Many Asian families who built businesses in Malaysia, Singapore, Hong Kong, Taiwan or mainland China and later settled in Australia hold their wealth through family trusts. The founder, usually the parent who created the wealth, often keeps the key levers of control: appointor, guardian or protector, the power to amend the trust deed, the power to remove and appoint trustees, and the position of sole director of the corporate trustee.
That works well while the founder is well. But founders now often hold these roles into their eighties and nineties, and once memory fades or dementia is diagnosed, every document they sign can become a target. Increasingly, the real question is not what the deed says, but whether the person who signed understood what they were doing.
Where capacity disputes arise in a family trust
Challenges tend to focus on a few high-stakes decisions:
- Amendments to the trust deed, such as changing the class of beneficiaries, excluding a child or adding a new spouse.
- Changes of appointor, guardian or protector, often nominating one child as successor to the exclusion of others.
- Removal or appointment of trustees, including changes to the directors or shareholders of a corporate trustee.
- Consents given by a protector or guardian to distributions, asset sales or early vesting.
- Large distributions, loans or forgiveness of debts late in the founder’s life.
Allegations also run the other way. Claiming that a founder “has lost capacity” can be used as a weapon to unseat a parent making unwelcome decisions, or to freeze the trust. Courts are alert to both risks.
Capacity is a legal question, not purely a medical one
Australian law presumes that an adult has capacity. The person who says otherwise generally needs to prove it, although how the burden operates can depend on the type of document and the evidence. The detailed rules differ between states, but several principles are common:
- Capacity is decision-specific. A person may be able to make a simple decision but not a complex one.
- It is assessed at the time. Capacity can fluctuate; what matters is the person’s understanding when the document was signed.
- The more complex the decision, the greater the understanding required. Restructuring a trust holding Melbourne property and Kuala Lumpur company shares demands far more than a routine distribution minute.
- Doctors help, but the court decides. A diagnosis or a cognitive screening score is not the legal test. A doctor who examined the person at the time usually carries more weight than a later opinion based on records.
The most persuasive evidence is usually contemporaneous: the lawyer’s file notes, the person’s reasons in their own words, whether they had independent advice, and any medical assessment near the time. For families whose first language is not English, it also matters whether an interpreter explained the document in Mandarin, Cantonese, Hokkien, Malay or Bahasa Indonesia.
Undue influence: the companion allegation
Capacity challenges often travel with allegations of undue influence, for example that a child or carer took advantage of an ageing parent’s dependence. Even where a person had capacity, a transaction may be set aside if their free will was overborne or a relationship of influence was abused. The rules differ between lifetime transactions and wills. Independent advice, meetings without the benefiting family member present, and a record of the founder’s reasons are the main protections.
Can an attorney exercise trust powers?
Families often assume that the founder’s attorney under an enduring power of attorney can simply step into the founder’s trust roles. Caution is needed. An enduring power of attorney generally deals with the principal’s own affairs. Powers that a deed gives to a person personally, or which must be exercised in a fiduciary capacity, such as an appointor’s power to remove a trustee or a protector’s consent, are generally not exercisable by an attorney unless the deed clearly allows it. Even then, the answer depends on the wording and the relevant state’s law. Courts have not been entirely consistent: in Belfield v Belfield [2012] NSWCA 416, the NSW Court of Appeal accepted that an attorney could exercise an appointor’s power to remove and appoint trustees, on the wording of that deed and NSW law. The safer course is to assume an attorney cannot act unless the deed clearly allows it, and to obtain advice before anyone does.
Some deeds pass the appointor’s role on incapacity to a named successor or to the person’s legal personal representative or attorney; others say the role simply ends. If the deed is silent, no one may be able to act validly and a court application may be needed. The enduring power of attorney itself can also be challenged if made when capacity was already doubtful.
A similar gap arises where the founder is sole director and shareholder of the corporate trustee. Corporations law offers only limited, often slow solutions, so the company’s constitution and the succession of its shares need attention in advance.
Practical planning for families
- Deed clauses that define incapacity (for example, medical certification or a guardianship or administration order) and say what happens next.
- Named successor appointors and guardians, with a fallback if a nominee dies, declines or is also incapacitated.
- A review of the corporate trustee’s constitution, a second or alternate director, and a plan for the shares.
- A staged handover, such as joint appointors or co-directors while the founder is well.
- A capacity assessment before major changes, by a doctor briefed on the legal test for that decision.
- Separate legal advice for the founder, without benefiting family members in the room, and records of the founder’s reasons and any interpreter used.
- Enduring powers of attorney coordinated with trust roles, so the right people are deliberately chosen for each.
- Family meetings and mediation before litigation when concerns first arise.
A composite hypothetical
This example is an anonymised composite and does not describe any real client.
Mr Lim, 86, built a timber and property business in Malaysia before moving to Melbourne. He is appointor of his family trust and sole director of its corporate trustee. Months after a diagnosis of mild cognitive impairment, he signs a deed of variation naming his younger son, who lives with him, as sole successor appointor and removing his daughter in Singapore as a beneficiary.
The daughter alleges incapacity and influence by her brother, who drove their father to the lawyer and sat in on the meeting. The brother says their father acted on a long-standing disagreement. The lawyer’s file note is brief, there was no medical assessment and no interpreter, although Mr Lim was more comfortable in Hokkien. Each gap made the dispute harder and costlier. At mediation the siblings agreed to joint appointorship and a more balanced distribution approach, an outcome better preparation might have reached without a dispute.
Frequently asked questions
My father has been diagnosed with dementia. Are his trust decisions now invalid?
Not automatically. The question is whether he understood the particular decision when he made it. But the risk of challenge rises after a diagnosis, so obtain advice before any further significant changes.
Can I use my mother’s enduring power of attorney to act as appointor?
Not safely, unless the trust deed clearly allows an attorney to exercise that power. Courts have reached different results depending on the deed and the state’s law. The deed, the power of attorney and the law of the relevant state all need to be checked before anyone acts, because a decision made without authority may be invalid.
Should we obtain a medical assessment before amending the deed?
For an older founder or a significant change, it is often sensible, provided the doctor is told what the decision involves and what the legal test requires. It is not decisive on its own, but is valuable if the decision is later questioned.
How Chua Tan Associates can help
We advise trustees, appointors, protectors, beneficiaries and families across Australia on succession of trust roles, deed reviews, capacity concerns and disputes, and we work with local lawyers where an offshore structure is involved. Justin Chua is a Nationally Accredited Mediator and Family Dispute Resolution Practitioner, and an Accredited Family Business Advisor, and can help families resolve concerns through structured discussion and mediation before positions harden. We advise in English, Mandarin and Cantonese.
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Chua Tan Associates acts for families, executors, trustees and their professional advisers in estate planning, estate administration and estate disputes in Australia and across borders. To arrange a confidential consultation, please contact our Melbourne office on +61 3 9602 3988 or submit an enquiry. Advice is available in English, Mandarin and Cantonese.
Justin Chua (蔡智勋), lawyer and mediator, Chua Tan Associates, Melbourne. General information only, not legal or tax advice.
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