court’s power to remove a Guardian.

Background

Fred and Judith Blenkinsop established two discretionary trusts (Trusts) during the lifetime of Fred.²

Fred, Judith, and their five children were the primary beneficiaries of both Trusts.³

Both Trusts had corporate trustees of which Fred and Judith were the directors until Fred’s death in 2004.⁴

The trustee’s powers in respect of both Trusts were very broad but were subject to the consent of the Guardian.⁵

Following Fred’s death in 2004, Judith and one of her daughters became directors of both corporate trustees.⁶  Judith became the Guardian and Appointor of the Trusts.⁷

For the next five years, both Trusts were essentially operated for the benefit of Judith. No real distinction was made between assets of the Trusts and Judith’s personal assets.⁸

In 2009, the family began a process to attempt to achieve equality between all family members in both governance of the Trusts and entitlement to assets.⁹

As a result, all five children were made directors and shareholders of both trustees companies in 2009. 

It was intended that following the issue of shares to the children, all of the shareholders would execute a shareholders agreement, which would include a trust distribution policy, to give effect to the family’s intentions.¹⁰  The shareholders agreement was never executed.¹¹

In 2011, the trustees executed a deed of variation which appointed Judith and all five children as Guardians and Appointors of the Trusts.¹²

Following a directors meeting in 2013, resolutions were passed requiring income of the Trusts to be distributed solely to one child.  Judith commenced proceedings and sought orders pursuant to section 77 of the Trustees Act 1962 for the removal of the trustees of each trust and for the removal of the Guardian.¹³

The primary judge, with the consent of Judith, ordered that the trustees be removed and replaced by independent trustees.¹⁴

The application for the removal of the Guardians of each trust was dismissed by the primary judge who identified two critical questions in the resolution of the application to remove the guardian:

1. did the settlor objectively intended the powers of the Guardian to be fiduciary in the sense that they must be exercised for the benefit of the beneficiaries; and
2. did the settlor intend that the trust might operate without a guardian, having regard to the identity of the Guardians and the obligation that they act jointly and unanimously.¹⁵

His Honour found that the following five matters supported the conclusion that the trust deeds, as varied, revealed an objective intention that the individual guardians could exercise their powers only in the interests of the beneficiaries and not in their own interests:

1. the powers are conferred by deed of trust and for the execution of the Trusts;
2. the Guardian’s role is supervisory.  The Guardian only has power to grant or withhold consent;
3. generally, the powers which the trustee may require the consent of the Guardian to exercise are powers under which the trustee may prefer one or more beneficiaries to the exclusion of others;
4. the guardians are all beneficiaries; and
5. any decision of the guardian to grant or withhold consent to a particular action of a trustee will affect one or more of the Guardians in their capacity as beneficiaries.¹⁶

His Honour held that the intention of the trust deeds, as varied, in conferring the power of guardians upon beneficiaries, is to allow each of them to have the right to consent or withhold consent to decisions which may benefit only one or more of them.¹⁷

Court’s power to remove a Guardian

His Honour found that to remove the Guardians, so that there was no Guardian under the trust deed, would be to effect a substantial amendment to the trust deeds and that the intention of the trust deeds was to fetter the discretion of the trustee.¹⁸

Whilst the number of Guardians, and the requirement that they act unanimously, may be impracticable, to remove them on those grounds would be contrary to the intention of the trust deed and could not be done.¹⁹

Judith appealed the decision.

The Court of Appeal upheld the primary judge’s decision to refuse to remove the Guardian.  It considered the role of a Guardian and what it is to hold a fiduciary power and made the following observations:

• Under general trust law the concept of a Guardian does not have a fixed meaning or content.  The role of a Guardian under a trust is defined by the trust deed.²⁰
• Turning to the issue of whether or not a Guardian is a fiduciary, it was held that when the donee of the power is entitled to exercise that power for his or her own benefit, and is not required to have regard to the interests of others, the exercise of the power is personal, and not attended by any fiduciary duty.²¹
• Conversely, where the donee of the power is obliged to act only in the interests of, and for the benefit of, others, the power will be fiduciary.²²
• When the power is an administrative power to appoint new trustees, then the power on its proper construction may be regarded as fiduciary.²³

Lavan Comment

The decision highlights the importance of careful drafting of trust deeds to ensure that the role of a Guardian is clearly defined.

The Court only has power to remove a Guardian if the Guardian had a fiduciary power.²⁴

When faced with a dispute over whether the role of a Guardian is fiduciary or otherwise, the Court will look to the terms of the trust deed, the courts role being to execute the trust, rather than to amend it.

This case highlights the importance of understanding the various powers under a trust deed, and the consequences of not understanding such powers, particularly when making amendments. 

The decision also demonstrates that guardians are not always fiduciaries.  The duties and powers of the appointee and factual matrix in which the instrument subsists must be reviewed carefully in order to determine whether the appointee is in fact a fiduciary.