Written by Despina Bouletos

The Western Australian Supreme Court recently published its decision of Dryandra Investments Pty Ltd as trustee of the Dryandra Trust v Hardie by her guardian ad litem Ian Torrington Blatchford. This judgment addressed two separate proceedings (heard together) relating to:

1. the Dryandra Trust (“the Trust”) of which Isobel Hardie (“Isobel”) was the appointor and guardian (“the Trust Proceedings”); and

2. Isobel’s will (“the Will Proceedings”).

Isobel suffers from dementia and was represented in the proceedings by her Guardian ad Litem.

In the Trust Proceedings, the trustee sought orders, pursuant to s90 of the Trustees Act 1962 (WA), that the Court approve and assent to variations to the Trust deed of the Trust. A similar power exists under Division 3A of the Trustee Act 1925 (NSW). The variations sought would allow:

1. Isobel’s enduring attorney, Timothy Ryan (“Attorney”) to exercise the powers of appointor and guardian in place of Isobel, so long as she lacked capacity; and

2. Isobel’s legal personal representative to exercise the powers of appointor and guardian in the event of a default of appointment (including upon Isobel’s death).

Alternatively, the trustee sought orders under the Court’s inherent jurisdiction, for the replacement of Isobel as appointor and guardian of the Trust.

In the Will Proceedings, Isobel’s Attorney, as plaintiff, sought an order pursuant to s40 of the Wills Act 1970 (WA) that the Court authorise the making of a codicil to Isobel’s last will dated 13 November 2006 (“2006 Will”), seeking to appoint the Attorney as Isobel’s successor as guardian of the Trust.

In both proceedings, the critical issue was the fact that Isobel did not have (and had not had since her appointment) capacity to act as appointor or guardian of the Trust. Accordingly, there was no guardian capable of consenting to the reserved and restricted powers set out in the Trust deed which, among other things, governed the trustee’s discretion in making distributions of Trust income.

Isobel also lacked capacity to appoint a replacement guardian to act in her stead, as there was no provision in the Trust deed for the appointment of a replacement guardian if Isobel lost capacity or died. As such, the Trust would be left without a guardian upon Isobel’s death.

The Court found that a lack of mental capacity did not, of itself, affect the validity of Isobel’s appointment as appointor and guardian (both as a general principle and on the basis of the terms of the Trust deed). However, the consequence of a lack of capacity was such that it prevented the valid exercise by Isobel of the powers conferred on her. That is, Isobel, by reason of her incapacity, was incapable of giving effective consent or of exercising such powers as conferred on her by her appointment.

Under the Trust deed, while there was a guardian appointed, the trustee was not able to exercise the reserved powers or restricted powers except with the consent of the guardian. The effect of this was that, while Isobel was the guardian but had no capacity to give her consent, none of those powers could be exercised by the trustee.

Practically, this meant that the trustee was confined to accumulating the Trust income or distributing it to Isobel only (which would have resulted in the income being taxed at the highest marginal tax rate).

In order for the Court to vary the Trust Deed under s90 of the Trustee Act, it was required to be satisfied that the person on whose behalf the variation was sought had an interest in the Trust. Although Isobel was a beneficiary under the Trust, the Court in this case was being asked to assent to the variation sought on behalf of Isobel in her capacity as a guardian, rather than as a beneficiary.

The Court was not persuaded that s90 extended to a power to approve a variation that required the consent of a guardian who lacked capacity to provide such consent. As such, the Court declined to approve the variations to the Trust deed as proposed.

However, the Court then considered whether it was able to exercise its inherent supervisory jurisdiction to appoint a replacement or substitute guardian and appointor. The Court considered that the effect of Isobel’s loss of capacity in this case meant that, despite there being a guardian of the Trust, the trustee could not consult the wishes of the guardian as contemplated by the Trust deed. Further, no one was capable of exercising the guardian’s power of consent to the trustee’s exercise of any of the reserved or restricted powers.

For those reasons, the Court was satisfied that it could exercise its inherent supervisory jurisdiction to replace Isobel as guardian and appointor of the Trust, in order to secure the proper administration and due execution of the Trust. Accordingly, the Court made orders to replace Isobel as guardian and appointor with her attorney. Upon making this order, the orders sought in the Will Proceedings were redundant.

This case has significant implications for the preparation of discretionary family trusts and testamentary trusts. When creating such a trust, it is imperative for clients and their lawyers to consider whether appropriate provisions have been put in place to replace an appointor, guardian or trustee in the event that they lose capacity and/or upon their death. Doing so is critical to avoid the potential for complex and costly Court proceedings.

The contents of this post are for informational purposes only. They do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such.

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