Spry’s Case - Exploring the limits of discretionary trusts

Sunday, 01 November 2009
The barrister who appeared as counsel for Mrs Spry in the Australian High Court gives a detailed description of the facts of "Spry's case" (Kennon v Spry; Spry v Kennon (2008) 83 ALJR 145)

Spry’s case1 has generated much interest among practitioners in trusts and family law. This paper seeks to analyse the bases for the decision, and some of the consequences for family and trust law.

The trust, as constituted and amended

(a) The original trust

Dr Spry created the ICF Spry Trust (the ’Trust’) on 21 June 1968 by parol. He prepared a trust instrument but did not execute it until 1981.

Under the trust instrument, Dr Spry was settlor and trustee and he had power to appoint any other person as additional trustee and could remove any trustees. Under cl 2 he had a power to vary the terms of the Trust, provided that the variation did not increase his rights to the beneficial enjoyment of the fund.

The beneficiaries were defined as all issue of Dr Spry’s father, Charles Chambers Fowler Spry, which thus included Dr Spry himself, and all persons married to such issue. The class would, on one construction, also extend to their further issue and any persons married to them.

As trustee, he also had the power to apply any part of the income or capital of fund for all or any of the beneficiaries, including himself. There was no requirement that the income each year be distributed.

At the defined distribution date, under Clause 7 the fund was to be divided equally among such of the beneficiaries as the trustee thinks fit and, in default, equally among all male beneficiaries, save for the settlor. In the event of failure of such trust, under Clause 8 the fund would be applied for scholarships for the sons of persons who both had been pupils of Melbourne Church of England Grammar School and also residents of Trinity College, Parkville, Victoria.

Finally, Dr Spry as trustee had a power to invest or deal in the fund as if it was his own absolute property.

(b) The 1983 amending deed

In and after 1968 Dr Spry accumulated various property in the Trust. This occurred both before and after his marriage in December 1978 to Helen Marie Spry. Four daughters were born to their marriage between 1980 and 1987.

One property of significance was a residence in Toorak, which was acquired by the Trust in 1979. Between 1983 and 1994 it was occupied as the marital home.

The first change occurred under a 1983 Deed made between Dr Spry, in the capacities of both trustee and settlor, and Mrs Spry. Under Clause 2 Dr Spry released and abandoned all and any beneficial interest or rights which he might as settlor have under the Trust and confirmed that by reason thereof he ceased to be a beneficiary. Clause 3 provided that the term ‘issue’ included all descendants however remote; and further provided that any variation of the Trust would be invalid to the extent to which it purported to confer directly or indirectly any right or benefit upon the settlor. Under Clause 5 Dr Spry as settlor appointed Mrs Spry to be the trustee on his death or resignation, provided the appointment was revocable by the settlor at any time.

Dr Spry executed the 1983 Deed in order to remove himself as a beneficiary of the Trust and avoid adverse land tax consequences.

(c) The 1998 amending instrument

The second major change to the Trust occurred via the 1998 Instrument. By this time the marriage was in difficulty. Dr Spry revoked the appointment of his wife as the successor to him as trustee and instead appointed his two eldest daughters jointly. Under Clause 4, the terms of the Trust were varied so that each of Dr Spry and his wife were excluded irrevocably from the ability to receive any part of the capital of the Trust. This was unnecessary if the 1983 Deed remained effective. His explanation was that he had forgotten the 1983 Deed.

(d) The 2002 transactions

In 2002, when the marriage was undoubtedly in trouble, Dr Spry established four separate Trusts in identical terms (the ‘Daughters’ Trusts’). He was the trustee of each Trust. The class of beneficiaries included the daughter as primary beneficiary plus the daughter’s children, grandchildren, sisters, nephews and nieces and their spouses. Dr Spry as trustee had a power to apply all or any part of the income or capital for the benefit of any of the beneficiaries. Dr Spry was excluded absolutely from any interest in the fund.

Coincident with the establishment of the Daughters’ Trusts, in January 2002 Dr Spry as trustee of the Trust applied all of the income and capital of the Trust in four equal shares to each of his Daughter’s Trusts (the ‘2002 distributions’).

The result of the 1998 Instrument, while ever it remained effective, was that Mrs Spry lost her ability to participate in the capital of the Trust but remained available as an object for distribution of income. The establishment of the four Daughters’ Trusts in January 2002, and the disposition of the entirety of the property of the Trust to them, meant that there was now nothing left in the Trust which could possibly be distributed in favour of Mrs Spry.

Proceedings in the Family Court

(a) The trial judge

In April 2002 the wife filed for property orders under s. 79 Family Law Act1975 (Cth) (the ‘Act’). In December 2002 the wife obtained an order for the dissolution of the marriage. Property orders in the section 79 proceedings were made in November 2005, under which Dr Spry was ordered to pay his wife AUD2.18million on the basis that the marital pool would be split 52/48 per cent in favour of Dr Spry. The pool was a little under AUD10million if one included, as the primary judge did, the assets of about AUD4.6million in the four Daughters’ Trusts which had come from the Trust.

No order was made that the husband be required, or permitted, to satisfy the s. 79 money order out of the assets which had travelled from the Trust to the Daughters’ Trusts. Further, the 1983 Deed was not set aside. Thus, since he was excluded as a beneficiary, he could not use the Trust as a direct means of satisfying the money order. Finally, the trial judge made orders under s. 106B, setting aside the 1998 Instrument and reversing the 2002 distributions.

In making these orders, the essential family law issue facing the Court was whether the assets which had been in the Trust until the 2002 distributions be described as ‘property of the parties to the marriage or either of them’ within s. 79 of the Act.

One of Dr Spry’s arguments on this question was as follows. He had been excluded as a beneficiary of the Trust in 1983. The wife, even ignoring the 1998 Instrument, had by her own election ceased to be a beneficiary in December 2002: the obtaining of the order of the dissolution of the marriage meant that she no longer satisfied the description of being a person ‘married’ to someone who was the issue of C.C.F. Spry. Accordingly, the only persons who were the beneficiaries of the Trust at the date of the hearing were persons other than the husband and wife. There was no point in making the s. 106B orders and restoring the assets to the Trust: even if such orders were made, the assets would not meet the description of ‘property of the parties to the marriage or either of them’.

The trial judge rejected this argument, holding that the assets of the Trust were property of one of the parties to the marriage, namely Dr Spry. First, Dr Spry could ‘reverse’ the 1983 Deed and thereby reinstate himself as a beneficiary, and so could distribute the whole of the assets of the Trust to himself. Second, in any event, Dr Spry had evidenced sufficient control over the assets of the Trust and their distribution during the Trust’s long history for the assets to be regarded as his. The trial judge applied a stream of Family Court authority whereby assets in a trust could be treated as property of one of the parties to the marriage if the party demonstrated in fact control over the trust and ability to benefit from them.2

(b) The Full Family Court

The majority, consisting of Warnick J and Bryant CJ, broadly agreed with the first of the trial judge’s routes. Warnick J, held that it was open to Dr Spry to ‘rescind’ the 1983 Deed and thus reinstate himself as a beneficiary. Bryant CJ considered that it would have needed agreement between Dr Spry and his wife to ‘revoke’ the 1983 Deed, but inferred that such an agreement was likely.3

Both Warnick J and Bryant CJ held that the second route of the trial judge was not available. Although Dr Spry had control over the assets of the Trust through his position as trustee with power to appoint and remove trustees, and power to distribute income and capital between the class of beneficiaries, he did not have a sufficient ability to benefit from distributions of income or capital to regard the whole of the assets in the Trust as his property. Unless the 1983 Deed was rescinded (per Warnick J) or revoked by agreement between Dr Spry and his wife (per Bryant CJ), then such distributions as Dr Spry had made over the history of the Trust since 1983 did not rise to the level of him being able to apply the whole of the assets of the Trust for his own benefit.4

Finn J dissented. She agreed that the trial judge’s second route was not available.5 As to the first route, she held that Dr Spry did not have a legal ability to restore himself to the status of a beneficiary under the Trust. First, she considered that it was inconsistent with Clause 2 of the Deed (which, as noted, limited Dr Spry’s power to vary the terms of the Trust such that he could not increase in any way his rights under the Trust). Finn J considered that this clause spoke to the position as at the date of the proposed variation, not the date of the founding of the Trust. As at November 2005 the variation would impermissably increase Dr Spry’s rights from zero to those of a discretionary object. Second, Finn J reasoned that the 1983 Deed had constituted a complete abandonment of Dr Spry’s rights as beneficiary under the Trust, which in law could not be rescinded or reversed by agreement. Third, the 1983 Deed had not in fact been set aside. Further, there was no proof of any agreement between Dr Spry and his wife to do so and it was simply speculation that they would do so.6 Thus, according to Finn J there was no point in making s. 106B orders.7

Significantly, with both the trial judge and the Full Family Court, the emphasis was upon whether the assets of the Trust could be regarded as property of one of the parties to the marriage, namely Dr Spry. There was little consideration whether the assets of the Trust could be regarded as property of the wife, or more generally whether the position of both Dr Spry and his wife could be brought to account under the composite phrase in s.79 ‘property of the parties to the marriage or either of them’.

But for the findings of the majority about Dr Spry’s ability to rescind or reverse by agreement the 1983 Deed, the wife’s claim would have been reduced to a financial resourse claim, which might have altered the 52/48 per cent split in the wife’s favour but over a much reduced pool of assets.8

Appeal to the High Court

Dr Spry and the trustees of the Daughters’ Trusts were granted special leave by the High Court. The essence of the argument was that Finn J’s dissent in the Full Court was correct. It was not open to Dr Spry to reinstate, whether by agreement with the wife or otherwise, his position as a beneficiary. The assets of the Trust, post-1983, could never be considered to be his property within s. 79. Any claim by the wife to a beneficial interest in the assets ceased in December 2002 upon the divorce, which took her out of the class of defined beneficiaries. Accordingly, the Family Court had no power to make any orders affecting the assets of the Trust. At most there was a (disputed) financial resource claim.

(a) The trial judge’s first route

Gummow and Hayne J held that Finn J was correct in at least one ground upon which she would have reversed the trial judge: [116], [124], [137]. While ever the 1983 Deed remained in force, one could not regard Dr Spry as a beneficiary of the Trust and he could not apply its assets in his own favour. Therefore the assets in the Trust were not property of the husband within s. 79.

Heydon J (dissenting in the ultimate result) approached this issue on the same basis: [148]. Kiefel J was more explicit in her agreement with Finn J: [196]. The release in the 1983 Deed was effective upon execution; any later cancellation of the Deed could not alter the effectiveness of the release. Further, Clause 2 spoke to the Trust instrument as constituted from time to time; any attempt to vary the instrument to reinstate Dr Spry to his original rights would offend Clause 2.

French J expressly left open the correctness of the approach of the trial judge to reinstatement of Dr Spry as a beneficiary: [71].

Thus a majority of four out of the five judges held that, whilever the 1983 Deed remained in effect, Dr Spry was not a beneficiary and the assets of the Trust could not be treated as property of him being one of the parties to the marriage.

(b) The trial judge’s second route

None of the five judges lent any support to the second route by the trial judge. Thus the wife could not hold onto the orders on the basis of the reasoning of either the trial judge or the majority in the Full Court. The point upon which special leave was obtained by Dr Spry and the trustees of the Daughters’ Trusts was decided, in brief terms, in their favour.

(c) The majority reasoning – Gummow and Hayne JJ

How then did the wife succeed by majority in the High Court? Gummow and Hayne JJ at [125] – [130] and [137] – [138] reasoned as follows. The statutory expression ‘property of the parties to the marriage or either of them’, should be given a meaning in the context of the whole of the Act and the principles of equity. Specifically, prior to the Instruments of 1998 and 2002, the wife was an object of the power of distribution, with a right to due consideration by the trustee Dr Spry. During the marriage, it would have been lawful for him to appoint her the whole of the assets of the Trust. Her right of due consideration represented correlatively his fiduciary duty to consider whether to make a distribution to her among other beneficiaries. Prior to the 1998 and 2002 Instruments, all of the assets in the Trust could properly be described as ‘property of the parties to the marriage’, when one had regard to the combined positions of husband and wife: [125] – [127].

That still left a further problem. Because of the divorce in December 2002, the wife no longer fell within the class of beneficiaries (or so it was assumed as the case was conducted). At this point, Gummow and Hayne JJ took two steps, one statutory and one based in the case law. The statutory step was to identify that, under section 4(2) of the Act, the reference in provisions such as s. 79 to ‘the parties to the marriage or either of them’ included a reference to parties to a marriage terminated by divorce at a time before the Court makes its property order. Further, the detailed provisions in s. 79 respecting the adjournment of property settlement proceedings assumed that the parties to those proceedings might also be parties to pending divorce proceedings which were completed before the grant of relief in property settlement proceedings: [128].

The second step was to rely upon a line of authority dating back to the nineteenth- century divorce Acts holding that it was within the power of the Court to proceed in property settlement proceedings ‘as if’ changes to property rights otherwise brought about by the anterior divorce had not yet occurred, provided always it was just and equitable to do so. Section 5 of the Matrimonial Causes Act 1859 (UK) conferred power on the Court after a final decree of dissolution of marriage to inquire into the existence of ante-nuptial or post-nuptial settlements made on the parties to the marriage, and to make such orders with reference to the application of the whole or a portion of the property settled for the benefit of the children of the marriage or of their respective parents as the Court shall seem fit.9

Finally, their Honours held it appropriate that the value to be placed upon the identified property was the full value of the assets of the Trust, since all of the assets could (notionally) have been appointed to her. The s. 106B orders were then appropriate: [137]. Although the order was only for payment of the money sum, if the husband wished to satisfy his obligation by recourse to the assets of the Trust augmented by the s. 106B orders, he could approach the Court for an appropriate order to assist him doing so. Such order would provide the machinery whereby the Trust was to be administered ‘as if’ the wife had not ceased to be the spouse of the husband. The children did not have any identifiable interest to oppose such an order, given that the assets had essentially been built up over the life of the marriage.

(d) The majority reasoning – French CJ

French CJ at [46] – [81] reasoned in a broader manner. Dr Spry had legal title to the assets in the Trust as trustee and he was the only person entitled to possession of them: [48]. Absent any specific application of income or capital by Dr Spry, none of the objects of the Trust had any equitable interest in the assets of the Trust: [49]. Prior to the 1983 Deed, the ability of Dr Spry to appoint all of the assets of the Trust to himself made them part of his property for the purposes of s 79:[58]. After the 1983 Deed, he still remained in possession of all the assets, with legal title to them and to all the income they generated unless and until he chose to apply them to the continuing beneficiaries: [59]. The combination of his legal title to the assets of Trust; his power to appoint the whole of the assets to the wife; their derivation from the efforts of the parties to the marriage; and her equitable right to due consideration, constituted ‘property of the parties to the marriage’ for s. 79; [62], [66] and [81].

French CJ also agreed with the narrower basis on which Gummow and Hayne JJ identified the relevant property: [73] – [80], and supported the conclusion of Gummow and Hayne JJ that the reference in s. 79 to ‘the parties to the marriage’ includes a reference to a marriage terminated by divorce before the Court makes the property settlement order. The Court could, if just and equitable, make orders in property settlement proceedings ‘as if’ changes to property rights otherwise affected by the divorce had not occurred: [72].

(e) The majority reasoning – Kiefel J

Kiefel J, the other judge in the majority, preceded by a different route. Leave had been sought, at the hearing in the High Court, to introduce a new argument based upon s. 85A of the Act. That provision, which traced back to the nineteenth-century English divorce legislation, gave the Court power to make orders with respect to the application, for the benefit of all or any of the parties to, and the children of, the marriage, of the whole or part of property dealt with by ante-nuptial or post-nuptial settlements made in relation to the marriage. The critical question was whether the Trust counted as such a marital settlement.

Kiefel J referred to various authorities in England and Australia, where a liberal meaning had been given to the term ‘settlement’10 The precise language used in s. 85A, which requires a settlement ‘made in relation to the marriage’ may require a less direct connection between the settlement and a marriage than predecessor statutes: [216]. The purpose of s. 85A, as introduced into the Act in 1983, was to extend the Court’s powers to property which did not fall within s. 79: [218]. Here s. 85A was attracted because the Trust assets constituted property, much of which were obtained by way of the parties’ contributions to the marriage: [225]. It is not necessary that the settlement was made in relation to this very marriage at the time the settlement first commenced: [226] and [227]. Indeed each disposition of property to the Trust, from the time of the parties’ marriage, could be viewed as a separate trust, albeit on the terms of the Trust: [229]. The fact that there were some persons in the class of objects outside the parties to the marriage and the children did not defeat s. 85A, particularly as their involvement with the Trust was peripheral: [231].

Kiefel J’s ultimate conclusion was that the Court had power under s. 85A to make an order directly applying property from the Trust to the benefit of the wife, without having to regard either husband or wife as beneficiaries of the Trust [234]. Accordingly Kiefel J would have ordered a variation to the trial judge’s orders such that the wife be paid the money sum out of the assets of the Trust and that the husband do all such things as are necessary to effect that payment: [238].

It appears from the manner in which Kiefel J regarded s. 85A as essential for the wife to sustain the ultimate result, and her cautionary remarks at [119] – [ 206], that her Honour did not agree with the approach taken by French CJ, Gummow and Hayne JJ. That is, although her Honour accepted that for some purposes the Court may treat the parties ‘as if’ they continue to be parties to the marriage after divorce, the Act does not deem persons to remain parties to the marriage for all purposes relating to property interests: [202]. There is no warrant to rely upon the ‘as if’ line of authority within s. 79. There needs to be explicit resort to s. 85A if the assets are to pass out of a trust other than in accordance with ordinary trust law.

French CJ at [82] and Gummow and Hayne JJ at [141] did not consider squarely the issues arising under s. 85A under the cross-appeal, other than to say that s. 85A should not be taken as reading down the scope of s. 79: [82] and [131] – [134].

(f) Heydon J in dissent

Heydon Jdissented. He held that after 1983 neither spouse could be regarded as having property within the meaning of the Act in the assets in the Trust. The husband had been removed as a beneficiary. The wife’s position was no more than the object of a bare power. This, plus her right of due consideration, did not bring her interest even to the level of a Livingston v Commissioner of Stamp Duties (Qld) (1964) 112 CLR 12 interest. There was nothing she could assign. Unreasonable results would follow from regarding this as property under the Act. Indeed it was the wrong property identified by her – she sought relief against the assets of the Trust, not in relation to her right of due consideration: [160] – [164].

Heydon J rejected an argument put by the wife, in reliance upon what was said by Griffith CJ in Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490 at 497, namely that if the legal estate in property is vested in a trustee, and there is no person entitled to the property in equity, then the trustee is entitled to the whole estate in possession both legal and equitable. Heydon J indicated that, in the land tax context being dealt with by Griffith CJ, it was right to regard the trustee as falling within the statutory definition of owner in circumstances where the tax was annual and income was required to be accumulated: [173]. By contrast in the present case, at least after 1983, although Dr Spry was entitled to all of the assets of the Trust in possession, he had no ability beneficially to enjoy them and thus he had no property in them within the Act: [174].11 Ultimately, Heydon J considered that the definition of property in s. 4(1) requires an interest in property either owned otherwise than as trustee, or owned as beneficial interest in a trust, such that the interest can be adjusted by orders made under s. 79: [175].

Heydon J then went further: [176] – [177]. He considered that, even prior to the 1983 instrument, the assets in the Trust would not be regarded as property of the husband. That is, notwithstanding that Dr Spry as trustee held a special power of appointment, which would have entitled him prior to 1983 to appoint income or capital among a class of objects, including himself, that did not make the assets in the Trust his property. A power is an individual personal capacity of the donee of the power to do something. If exercised it may result in property becoming vested in the donee, but the general nature of the power does not make it property itself: Ex parte Gilchrist; In Re Armstrong (1886) 17 QBD 521 at 531 – 532.

Heydon J rejected reliance upon s. 85A, both because the character of the settlement needed to be tested at the date it was created, i.e. in 1968. There was nothing in the original 1968 settlement indicating that it was made in contemplation of the later 1978 marriage. It was irrelevant that, once the marriage occurred, the Trust was utilised for an accumulation of assets contributed by husband and wife: [183] – [186].

It follows that, of the only two justices who dealt substantively with s. 85A, radically different views were expressed as to its scope and the question remains unresolved.

(g) Spry’s case – the ratio

The ratio of the decision, represented by the reasons of Gummowand Hayne JJ as supported and expanded by French CJ, can be summarised as follows:

  1. Where, at the date of the commencement of the matrimonial cause, one party to the marriage has power under the trust instrument to appoint the entirety of the property in favour of the other party as one of the class of discretionary objects, the whole of the assets of the trust fall within the description of ‘property of the parties to the marriage to either of them’ within s. 79, and at full value
  2. It is within the power of the Court to make an order for the payment of a money sum which assumes that the entirety of the assets of the trust are within the disposition of the first party, even if at the date of resolution of the property settlement proceedings the other party no longer remains within the class of objects
  3. Before exercising such a power, the Court would consider the interests of the other members in the class of discretionary objects, but where they represent in large measure the children of the parties to the marriage and where the assets in the trust represent accumulated property over the life of the marriage, the children have no substantial claim against the making of the order
  4. Where persons other than the parties to the marriage and the children fall within the class of discretionary objects, they would have standing to oppose the order but would need to establish a proper ground upon which it would be just and equitable to refuse or modify such order
  5. Where such a money order is made, the Court has power, by way of further machinery orders under ss. 79 and 80, to order that first party satisfy the liability to pay the money sum out of the assets of the trust.

By way of obiter, it follows from the express reasons of French CJ: [58], and by necessary implication from reasons of Gummow and Hayne JJ: [126] and [137], that in a more straightforward case where one party to the marriage has power under the trust instrument to appoint the entirety of the property in favour of a class of persons including that same party, the whole of the assets of the trust can be regarded with s. 79 as the property of that party to the marriage. Heydon J reasoned directly to the contrary: [176] and Kiefel J did not deal with the point.

Implications of Spry’s case for family law

With this review of the case, a number of particular questions of family law and trust law can be further addressed.

(a) The reach of the Family Court over discretionary trusts

Based on the above ratio and obiter, if a person is desirous of establishing a discretionary trust whereby the Family Court will not have power under s. 79 to reach the trust assets in the event of marital breakdown, it would be necessary to ensure that person does not fall within the class of objects and further that the class cannot extend to that person’s spouse. Further, as there is a prospect that the broader approach of Kiefel Jto s. 85A may come to be accepted, then the trust both in its character at the date of institution, and in the manner in which it is actually administered, should not be identified with an accumulation of assets from the marriage. The underlying justification for these somewhat differing approaches is that where the trust, as established or as operated, constitutes a vehicle for the accumulation of assets of the marriage which, in other circumstances, might simply be held in joint names, then, upon the breakdown of the marriage the ample powers of the Family Court under the Act allow it effectively to deal with those assets in the altered circumstances which have eventuated. If persons are seeking to avoid that broad outcome, and yet at the same time make use of discretionary trusts, the steps they will need to take by way of structuring of the trust could well be regarded as extreme practically unworkable.

(b) Do existing Full Court authorities remain intact?

An established line of authorities in the Family Court12 had extended s. 79 to look beyond the form of the trust instrument to the substance of whether one or either of the parties to the marriage was able to control and benefit from the assets of the trust. If one party to the marriage was a beneficiary and, although not the trustee, had the ability to control the actions of the trustee, this could result in the assets of the trust being regarded as being property of that party. Or again if one party of the marriage was trustee or controlled the trustee and, although not falling strictly within the class of beneficiaries, was able in a real sense to enjoy the benefit of the distributions which would be made to a beneficiary, again the same result could follow. By similar reasoning, where a party to the marriage may not have had an immediate legal ability to enjoy the assets of the trust but has available powers (e.g. the power of removal of trustee and appointment of new trustee and/or a power to vary the trust instrument such that he or she could benefit from the trust) a like result could follow.

These conclusions are somewhat difficult to reconcile with the terms of s. 79 itself. Property for purposes of s. 79 is defined in s. 4(1) to mean ‘property to which the parties to the marriage are, or either of them is, is the case may be, entitled, whether in possession or reversion’. The language of entitlement in possession or reversion harks back to the expression used in the Matrimonial Causes Act 1857 (UK). It readily invokes notions of strict property law, rather than looser conceptions of capacity to benefit, particularly capacity dependent upon future actions being taken.

These issues were not squarely addressed by Gummow, Hayne J or Keifel JJ in Spry’s case. French CJ paid heed to the earlier Full Court authorities. He said they were consistent with his (obiter) conclusion that prior to the 1983 Deed Dr Spry’s ability to appoint the whole of the income or capital of the Trust to himself as one of the beneficiaries would have enabled the assets of the Trust to be regarded as his property for the purposes of s. 79: [55] – [58]. He also referred to other Full Court authorities13 to the effect that, in the context of superannuation funds, the fact that a party to the marriage may have a right to due administration of the fund which supports a contingent claim to a benefit which will not vest until a future date poses real difficulties of valuation of the right. French CJ considered that these problems did not arise on the facts of Spry’s case for reasons noted above: [75] – [80]. Accordingly, French CJconsidered that his conclusions sat comfortably with, and were supportive of established lines of authority in the Full Court.14

The approach of Heydon J in dissent would have cast real doubt on these Full Court authorities.

It thus remains for debate and resolution in later cases, in circumstances not falling within the facts of Spry where a party seeks to invoke the broader conception of benefit evident in the existing line of Full Court cases, whether they can really be reconciled with the definition in s. 4(1)of property to which there is ‘an entitlement in possession or reversion.’

(c) Part VIIIAA of the Act

The Act was amended in 2003 to introduce Part VIIIAA. Its express object as stated in s. 90AA is to allow the Court, in relation to the property of a party to the marriage, to make an order under relevantly s. 79 that is directed to, or alters the rights, liability or property interests of the third party to the marriage. Under s. 90AC the Part overrides any other law, written or unwritten, of the Commonwealth or a State and further overrides anything in a trust deed or instrument. Section 90AE(2) empowers the Court in proceedings under s. 79 to make orders altering the rights, liabilities or property interests of a third party in relation to the marriage. Under s. 90AE(3) and (4) there are certain requirements the Court must taken into account before it makes such an order affecting a third party, including considering the taxation effects of the order on the third party.

An attempt had been made late in the case at first instance to introduce a claim under Part VIIIAA. It was rejected by the trial judge as the s. 90AE(4) factors were not adequately expired in the evidence. Although raised on the appeal it was not considered the majority.

In another case, questions may arise as to the use of Part VIIIAA in order to obtain a Court order, for example, extinguishing a vested interest which a third party to the marriage has in a trust fund where the Court has otherwise identified relevant s. 79 property. Questions of the constitutional validity of Part VIIIAA by reference to the scope of the marriage power under s. 51(xxi) of the Constitution may also need to be considered.15

As a recent example, a claim survived strike-out where Pt VIIIAA was invoked by a wife against the trustee of a family trust. The husband was one of the class of objects, but was not the trustee nor the controller of the trustee. He had some connection with the build-up of assets in the trust. Spry’s case was relied on to identify the husband’s rights as discretionary object as ‘property’. Part VIIIAA was then relied on for the claimed remedy: see Simmons v Simmons (2008) 40 Fam LR 520.

(d) Other practical matters of litigation

In the end, Mrs Spry succeeded even though by reason of the divorce order being made prior to the property settlement orders she arguably ceased to be a beneficiary of the Trust, and even though no express order was sought at trial, either setting aside the 1983 Deed or permitting or requiring an application of assets of the Trust in her favour and Part VIIIAA was only invoked belatedly. However, in future cases it would be safer to deal with these issues more directly, for example by use of interlocutory orders under s. 81(h), ancillary orders under s. 81(k) and Part VIIIAA should be invoked where available.

Implications of Spry’s case for trust law

(a) Drafting of trust deeds

A number of issues of drafting of trust deeds are thrown up by Spry’s case. First, when defining a class of beneficiaries by reference to the ‘issue’ of a named person and persons ‘married’ to such issue, there is a question whether ‘issue’ includes all descendants however remote and not merely children; and whether persons ‘married’ to such issue includes persons presently or once married to such issue. The Trust as recorded in 1968 and executed in 1981 merely spoke of ‘issue’ and persons ‘married’ to such issue. Dr Spry subsequently dealt with the first of these questions by the 1983 Deed, which stated in cl 3 that for the purpose of removing doubt the expression ‘issue’ used in the instrument included all descendants however remote and not merely children. As to the second question, the expression in the original instrument was simply persons ‘married’ to such issue. It was never amended or expanded. Dr Spry argued that as soon as a spouse of any issue was divorced, the spouse fell outside the category of beneficiaries. The High Court noted that the argument below had proceeded on the basis that this view is correct,16 but did not expressly opine on the question of construction. The safest course is to obtain express instructions on these two related issues and draft in the clearest of terms.

(b) Scope of the amendment power

Issues may arise concerning the drafting of any power reserved to a person to vary the terms of the Trust.

One aspect of the power of variation is the limitation contained in it that any variation must not increase the settlor’s rights to the beneficial enjoyment of the fund. The view of Finn J17 is probably correct on a limitation so worded. Accordingly, if the real desire is to limit the scope of the amendment power only so that the settlor cannot use it to increase his rights beyond those existing at the date of original constitution of the trust, this should be made express.18

Further, the High Court did not need to decide whether Dr Spry as settlor could have exercised the amendment power so as to reinstate Mrs Spry as a beneficiary. Dr Spry contended that the power of variation did not extend this far: a power to vary the terms of the Trust did not extend to a power to expand or contract the class of beneficiaries; the power was subject to an implied limitation that it could not be exercised so as to vary the essential substratum of the Trust, which implication would be offended by reinstating a person who had ceased to be a beneficiary upon divorce; and the power was a fiduciary one which could not be exercised to reintroduce the wife into the class of beneficiaries thereby reducing or eliminating the ability of the other named beneficiaries to be objects of the trustee’s benefaction.

The counter-argument was that, as French CJ noted at [46], the power was conferred upon Dr Spry as settlor and not subject to any fiduciary constraint. A power to vary the terms of the Trust included a variation of the defined class of beneficiaries. There was no intention expressed in the instrument that the class of beneficiaries would remain inviolate (save for the limits contained in clause 2 itself in respect of variations for the benefit of the settlor.) There is no doctrine of the whole substratum which would be offended.19

Thus as a matter of drafting, there is a need to express clearly in the trust instrument whether the power of amendment is to be conferred on the settlor, free of fiduciary constraints, or on the trustee subject to such constraints; and whether there is any constraint upon the power being exercised so as to vary the defined class of beneficiaries.

(c) Extinguishment of beneficial interests under a Trust

An issue which was the subject of much debate was whether Dr Spry’s actions under the 1983 Deed constituted an irrevocable extinguishment of his rights as beneficiary under the Trust, or whether this could in some way be ‘rescinded’ or ‘reversed by agreement’.

Four of the five Justices of the High Court proceeded on the basis that Finn J, in dissent in the Full Court, was correct in her conclusion on the 1983 Deed. Three of the five Justices went no further than to say that, as the 1983 Deed had not been set aside, and no application was made to set it aside, the Family Court should have proceeded on the basis that Dr Spry was not currently a beneficiary of the Trust. As noted, Kiefel J went further in agreement with Finn J.

In principle, there are four routes by which Dr Spry could have attempted in 1983 to remove himself from an ability to benefit under the Trust:

  1. as trustee making a distribution of the entire income and capital of the fund to himself under the relevant power in the Trust, and then resettling the property on himself as trustee under a new trust in which he was excluded from the class of beneficiaries
  2. seeking to use his reserved power as settlor under the Trust to vary the terms of the Trust so as to exclude himself from the class of objects
  3. seeking as donee of the powers of distribution as to income and capital under the Trust partially to release those powers, or
  4. as beneficiary, seeking to disclaim or avoid all rights which he would otherwise have against the trustee from time to time by reasons of his position within the class of objects.

Each of the first three options would suffer the disadvantage of being likely to attract ad valorem stamp duty. That is, each arguably involves the imposing of fresh equitable restrictions upon the enjoyment which Dr Spry otherwise had arising from his full ownership of the assets of the Trust, thereby marking out the instrument as a settlement: Buzza v Controller of Stamps (Vic) (1951) 83 CLR 286 at 300.

In addition, while the first option would clearly have been available in law: see Muir v IRC (1966) 1 WLR 1269 at 1283, there are questions as to the availability of the second or third. As to the second, would equity permit the power of variation to be used to alter (by contraction) the class of objects?20 As to the third, as the power of distribution of income and capital was vested in Dr Spry in a trustee or fiduciary capacity, arguably it could not be released by him in the capacity as done.21

As to the fourth option, what effect would equity give to the attempt by a beneficiary to ‘release’ or ‘abandon’ any rights or interests which the beneficiary has under a trust? In Re Gulbenkian Settlement’s Trusts (No 2) [1970] 1 Ch 408, the party seeking to renounce its position under the Trust by agreement, for consideration, renounced each and all of the appointment as trustee, the right to appoint trustees, the right to all income of the Trust and the right to designate any beneficiary of or successor to the capital Trust. The Court held that the transaction was effective and not liable to later reversal.

Re Gulbenkian is explicable on the basis that equity would give effect to the agreement for valuable consideration. But what if the transaction is not supported by consideration? The doctrine of disclaimer does not assist. Disclaimer by a discretionary object operates as and when each exercise of discretion is offered in favour of the object: Commissioner of Taxation (Cth) v Ramsden (2005) ATC 4136 at [32] – [35]. What is presently under consideration is Dr Spry indicating that he did not (ever) wish to be considered for any future distributions from the Trust.

In Re Cranstoun [1949] 1 Ch 523, Romer J held that a beneficiary who had renounced in unequivocal terms a gift under a will could withdraw the renunciation provided that no person in the meantime had altered his position by reason of the renunciation. The primary duty of executor was to give effect to the will of the testator as expressed in the testamentary instrument. Even if a named beneficiary has renounced a gift, provided no third-party rights have intervened and it remains open to effectuate the testator’s expressed intention, the renunciation is able to be withdrawn.

By analogy, arguably the primary mandate of the trustee is to execute the will of the settlor as expressed in the trust instrument. Absent any variation by the settlor of the class of beneficiaries, it remains open for the trustee to consider a discretionary object for the exercise of future discretions once the discretionary object has restated his desire to be considered. In the present case, if Dr Spry were able to withdraw his renunciation, each person in the class of objects would remain in exactly the same position afterwards as before, i.e. with no more than a hope that Dr Spry as trustee would exercise the discretion in his or her favour. No vested interest of any person would be affected or defeated by reason of the ordinance being revoked.

What if, as here, the release was contained in a deed? A deed may be cancelled with the consent of all parties to it, with the cancellation operating in futuro: Banque Nationale De Paris v Falkirk Developments Ltd (1977) 136 CLR 177 at 186 per Mason J. The argument would be, as indicated by Bryant CJ22 if and when Dr Spry and Mrs Spry by consent cancelled the 1983 Deed, it would not stand in the way of future distributions by Dr Spry as trustee to himself.23

Perhaps the ultimate resolution of this question lies with the differing views expressed by French CJ on the one hand and Heydon J on the other whether Dr Spry held property for the purposes of s. 79 immediately prior to the 1983 Deed. As noted, French CJ concluded obiter that, prior to that Deed, his ability as sole trustee to apply the whole or any part of the income or capital of the fund to himself as one of the beneficiaries meant that the assets of the Trust constituted his property for the purposes of s. 79: [58].24 Heydon J concluded to the contrary: [176]. If French CJ is right, then Dr Spry’s position within the class of defined objects prior to the 1983 Deed, although it did not give him a vested interest in any of the assets of the Trust, nevertheless gave him, when viewed in combination with other rights and powers, a species of property for the purpose of the Act. Therefore by executing the 1983 Deed he purported to deal immediately and irrevocably with that species of property. Thereafter his rights, viewed for purposes of s. 79, were immediately and irrevocably altered and reduced. In that sense, he was dealing with a more than a mere expectancy, and the 1983 Deed operated by way of disposition not merely by way of purported avoidance of future exercises of discretion which he might make in favour of himself.

Where there is no marriage involved and thus no question of statutory property, the argument would still be, by extrapolation from the reasons of French CJ, Gummow and Hayne J, that any beneficiary of a discretionary trust has rights in equity to due consideration and to due administration of the trust deed. These rights, although not the same as a vested interest in a trust fund, are recognised in equity and can be capable of having value. They thus are different from mere expectancies, and are capable of being irrevocably released either by deed.

In summary, where there is a desire to amend the class of beneficiaries by deletion, and it is sought to avoid resettlement of the trust deed as would attract valorem stamp duty, the route followed by Dr Spry of the beneficiary irrevocably releasing all rights held against the trustee by deed will probably be regarded in law as effective (as more clearly would be the case where consideration passes).

(d) Default provisions in a trust instrument

It seems from [60] – [62] that French CJ accepted the wife’s argument that the default distribution in Clause 725 gave male beneficiaries other than Dr Spry no more than a contingent remainder. None had a vested interest subject to divestiture. In effect, this means construing Clause 7 such that the default provision was for an equal distribution among all male beneficiaries living at the distribution date. In Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at [21] and [37] the Court construed the unamended Deed which required for a default distribution to those persons within a class who were alive at the distribution date, as creating contingent interests (i.e. contingent upon being alive at that date) which were liable to displacement by exercise of power by the trustee.

The only other judge in Spry’s case sitting squarely with this question was Heydon J. He observed that at the time of the trial there were two persons alive who were male beneficiaries: [170]. He viewed their interests as being vested, although only in interest not in possession [172]. In reaching this conclusion he relied upon Re Brooks’ Settlement Trust; Lloyds Bank Ltd v Tillard [1939] Ch 993. In that case, Farwell J said that in the case of a special power the property is vested in the persons who take in default of appointment, subject of course to any prior life interest, but liable to be divested at any time by a valid exercise of the power. However, the trust Deed in Re Brooks provided in the default clause that the fund would be held in trust for all of the children of the wife who being sons attained the of 21 years or being daughters attained that age or married, in equal shares. The report is not clear, but it seems that the son had reached 21 years at the date of the events considered by the case. If so it is understandable that Farwell J would speak of him having a vested entitlement, vested in interest but liable to divestment.

In the present case, unless Heydon J construed (and correctly construed) clause 7 as indicating that any person fell within the default class so soon as they were alive and were a male beneficiary, without need to be alive at the distribution date, arguably that the statements in Re Brooks do not apply; and the position is directly governed by Buckle. That is, a male beneficiary did not acquire a vested interest in default until he was alive at the distribution date.

The practical lesson in drafting default clauses is that the condition to be satisfied must be clearly stated. If the condition is that the person be of a certain relationship, e.g. a male beneficiary, but also be alive at the distribution date, that should be clearly stated.

(e) Ultimate default clause to clarity

Clause 8 provided that in the event of the failure of Clause 7 the fund would be held for charitable purposes, that is to be applied for scholarships for the sons of persons who have been pupils of a particular school and residents of a particular university college.

A question not reached in the case is whether the ultimate default clause did satisfy the requirements for a valid charitable trust. The advancement and propagation of education and learning generally are good charitable purposes, irrespective of the financial circumstances of the persons for whose benefit such trusts are created.26 Trusts for educational purposes, like all other charitable trusts, must be of a public nature; if the nexus between the possible beneficiaries is the relationship to a single propositus or several propositi, then the beneficiaries are neither the community nor a section of the community for charitable purposes and the trust for their education cannot be a charity.27

In Re Compton [1945] Ch 123, a perpetual Trust for the education of the lawful descendants under the age of 26 years of three named persons was held to lack the necessary public element to make it charitable. Further in Oppenheim v Tobacco Securities Trust Co (Ltd) [1951] AC 297 a Trust for the education of children of present or past employees or a specified company or group was held to lack the public benefit to requisite to establish it as charitable (notwithstanding such class of employees was very numerous).

Was there a similar kind of difficulty here? The default provision was not for the foundation and support of the school itself or the particular university college. Rather it was the satisfaction of the double criteria of attending both the school and college, which defined a group of persons whose sons then become the subject of the claimed charity. In the end it is difficult to see the persons become a section of the public merely through this nexus.

However, even if Clause 8 failed to constitute a valid charitable trust, any application of the rule against remoteness of vesting was deferred by statute.28 This would not have been a reason to conclude that the Trust failed at the outset or that all property remained in Dr Spry.

Spry’s case: the sequel

The sequel to the High Court decision is that the case came in 2009 before a single judge of the Family Court in circumstances where Dr Spry had liquidated his own assets and the assets of the Daughters’ Trusts, realising about AD4.4million. In response to evidence of a threat of Dr Spry to dissipate the assets, the wife had seized them and obtained an order of the Court for their safe custody pending further hearing.

At that further hearing Dr Spry conceded that the proceeds of his own assets (about AD1million) were payable under the original orders as upheld by the High Court; but denied he could be compelled to access the proceeds of the Daughters’ Trusts as they were not his ‘property’. In circumstances where counsel for the children stated that they did not oppose the wife’s application, Coleman J made orders which permitted satisfaction of the balance of the original money sum judgment (plus interest) out of the liquidated assets in her favour, with a further part of the liquidated assets reserved to meet costs orders of the various proceedings.29

Thus, in effect, the course contemplated by Gummow and Hayne JJ at [138] that further court orders could be made to ensure performance of the original money order came to happen, although in unusual circumstances.

Dr Spry took that decision on appeal for the Full Court, with the further orders in the meantime stayed.30 Judgment in the Full Court is at the date of writing reserved.

This is an edited version of a paper delivered to STEP, Sydney Branch, on 22 July 2009. The author appeared as counsel for the wife in the High Court.

  • 1. Kennon v Spry; Spry v Kennon (2008) 83 ALJR 145.
  • 2. In the marriage of Kelly (No 2) 1981 7 Fam LR 762; Ashton v Ashton (1986) FLC 91-777; Stein v Stein [1986] FLC 91-779; In the Marriage of Davidson (No 2) (1990) 101 FLR 373; In the Marriage of Goodwin (1990) 101 FLR 386;Webster v Webster (1998) FLC 92-832; JEL & DDF (No 2) [2001] FLC 93-083; Milankov & Milankov [2002] FLC 93-095.
  • 3. Stephens v Stephens (2007) 212 FLR 362 at [27] and [244] – [248].
  • 4. ibid at [8] and [259].
  • 5. ibid at [136] – [137].
  • 6. ibid at [128] – [132].
  • 7. ibid at [139].
  • 8. See ss. 79(4) and 75(2)(b) of the Act, and see [56] and [142] of the judgment.
  • 9. See Langley v Langley [1892] 8 VLR 712 at 715; Dormer v Ward [1901] P 20 at 33; Blood v Blood [1902] P 78 at 82. See also in Re Allsop’s Marriage Settlement Trust; Public Trustee v Cherry [1959] Ch 81; in Re Poole’s Settlements Trusts [1959] 1 WLR 651; Smith v Smith [1970] 1 WLR 155 at 157 – 8.
  • 10. See, e.g. Dewar v Dewar [1960] 106 CLR 170 at 174.
  • 11. By contrast, French CJ regarded the statement by Griffith CJ in Glenn as apposite and as assisting in the characterisation which he reached: [49] – [50], [64] and [70].
  • 12. See footnote 2.
  • 13. In marriage of Houff (1986) 10 Fam LR 1076 at 1081; In marriage of Evans (1991) 104 FLR 130.
  • 14. Earlier in Re Richstar Enterprises Pty Limited (2006) 153 FCR 509, French J had also approved this line of Full Court cases but in a different context: holding that the definition of property in the Corporations Act 2001 (which includes any estate or interest whether vested or contingent in any real or personal property) extends to the interest of a discretionary object who has an ability to control the actions of the trustee.
  • 15. Validity was upheld by Ryan J at first instance in Hunt v Hunt (2006) 36 Fam LR 64, cited by approval by the Full Court in B Pty Limited v K (2008) 39 Fam LR 488 at [40].
  • 16. See [127] and [199].
  • 17. Stephens v Stephens (2007) 212 FLR 362 at [131], approved by Kiefel J at [196].
  • 18. The relevance of s. 102 of the Income Tax Assessment Act 1936 (Cth) to such a clause merits consideration.
  • 19. See Kearns v Hill (1990) 21 NSWLR 107; and Lock v Westpac Banking Corporation (1991) 25 NSWLR 593 at 606G.
  • 20. See the discussion in the preceding section.
  • 21. Mowbray (et al), Lewin on Trusts, 18th edn (London, Thompson/Sweet & Maxwell, 2007) at 29-285: Thomas, Powers, 1998 at 15-03; cf Property Law Act 1958 (Vic) s. 155; Conveyancing Act 1919 (NSW) s. 28.
  • 22. Stephens v Stephens (2007) 212 FLR 362 at [24].
  • 23. See also Smith v Smith [2001] 1 WLR 1937.
  • 24. Gummow and Hayne JJ did not squarely deal with the question but by parity of reasoning, they would probably have agreed with French CJ.
  • 25. See section II(a) above.
  • 26. Heydon and Leeming, Jacobs’ Law of Trusts in Australia, 7th edn (Chatswood, NSW, LexisNexis/Butterworth,2006) at 1026, citing R v Special Commissioners of Income Tax; Ex parte University College of North Wales (1909) 78 LJ (KB) 576 at 578.
  • 27. Heydon and Leeming, ibid, at [1030], citing Oppenheim v Tobacco Securities Trust Co (Ltd) [1951] AC 297 at 306; Davies v Perpetual Trustee Co Ltd (Ltd) [1959] AC 439.
  • 28. Perpetuities and Accumulation Act 1968 (Vic).
  • 29. Stephens v Stephens [2009] 41 Fam LR 288 esp at [99] – [106].
  • 30. Stephens v Stephens (No 2) 2009 Fam CA 335.
Author block
Right
Justin Gleeson SC

Justin Gleeson SC is a Barrister practising at Banco Chambers, Sydney, NSW, Australia.

Topic
Trusts
Section
STEP Journal
Country
United Kingdom