The recent HCA decision of Fischer v Nemeske  HCA 11 is legally significant in both its clarification of, and the divergence of opinion on the bench about, the principles applying to trustee’s powers of advancement.
From a practical perspective, the decision delivers a lesson in the importance of investigating (and appreciating the impacts of) not only the status of property ownership but also the administration of relevant trusts in complicated succession planning.
Briefly, the facts were as follows.
During their lifetimes, most of Mr and Mrs Nemes’ assets were held in various companies the shares of which were, in turn, all owned by a single company called ‘Aladdin‘. The shares in Aladdin were therefore of significant value as ownership of Aladdin, in effect, would translate to ownership of the assets of the various companies.
Prior to the passing of Mr and Mrs Nemes, all the shares in Aladdin were owned by a corporate Trustee that held them under the terms of a discretionary Family Trust. Mr and Mrs Nemes (among others) were specified as beneficiaries of that Trust. The Trust’s books recorded the shares in Aladdin as having a value of around $3.9m.
Mrs Nemes passed away leaving all her estate to her husband Mr Nemes, by her will. When Mr Nemes subsequently passed away, by his will he sought to give:
- All the shares in Aladdin to certain members of the Fischer family (whose mother was the cousin of Mr Nemes); and
- The residue of his estate to a number of other persons
Before Mr and Mrs Nemes passed away, the Trustee had:
- Signed a resolution effectively stating that an amount representing the unrealised value of the shares in Aladdin ($3.9m) be distributed to Mr and Mrs Nemes as joint tenants (Resolution); and
- Entered into a deed of charge reciting the Trustee’s indebtedness to Mr and Mrs Nemes in the amount of $3.9m, payable on demand (Charge).
Despite the resolution and charge, the Trustee never transferred any amount from the trust assets to Mr and Mrs Nemes. No amount was ever set aside or allocated from the Trust assets for distribution to Mr and Mrs Nemes. In fact, nothing had been done to transfer any property from the Trust assets and the Trust assets never had in them an amount of $3.9m. Rather, the Aladdin shares at all times continued to be treated as if part of the body of Trust assets.
As identified by the French CJ and Bell J, a trust over particular trust assets can be ended if it is established that a trustee intended to hold (or ‘admits’ that it holds) that part for payment to a particular beneficiary or beneficiaries.
Where that happens, the trust relationship changes and the trustee becomes a debtor to the beneficiary in the amount of the intended payment.
Here, it was argued such a creditor/debtor relationship had been created by exercise of the trustee’s power under the trust deed “… to advance or raise any part of parts of the whole of the capital … of the Trust Funds and to pay or to apply the same … for the advancement in life of any of the Specified Beneficiaries” (Power of Advancement).
It has been argued with respect to the Power of Advancement:
- There was no effective exercise of that power (by the Resolution) unless it was intended to effect an immediate change of the beneficial ownership of a specific part of Trust assets; and
- It not been exercised as the Resolution did not purport give Mr and Mrs Nemes beneficial ownership of any specific part of the Trust assets (rather, it purported to give them the value assigned to the Aladdin shares in the Trust books).
In issue therefore was:
- Whether the Power of Advancement had been exercised at all (there having been no distribution from, or change in ownership of, Trust assets).
- Or, in other words, whether or not the Power of Advancement permitted the Trustee to create a debt reflecting all or part of the value of the Aladdin share as a mechanism by which capital of the trust can be advanced and applied (instead of transferring specific property out of the Trust assets).
Determining that issue divided the High Court.
Decisions of French CJ, Bell J and Gageler J
French CJ and Bell J together with Gageler J (in a separate judgment) found that the Power of Advancement had been effectively exercised.
French CJ and Bell J in construing the power of advancement in the Trust’s deed noted (at [21):
- That the relevant ordinary meaning of the word “advance” is to “pay (money) before it is due“;
- “That may be generalised to the creation, in advance of any entitlement under the terms of the trust, of equitable and legal rights binding on the trustee and depending for their enforceability on the trustee’s ability to resort to trust capital or income“; and
- In the context of the Trustee’s powers, extended to “the creation in favour of beneficiaries of a vested, absolute equitable interest, realisable by payment out to the beneficiaries or by an action for money had and received”.
French CJ and Bell J approved the conclusions of the WA Court of Appeal (in Chianti Pty Ltd v Leume Pty Ltd (2007) 35 WAR 488 at 495, 515) that trustee distribution resolutions coupled with account entries constituted an ‘admission’ by a trustee of an obligation to pay the money distributed on demand and that it did not appear to be essential, for there to be a binding admission, that the relevant amount was held as, or represented by, cash at bank or some other monetary sum when the alleged admission was made (at ).
It was also accepted that a resolution deliberately arrived at and recorded can of itself be sufficient to effect an immediate vesting of a specific part of the trust capital (at ).
The proposition that advancement required a portion of trust funds or assets to be actually taken out of the trust assets and applied immediately were rejected. It was said of earlier authorities, arguably supporting that proposition, that “they should not be taken as excluding from the ambit of the power of advancement the creation of a creditor/debtor relationship between the trustee and beneficiary by creation of a vested, absolute equitable interest in capital realisable by an action for money had and received“(at ).
It was held by French CJ and Bell J that:
- There are many ways of achieving an advancement and the range of options available in any particular case depends upon the scope of the power conferred by the trust deed (at  – [28);
- The text of the trustee’s resolution disclosed an intention to create a debt due by the trustee to Mr and Mrs Nemes to the extent of the amount shown relating to the shares (in Aladdin);
- In doing so, the trustee adopted a mechanism which, without affecting the ownership of the Aladdin shares, provided a basis for the application of the trust capital to Mr and Mrs Nemes by sale of the shares to meet the debt;
- That created a creditor/debtor relationship that constituted an advance and application within the trustee’s power to advance and apply trust capital.
It was concluded that the trustee had advanced and applied capital of the trust funds to Mr and Mrs Nemes by creating a debt reflecting the value of the shares comprising that capital at the time the advance was made.
Gageler J agreed with the ultimate conclusions of French CJ and Bell J. His Honour reasoned that:
- once it is accepted (as a legal proposition) that a trustee can “apply” trust property to the advancement of a specified beneficiary by resolving to allocate trust property unconditionally and irrevocably to the benefit of that beneficiary, it is difficult to see any reason in principle why such an unconditional and irrevocable allocation of trust property must take the form of an alteration of the beneficiary ownership of one or more specific trust assets (at );
- earlier authorities did not suggest that the power to apply trust property necessarily involved a resettlement of trust property. Rather the exercise of that power (by way of unconditional and irrevocable allocation of trust property to a beneficiary) was seen to result in an immediate absolute beneficial entitlement to property which remained held on the terms of the trust (rather than a transfer of property out of the trust assets) (at );
- an absolute entitlement to some part of a fund of property held on trust need not be reflected in an absolute beneficial entitlement to any specific part or asset within that fund (at );
- an absolute beneficial entitlement to some part of a [trust] fund of property may (depending on the terms of the settlement) be defined as an entitlement to be paid a sum of money out of the fund of property that is held on trust, irrespective of whether or not the assets within the fund are currently held in monetary form (at ).
Employing that reasoning, Gageler J found that the Power of Advancement was not so limited as to require for its exercise a resolution manifesting an intention to effect an immediate alteration of the beneficial ownership of specific trust assets (at ).
His Honour’s conclusion was that (although there had been no transfer of trust assets) the trustee had, by entering the deed of charge, created a debt of $3.9m payable to Mr and Mrs Nemes out of the trust assets.
Gordon and Kiefel JJ (dissenting)
Gordon and Keifel JJ disagreed with the majority, each delivering separate dissenting judgments.
Gordon J held that, as a legal concept, a power of advancement “operates by altering the proprietary interests in the property advance so that the property is no longer property of the trust. It involves more than a notional “earmarking” of property for specific beneficiaries (at ).” The terms of the power of advancement had engaged that concept.
His Honour found that the trustee’s resolution had purported to deal with the value of an asset held by trust (as opposed to an actual part of the capital or income of the trust) but “value” is not property held by the trust (at  – ).
It was concluded that an effective exercise of the Power of Advancement required the immediate vesting of absolute title to some property held on trust in a beneficiary. The Resolution did not do that. The power had not been exercised as there had been no change in the beneficial ownership of any asset of the trust (at  – ).
Keifel J reached the same conclusion as Gordon J, but with a focus on the trustee’s intention (or lack of thereof) to exercise the Power of Advancement.
Similarly to Gordon J, Her Honour accepted as a principle that the general purpose of a Power of Advancement is to enable trustees to anticipate the vesting in possession of an intended beneficiaries contingent or reversionary interest by raising money (or property) on the beneficiaries’ account and paying or applying it immediately for his benefit (at ).
Her Honour reasoned, essentially, that:
- In fact, no monies (apart from the nominal settlement sum) were ever held by the trust or paid to Mr and Mrs Nemes (at ).
- The trustee’s resolution did not identify any property of the trust as the subject of the exercise of any power or speak of advancing any part of the trust property to Mr and Mrs Nemes (at  – ).
- The power of advancement was only exercised (by applying trust capital to the benefit of beneficiaries) if the trustee’s words showed, in context, that some allocation of trust property out of the trust was intended (at ).
- For a conclusion that capital was applied, there should be a corresponding reduction in the capital of the trust (at ).
In those circumstances, neither the terms of the resolution nor the surrounding circumstances or conduct of the trustee supported an inference that the Power of Advancement was intended to be exercised by the Trustee. It was not possible to say that it was intended that Mr and Mrs Nemes become absolutely entitled to any property of the trust (at ).
Looking at Fischer from a practical perspective, it appears that Mr Nemes desired to give by his will:
- The shares in Aladdin to the Fischers, his first cousins once removed (who were also beneficiaries under the Family Trust); and
- Whatever was left of his assets, to others.
The implications of the HCA’s decision means that will not happen. The Fischers will not receive the shares in Aladdin under Mr Nemes’ will or under the Trust Deed.
Instead, the others, to whom Mr Nemes intended to leave the residue of his estate, are entitled to be paid from the Family Trust the value of the Aladdin shares (presumably $3.9m or thereabouts).
Presumably, that payment will be satisfied by either a direct transfer of the Aladdin shares to those others or a sale of the shares to third parties and payment over of their purchase price.
How? Two reasons.
First, it was obviously not appreciated when Mr Nemes’ will was prepared that the shares in Aladdin could never have been given to the Fischers under his will. Those shares were not his property to give. Rather, they belonged to the Trustee of the Family Trust.
Secondly, the impact of the Trustee’s Resolution and Charge on Trust assets and the personal estates of Mr and Mrs Nemes was apparently not considered. The effect of the acts was to indebt the Trust to Mr and Mrs Nemes personally for an amount reflecting the value of its only significant asset.
Ultimately, Mr Nemes became (through his wife’s bequest to him) the sole creditor to that debt. The benefit of the debt owed to Mr Nemes will be passed on as part of his residuary estate to other persons, not the Fischers.
Aside from being an interesting development in the law relating to powers of advancement, Fischer is a prime example of the necessity in planning complicated estates where trusts are involved for:
- Investigation into, and clear understanding of both property ownership and the way relevant trusts have been administered; and
- An appreciation of the legal implications of the structures of asset ownership, and the way trusts have been administered, on the passing of property by will.