The very public dispute between mining magnate Gina Rinehart and her children over access to family wealth held in a Family Trust came to a head this year, when the NSW Supreme Court appointed one of Gina’s 4 children (Bianca) as the new trustee of the Family Trust in place of Gina.
The Family Trust, in effect, owned a 24% shareholding in Hancock Prospecting Pty Ltd (HPPL) and HHPL owned all the shares in the company which has an interest in an iron ore mine at Hope Downs. Bianca and her brother, John, had issued court proceedings against their mother to remove her as trustee so they could access their share of the Trust’s assets.
A beneficiary has no right to any of the assets of a discretionary trust unless the trustee chooses to distribute part or all of the assets to that beneficiary or, in limited cases, upon the vesting or “end date” of the trust (Termination Date). Even then the distribution or entitlement may be subject to conditions.
In the case of Hancock v Rinehart  NSWSC 646, the Termination Date of the Family Trust was 6 September 2011 being the date Gina’s youngest child reached 25 years. Under the terms of the Family Trust deed, on the Termination Date each of Gina’s 4 children became entitled to approximately 21% of the Trust’s assets, with Gina being entitled to the balance.
Three days before the Termination Date, Gina sent a letter to each of her children saying she had been provided with tax advice to the effect that each child would be liable to pay capital gains tax on the value of the share of the Family Trust to which they became entitled upon it vesting. Further, given the value of the shares, the severe restrictions placed on the sale of those shares to a non-family member, and the amount of the capital gain, this would have resulted in the bankruptcy of each child. In the letter, Gina said this tax problem could be resolved by extending the Termination Date of the Family Trust, but that she would only extend the date if each child agreed to sign a deed whereby they would not question her authority in relation to the Trust.
In effect, Gina refused to inform her children of the real tax position or negotiate with her children on what they wanted and what she wanted, which resulted in John and Bianca taking their mother to court and intense media coverage of the family’s private lives.
Subsequently, without the knowledge of her children or the court, Gina first extended the Termination Date and later, before she resigned as trustee, vested or terminated the Family Trust.
The case highlights what a trustee should and should not do when administering a trust and the factors a court will take into account in determining whom to appoint as trustee.
Other lessons from the case relate to how to structure a discretionary trust and to provide for resolution of disputes between the persons for whose primary benefit the trust is created. In particular:
- Ensure the trustee can be removed by another person without court involvement
An appointor is the person empowered under a trust deed to remove and/or appoint the trustees of the trust. One way of ensuring trustees act in good faith, reasonably and in the interests of the class of beneficiaries as a whole is to ensure:
- the appointment of competent appointors which may include an independent person; and
- that there is always an appointor by providing for persons to act successively as appointors when the first persons appointed can no longer act.
- Review and update trust deeds regularly to ensure those appointed as appointor are capable of acting in good faith and with the best interests of the beneficiaries in mind and possibly, also without undue influence from the trustee.
- Consider including provision in trust deeds and testamentary trust wills for private arbitration as the preferred dispute resolution procedure for conflict between trustees, beneficiaries and/or appointors.
- Consider whether a separate confidentiality agreement should be entered into between the trustees, principal beneficiaries and/or appointors. Then if a matter goes before the court (for example, if a trustee seeks a ruling from the court as to what action the trustee should take, or in the case of deceased estates, to seek leave to remove an executor), the court may act to preserve the parties’ confidentiality.
Please contact Amanda Morton if you have any queries or require any assistance in implementing any of the above strategies.