The Trustee’s Dilemma: Balancing Duties with Discretion

A trust structure can provide a number of advantages, including tax minimisation, asset protection and control over how property and/or assets are held and distributed. Being appointed as a trustee of a trust means, as the name suggests, that someone has placed you in a position of great trust and confidence. In this article, our commercial and estate teams consider the application of trust, trustee obligations and the recently examined duty of a trustee to exercise “real and genuine consideration” in exercising their powers.

BACKGROUND – TRUSTS & TRUSTEE’S

Trusts are an effective tool for dealing with finances between families, businesses and in estate planning. However, many people misunderstand the functions of trusts and how they operate.

At its simplest, a trust is a mechanism for controlling the distribution of property and assets. It involves a legal agreement where a person (known as the ‘settlor’) transfers property and/or assets to another person or entity appointed to manage the trust (the ‘trustee’) for the benefit of a third party or parties (the ‘beneficiaries’). This agreement is documented through a trust deed.

The parties to a trust will ordinarily include:

• Settlor – the party who establishes and “sets up” the trust;
• Beneficiary – the party(s) whom the trust is established for and who receive the benefit of the trust (i.e. through distributions of trust income and property);
• Trustee – the party who is responsible for the administration of the trust; and
• Appointor – the party who monitors the trustee and keeps them in check, with the power to appoint and remove the trustee.

There are several types of trusts each of which serve a unique role and offer different ways of dealing with property and assets. However, this article will look specifically at discretionary trust (also commonly referred to as “family trusts”), the most common form of trust structure in Australia. Unlike a fixed trust, a discretionary trust is a type of trust where the beneficiaries do not have any fixed entitlement or interest in the trust property and assets, but rather the trustee is given the discretion to determine how they distribute the income and assets of the trust to the beneficiaries (within the confines of the trust deed).

Discretionary trusts are also commonly utilised in estate planning through a type of discretionary trust called a testamentary trust (‘Testamentary Trust’). For further information on Testamentary Trusts and how they are utilised in estate planning, you can see our recent article Here.

TRUSTEE’S OBLIGATIONS

Under a discretionary trust, a beneficiary’s rights are limited to the right to be considered by the trustee in the distribution of trust income and property. This means a beneficiary is not necessarily entitled to any trust distribution.

As indicated above, a trustee therefore has an obligation to exercise discretion in the distribution of the trust. However, a trustee’s duties are not limited to this, and the obligations of a trustee also include the duty to:

(a)       preserve and safeguard the trust property and assets;

(b)       distribute trust property and assets in accordance with the terms of the trust deed;

(c)        act in good faith and in accordance with their fiduciary duties for the benefit of the beneficiaries;

(d)       act personally and not delegate their responsibilities, except as exempted under the trust deed;

(e)       keep accounting records (e.g. statements, account information and tax reports);

(f)        communicate with beneficiaries and provide information when requested; and

(g)       not be deceitful or personally benefit from the trust.

While the duties to act in good faith, preserve trust property, and other obligations have been explored in great detail (and are frequently considered by the courts), the fundamental duty to exercise discretion is often overlooked.

OWIES CASE

The Victorian Court of Appeal recently considered the topic of trustee discretion in the administration of a discretionary trust in the case of Owies V JJE Nominees Pty Ltd [2022] VSCA 142 (‘Owies’).

This case considered many long-established principles concerning family trusts and, in particular, looked at a trustee’s obligation to exercise “real and genuine consideration” in the exercise of their discretion.

By way of background, John and Eva Owies had three children – Michael, Deborah and Paul. In 1970, John and Eva set up a discretionary trust for the benefit of themselves and their children as primary beneficiaries and appointed their company JJE Nominees Pty Ltd (‘JJE’) as trustee. Over the course of almost a decade, the trust income was distributed as follows: John (40%), Michael (40%) and Eva (20%), with Paul and Deborah not receiving any distributions.

Paul and Deborah later commenced proceedings concerning the distribution of trust income between 2010 and 2019, claiming that the trustee failed to give “real and genuine consideration” to them as beneficiaries of the trust. They also sought the removal of JJE as trustee.

In the end, the Court of Appeal held that the trustee had failed to give real and genuine consideration to the interests of Paul and Deborah as two primary beneficiaries. In coming to this decision, the Court took into account the following factors:

a) the fact that the trustee did not make any enquiries or speak with Paul or Deborah to determine their circumstances and needs, noting that Deborah had numerous medical conditions and had faced financial difficulties at multiple times throughout her life;

b) the settled pattern of uniform distribution, which suggested that the trustee was not exercising its discretion properly; and

c) the “remarkable” 2019 distribution of 100% of the trust income to John who was 96 years old at the time.

Accordingly, it was held that distributions made from 2015 to 2019 were voidable and the trustee was removed.

TAKEAWAYS – REAL AND GENUINE CONSIDERATION 

If anything, trustees should take note of the following principles highlighted by Owies prior to making any distributions:

1.    A trustee’s discretion is not unlimited nor is it necessarily unfettered;

2.    Discretion must be exercised in accordance with the terms of the trust deed and with the trust deed’s overarching purpose in mind; and

3.    Trustees should personally seek out relevant information about beneficiaries’ circumstances frequently to ensure they give proper consideration to the interests and needs of the beneficiaries.

RAMSDEN LAWYERS – HOW WE CAN HELP WITH TRUSTEE’S

Trustees must ensure that discretion is exercised with caution and not blindly. A trustee must make sufficient enquiries so that they may give real, accurate, and genuine consideration to the beneficiaries of a trust since the failure to do so may mean distributions are treated as void or, in some cases, lead to the removal of the trustee.

If you are seeking legal advice or assistance with your appointment as a trustee or need advice concerning your trust, Ramsden Lawyers can assist you. We are happy to arrange an obligation-free initial consultation to assist you in navigating the procedures set out under the relevant legislation for your circumstances.

The content of this article is intended to provide general guidance to the subject matter and must not be relied on as legal advice. Specific advice about your circumstances should be sought.