In most discretionary or family trusts, there are three main roles. The first is of the trustee, who holds the property and carries on the business for the benefit of the trust. The second is the identity of the primary beneficiaries. Usually, the beneficiaries will be in some way related or associated with the primary beneficiaries, and it is usually to the primary beneficiaries that the income of the trust will be allocated if it is not distributed by the end of the financial year, and it is usually to the primary beneficiaries that the capital of the trust will be returned when the trust is wound up.
The third role is that of “Appointor”, sometimes called “Principal” or “Nominator”.
The power of the Appointor is one which allows them to dismiss the trustee and appoint a new trustee in their place, or to fill the role of trustee if it is otherwise vacated (as an example, by the death of the Trustee), without having to make an application to court.
As a result, the position of Appointor is a very important one, as in an extreme case the Appointor can dismiss a Trustee who they are for some reason unhappy with and appoint themselves or a more compliant person or company to be trustee in their place. It is therefore critical that if the Appointor ceases to have that role, the trust deed provides for a suitable replacement process.
Many trust deeds provide for the power of appointment to be vacated in the event that the Appointor is bankrupted or dies. The power of appointment is not a property right and will not normally go to a trustee in bankruptcy if the Appointor is bankrupted. Despite that, some commonly used trust deeds provide that on a person becoming bankrupt, the power of appointment vests in their “legal personal representative”. Unless otherwise defined in the trust deed itself, the expression “legal personal representative” is one that is only relevant to superannuation law (and in that context means the executor of the persons last Will). As discretionary trusts are not governed by superannuation legislation, it is arguable that the “legal personal representative” of the Appointor is actually their trustee in bankruptcy, literally the last person that the parties to the trust would want to hold the power of appointment in respect of the trust.
It is accordingly important to check the power of appointment in trust deeds to ensure that not only does it reflect what you want, but also the succession (replacement) provisions reflect a sensible outcome. This should be done frequently, and also as part of estate planning processes.