Can control and assets of a Family Trust be given as a gift in my Will? Reschke v Reschke [2017] SASC 192

This question was raised before the Supreme Court of South Australia in the case of Reschke v Reschke [2017] SASC 192, concerning a discretionary family trust called the Rocky Castle Trust (“Trust”), and the last Will of Mr Reschke (“Will”).

It was generally accepted by the parties in dispute that it was not possible for Mr Reschke to give the assets of the Trust as a gift in his Will.  However, his ability to hand over control of the Trust in his Will ultimately turned on the construction of the Trust Deed establishing the Trust, and the terms of the Will.

Background

The Trust was created in 1989 for beneficiaries including Mr Reschke, his wife Mrs Reschke and their three children.  Under clause 28 of the Trust Deed, Mr Reschke had a power of appointment during his lifetime to remove and replace any trustee, and upon his death the power was to vest in his legal personal representative.

Prior to Mr Reschke’s death, the trustee of the Trust was Fabriano Pty Ltd (“Fabriano”), and Mr and Mrs Reschke were the shareholders and directors of Fabriano. 

On 1 August 2007, Mr Reschke made his last Will appointing Mrs Reschke as his executor, and under clause 8 purporting to give:

  • his power of appointment in respect of the Trust; and
  • his shares in Fabriano,

to his wife Mrs Reschke, his accountant Mr Scott, and his solicitor Mr Westley:

  • “to hold and to act as trustees of the [Trust]”; and
  • “in that capacity to vest the farming land owned by that Trust in favour of [his two sons]”, subject to an ongoing lease of that land to Mrs Reschke (rent free) for her lifetime or until her earlier surrender of such lease.

Mr Reschke died in 2008. 

The Dispute

In August 2017, one of Mr Reschke’s sons brought an action, which in substance sought the removal of Mrs Reschke as the executor of Mr Reschke’s estate, and a replacement of the trustees of the Trust.

In October 2017, Mrs Reschke and Fabriano brought a cross action seeking the determination by the Court of three preliminary issues:

  1. Whether Mr Reschke’s power of appointment in respect of the Trust lasted only while he was alive, and whether Mrs Reschke now held this power as executor of his estate;
  1. Whether clause 8 of Mr Reschke’s Will (properly construed) should fail; or give effect to an appointment of Mrs Reschke, Mr Scott and Mr Westley as trustees of the Trust; or be void for uncertainty; and
  1. Whether the trustee of the Trust was obliged to comply with that part of clause 8 of the Will referring to the vesting of the farming land in favour of Mr Reschke’s two sons.

Issues before the Court

The parties all agreed (and the Court determined) that, under the terms of the Trust Deed, Mr Reschke’s power of appointment in respect of the Trust lasted only while he was alive, and that upon his death Mrs Reschke held that power as executor of the Will. 

It was also common ground that:

  • It was legally possible for a person with a power of appointment to exercise it during their lifetime but defer its effect until their own death; but
  • If Mr Reschke purported to transfer his power of appointment by way of a gift in his Will, it would have been ineffective as it was not authorised under the terms of the Trust Deed; and
  • Mr Reschke did not have the power to, in his Will, oblige the trustee of the Trust to dispose of the property in the Trust.

The issues before the Court were therefore:

  1. Whether on the proper construction of clause 8 of the Will, Mr Reschke intended to transfer his power of appointment by way of a Will gift (as argued by Mrs Reschke), or exercise his power of appointment to appoint a new trustee but defer its effect until his death (as argued by his son);
  1. What effect clause 8 of the Will should have, if any;
  1. To what extent the trustee of the Trust must consider Mr Reschke’s wishes expressed in clause 8 of the Will in relation to the vesting of the Trust property.

The Decision

The Court accepted, on the authority of Baird v Baird [1990] 2 AC 548 (at 556), that an “instrument which creates interests taking effect on the death of the person executing the instrument”, is not necessarily a Will.  Additionally, it considered the case of Wolfe v Wolfe [1902] 2 Ir R 246 as authority for the proposition that a document could contain (in part) an effective contract notwithstanding that it also comprises (in part) a Will with testamentary dispositions.

However, the Court considered that the language of clause 8 and its context within the Will as a whole indicated Mr Reschke intended to gift the power of appointment in his Will, rather than exercise the power of appointment while he was alive with the intention that the appointment would take effect on his death. 

In reaching this conclusion, the Court noted:

  • Clause 8 also contained a gift of Mr Reschke’s shares in Fabriano, which was clearly a Will gift. It was unlikely that, using the same language and in the same sentence, Mr Reschke intended to gift the shares but not the power of appointment.  The opening words of clause 8, “I GIVE”, were also used at the beginning of other clauses in the Will to give effect to intended gifts; 
  • The fact that clause 8 was also, clearly, part of Mr Reschke’s last Will was an important indicator that a testamentary disposal of the power of appointment was what was intended;
  • The fact that it was not possible to transfer Mr Reschke’s power of appointment as a gift in his Will did not prove that Mr Reschke would have intended clause 8 to be an exercise (rather than a gift) of the power. Mr Reschke’s Will also contained another clause purporting to gift his power of appointment under a different trust (but not purporting to exercise that power).

The Court therefore held that the gift of the power of appointment in Mr Resche’s Will was ineffective, that this power had vested in Mrs Reschke as executor, and that Fabriano remained the proper trustee of the Trust.

Whilst the gift of the power of appointment was invalid, the Court held that the gift of Mr Reschke’s shares in Fabriano under clause 8 was effective.   

Finally, the Court held that Fabriano (as “Trustee”) was not obliged to comply with that part of clause 8 that purported to vest the farming land held in the Trust in favour of Mr Reschke’s sons.  Whilst the Court accepted the son’s argument that the Trustee was required to consider Mr Reschke’s wishes, it held that the Trustee’s usual discretion was not otherwise fettered, where it was stated (at paragraph 53):

“It may be accepted that in these circumstances Fabriano as the Trustee is required to give consideration to [Mr Reschke’s] wishes as to such devolution in the exercise of its discretion whether to make capital distributions and to whom. However, that level of consideration is the same as the consideration that would be required to be given by the Trustee to [Mr Reschke’s sons] (and indeed [Mrs Reschke, their daughter] and the next generation) as objects of the discretionary trust in terms of capital distributions. There are well-defined limits to the level of consideration required to be given and to the ability to judicially review the exercise or non-exercise of the discretion. There is no basis to elevate this level of consideration to “utmost” consideration.”

This case drives home the importance of knowing and understanding the terms of a Trust Deed before attempting to deal with the control of a Trust in your Will. 

With an appropriate amendment to the Trust Deed during Mr Rescke’s lifetime, it may have been possible for him to pass on the power of appointment in his Will.

If you require estate planning advice in relation to how control of a Trust passes after you have passed away, contact us to speak to one of our Wills and Estates Lawyers

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