Expertise, Trust, Wills, Estates and Enduring Powers of Attorney

Getting The Power Of Appointment Right

Many Discretionary Trusts are set up by two spouses (“settlors”). They often appoint themselves as trustees along with an independent trustee. The power of appointment – the power which gives the right to hire and fire trustees – is usually vested in the settlors or the survivor of them. The Trust has generally been set up for the settlors, their children and grandchildren and the power of appointment given in the belief that the survivor of them will continue to provide for him or herself as the prime beneficiary of the Trust and thereafter the children and grandchildren. What can happen of course is that a surviving spouse can, for whatever reason, effectively alter the control of the Trust by using the power of appointment which could result in additional beneficiaries being added and/or some being deleted.

You may well say that in your particular circumstances that is unlikely to happen, particularly given the current strength of your relationship. Unfortunately statistics demonstrate that relationships have become more and more short lived. This is particularly true for younger spouses/partners who may enter further relationships which could produce additional children or further break-up of the family for whose benefit the Trust was initially formed.

While many spouses recognise this fact they also, to a large extent, regard the possibility as remote. Some however feel very conscious of the possibility arising; often based on experiences in their own family background.

One simple way to ensure that this situation does not arise is to provide in the Trust Deed that upon death of the first spouse the power of appointment, instead of passing to the surviving spouse, is to pass to the surviving spouse and the trustees, executors or administrators of the deceased spouse’s Will. Care then needs to be taken to ensure that independent executors and trustees are selected for the Will and if an enduring power of attorney is to be entered into in respect of property, care also needs to be taken in selecting the attorney/s.

Alternatively the power of appointment provision in the Trust Deed could be amended to include that each spouse appoints someone to hold the power of appointment with the survivor therefore the deceased spouse’s wishes are also maintained. However most modern Trust Deeds have the power to vary the Trust Deed and also the power to resettle the Trust assets onto another Trust which may defeat this objective.

The most effective way to ensure that this situation does not arise is to establish parallel Trusts where each spouse and after them their executors control a separate Trust. The property is then held by the two Trusts with an agreement between the spouses and Trust not to alter the Trust (and Wills).

Our experience is that the majority of couples purchasing a property together hold it as joint tenants with the result that the survivor will receive the property automatically, irrespective of the terms of the Will of the spouse/partner dying. A joint Trust reflects this approach to property ownership. Parallel Trusts reflect a tenancy in common approach to property ownership where each party determines what happens to their share of the property through his/her Will.

Any concerns you may have in relation to this matter should be discussed with us prior to the completion of the Trust Deed.

For further information, please contact Tony Fortune or Katherine McCarthy.