I was asked the other day what is a trust?  I have posted about Testamentary Trusts  including those for the provision of on-going support for a beneficiary under a Will.

However a trust in its most basic form is simply a relationship where A holds property for the benefit of B. A is known as the Trustee and is the legal owner of the property which is held on trust for the beneficiary B. It is a relationship where the rights of persons for whose benefit the property is held is recognised and enforced by the courts.

The trustee can be an individual person, a group of individuals or a company. There can be more than one trustee and there can be more than one beneficiary.

Although the trustee is the legal owner of the relevant property, the courts will strictly enforce that the property must be used only for the benefit of the Beneficiaries.

Trustees have a fiduciary duty towards beneficiaries and the courts will always enforce this duty rigorously.

In relation to a trust Australian courts have defined fiduciary duties include the duties:

• Not to place oneself in a position of conflict of duties relating to the beneficiary and the fiduciary’s interests;
• Not to make a profit out of the beneficiary’s trust;

Not act for one’s own benefit or the benefit of third parties, without the consent of the beneficiary.

The trustee has full control over the assets held by the trust so prior to naming a friend or relative as your trustee you should be sure that they are entirely trustworthy. Importantly trust administration is ongoing and complicated, and involves specialist financial understanding.

Where a parent is the trustee and their children beneficiaries the nature of the trustee’s duty is often misunderstood; importantly the children have rights under the trust that are enforceable by the Courts, although this rarely occurs.

One recent example is litigation concerning the Hope Margaret Hancock Trust (“the Trust”); established in 1988 by Lang Hancock,  his grandchildren Bianca, John, Hope and Ginia, were the beneficiaries of the Trust. Upon his death in 1992 his estranged daughter, and the beneficiaries mother, Gina Rinehart was appointed the trustee.

The trust property is a 23.4 per cent share in Hancock Prospecting  estimated to be valued at $4 billion.

The trust was supposed to vest, meaning the beneficiaries were to be paid their share of the money, in September 2011, when the youngest child, Ginia, turned 25. Three days before Ginia’s birthday, Mrs Rinehart wrote to her children explaining the trust was set to vest, but that they would be bankrupted if they took their money due to capital gains taxes. In order to prevent this they should enter into a deed that extended the vesting date.

Her children asked for evidence of these claims, which Mrs Rinehart refused to provide, they began court proceedings the basis of which were that by sending the letter and proposing the deed, Gina Rinehart demonstrated she was unfit to remain as trustee of the Trust.

Mrs Rinehart was found to have manipulated and misrepresented advice regarding the liability of capital gains tax and bankruptcy; and was

“… prepared to go to extraordinary lengths to retain control … she is capable of exerting enormous pressure and great influence to do so … she would likely attempt to overbear any trustee … who acted against her interests.”

Her eldest daughter Bianca was named by the court as the replacement trustee, (the court did not believe that her appointment was ideal but was far less unsatisfactory than the alternative) conditional upon her taking certain steps in the interests of transparency of administration of the trust.

Mrs Rinehart took Court action to prevent Bianca from accessing the trust documents. She lost.