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If you are operating a discretionary trust (which includes family trusts), it is vital to understand how to implement changes to its structure. Changing components of a trust can be a complicated process, and it is essential to ensure you comply with the law. Improper adjustments can lead to the invalidity of the trust or generate additional tax. This article will discuss the steps to remove a beneficiary or a trustee from a trust. 

The Trust Deed 

The trust deed sets out the processes for managing the trust, including how you can make changes to it. For example, the deed will describe whether the trust allows you to change the trustee and how you would do this. When making any change to a trust, the golden rule is to follow the trust deed’s instructions. Therefore, you should first read the trust deed when considering any update to your trust. As such, before you remove a trustee, look to your trust deed for the correct process. 

Additionally, many trust deeds have a general definition of what constitutes a ‘beneficiary’. The trustee is bound to act in good faith and for the benefit of the beneficiaries. In most cases, a trust deed generally offers two processes for the removal of a beneficiary. 

Most commonly, the beneficiary can sign a document to renunciate all interests as a beneficiary. Otherwise, the trustee may have discretionary power to revoke the beneficiary. This involves the trustee making a declaration that a person will no longer be a beneficiary from a stipulated date. However, this is not always the case.

Executing a Deed of Variation

Alternatively, you can amend the trust deed to remove a beneficiary or change the beneficiaries’ class. To change the trust deed to remove a beneficiary, the trustee must execute a deed of variation (also sometimes called a deed of amendment). This is a document that updates the relevant section of the original trust deed. 

The deed of variation must follow the instructions provided in the trust deed. Notably, this document updates the relevant section of the original trust deed. It then forms part of the documentation of your discretionary trust and details how the trust deed has altered throughout its entire operation. Therefore, you should keep the deed of variation with the rest of your trust’s documents. 

It is critical to seek legal and tax advice before changing a trust deed. Failing to follow the correct procedure could be seen as ‘resettling’ the trust. This is when you create a new trust from a former one. As a result, you may incur additional taxes such as stamp duty.

Grounds for Removal of a Trustee 

Trustees of discretionary trusts have some discretion in managing trust assets. However, trust deeds usually provide the trustees with some degree of guidance as to how they should manage assets and the bases and procedures for removing a trustee. 

Importantly, trustees have certain duties and responsibilities, including the obligation to follow the terms of the trust agreement. They must also act in good faith and in the best interests of the beneficiaries. Legal grounds to remove a trustee may include:

  • breaching requirements of the trust deed;
  • trust asset mismanagement, intentionally or negligently;
  • trust asset fraud or misappropriation;
  • self-dealing or conflict of interest. For example, if a trustee acquires assets from the trust for personal gain, particularly if the purchase is for less than fair market value;
  • charging excessive fees;
  • irreconcilable conflict with the other trustees or beneficiaries;
  • mental incapacity of the trustee; and
  • financial insolvency of the trustee, such as trustee bankruptcy.

Removal by Trustee

A serious conflict between co-trustees can lead to one or more seeking to remove another. If the appointor of the trustee is still alive, the trustees should express the problem to the appointor and ask that the other trustee be removed

However, the appointor may be deceased or incapacitated. In this case, the trustees should convey the problem to the beneficiaries and ask them to join in seeking removal. The matter is more complicated if any beneficiary is a minor or is not explicitly named, such as when beneficiaries are designated as the children of a certain person rather than as named individuals. It is unlikely that a court would remove a trustee against the wishes of the appointor or the beneficiaries. The trustees seeking removal may also file a petition for removal, as discussed below.

Removal by Beneficiaries

Trust deeds commonly have provisions that allow beneficiaries to remove or replace a trustee. Usually, a majority vote of the beneficiaries is required. Often the trust deed provides that beneficiaries may only remove a trustee for a cause. Beneficiaries seeking the removal of a trustee may also need to file a petition for removal in some cases.

Key Takeaways

When amending components of a trust, it is essential to ensure you comply with the law. The trust deed will outline instructions for the trust, including how the trust may be amended. As such, before you remove a trustee or beneficiary, look to your trust deed for the correct process. It is best practice to seek legal advice before attempting to amend your trust. By not following the correct procedures, you risk making yourself liable to complex legal issues including additional tax liability.

For more information on managing your trust deed, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a discretionary trust?

A discretionary trust is a trust where the trustee has the discretion as to how to distribute the income and capital of the trust. The exercise of the trustee’s discretion is governed by the terms of the trust deed of the trust.

I am a trustee. Can I remove a beneficiary from the trust?

To remove a beneficiary from the trust, you must first amend the trust deed. To do so, the trustee must execute a deed of variation (also known as a deed of amendment). This document updates the relevant section of the original trust deed and will amend the trust’s beneficiaries.

I am a trustee. Can I remove another trustee from the trust?

If the appointor of the trustee is still alive, the trustees should express the problem to the appointor and ask that the other trustee be removed. However, the appointor may be deceased or incapacitated. In this case, the trustees should convey the problem to the beneficiaries and ask them to join in seeking removal.

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