Amending trust deeds – It’s trickier than it looks
- expanding trustees powers to keep lending banks happy;
- changing trustees, appointors and guardians; or
- adding or excluding beneficiaries
in reliance upon a clause in the trust deed saying “the trusts declared in this Deed may be changed … etc”.
While it may appear simple to amend a trust deed relying upon a general amendment power contained in the trust deed which says “to amend the trusts …” the practice of blanket reliance on such a general amendment power to permit amendments is extremely dangerous. As the recent West Australian Supreme Court decision of Mercanti v Mercanti  WASC 297 illustrates, the scope of a general amendment power in the trust deed may not be wide enough to permit the trustee to make many amendments which trustees have to date made in reliance on these general “amendment of trusts” powers.
The Mercanti case concerned the validity of deeds of amendment for two family trusts. The deeds of amendment in question removed the existing appointor and guardian Michael Mercanti and replaced him with his son Tyrone Mercanti.
Following a dispute between Tyrone and Michael concerning Tyrone’s purported exercise of his newly acquired power as guardian and appointor of the two family trusts to appoint a new trustee of each trust, Michael commenced legal proceedings seeking declarations that the deeds of amendment that removed Michael as appointor and guardian and replaced him with Tyrone were invalid on the basis that the general amendment power in the trust deeds did not give the trustee authority to make these amendments and therefore Michael remained the appointor and guardian of the two family trusts and Tyrone had never been validly appointed.
The first trust deed permitted the trustee to “vary all or any of the trusts, terms and conditions” in the trust deed. The Supreme Court held that this permitted the trustee to vary the name of the appointor and guardian in the schedule of the trust deed, therefore in the case of the first trust the deed of amendment appointing Tyrone and removing Michael as appointor and guardian was effective.
The second trust permitted the trustee to “vary all or any of the trusts” in the trust deed i.e. did not mention “terms and conditions”. The Supreme Court held that this did not permit the trustee to amend the name of the appointor and guardian in the schedule of the trust deed, therefore in the case of the second trust the deed of amendment appointing Tyrone and removing Michael as appointor and guardian was not effective and Michael remained the appointor and guardian.
The subtle difference in the wording of the two trust deeds in the Mercanti case illustrates that the amendment of trust deeds is a highly technical process. The impacts of getting it wrong can be significant, particularly if the invalidity of a purported amendment is only discovered many years later.
For example, consider the situation where a trustee is invalidly appointed and proceeds to make distributions of income and capital in years following on the assumption that it has the power to do so but in fact does not. If those distributions were invalid, who was assessable on the income of the trust? The resulting tax consequences could be disastrous.
If you’re considering amending a trust deed you should engage lawyers who understand these issues and carefully consider the terms of the trust deed and other related documents. Businesses that prepare deeds of amendment without considering the trust deed and related documents should not be engaged.
It should be noted that the Mercanti decision is the subject of an appeal. Whether or not this particular appeal is successful, there are other decisions of the Courts in recent years which demonstrate a rapidly increasing focus on this issue of amendments to trust deeds being ineffective because the amendment power is simply not wide enough to permit the particular amendment.
The contents of this publication are not legal advice to anybody who receives it and should not be treated as legal advice. You should not take any action following reading this publication without legal advice concerning its application or relevance to your own circumstances.
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