Just Because You Can, Doesn’t Mean You Should – Trustee’s Discretionary Powers Are Not Without Limits

Discretionary trusts have been a popular form of investment vehicle in Australia. The trust protects and preserves ones accumulating assets as well as offer tax benefits. These trusts are flexible in nature as it gives the trustees discretionary powers to decide how the income and capital of the trust is being distributed to various beneficiaries as defined in the trust deed. The right of a beneficiary to an income does not arise until the trustee exercise its discretion to a distribution. This is normally the form of discretionary trust established in families, i.e. family discretionary trusts.

A now leading authority in this area, the case of Owies v JJE Nominees Pty Ltd [2022] VSCA 142 (“Re Owies”), discusses the trustees exercise of its discretionary powers to make income and capital distributions.

Background

John and Eva Owies were the appointors and guardians of the Owies Family Trust established in 1970. The corporate trustee of the trust was JJE Nominees Pty Ltd which John and Eva were directors from its registration until their deaths in 2018 and 2020 respectively. The primary beneficiaries of the trust were John and Eva’s 3 adult children, Michael, Paul and Deborah. John and Eva were the general beneficiaries of the trust. The trust deed provided the trustee has absolute discretion to distribute income and capital of Trust and if no distributions were made, the income of the trust was to be held for the children in equal shares.

For significant periods of time, John and Eva were estranged from Paul and Deborah. Both Paul and Deborah had financial needs especially Deborah who suffered from numerous medical conditions which required costly medical treatment.

The assets of the Trust were more than $23 million. In each of the financial years ending 30 June 2011 to 2018, the trustee distributed all of the net income in the following patterns:

  • John – 40%
  • Michael – 40%
  • Eva 20%

Paul and Deborah did not received any distribution in any of those years.

In the financial year ending 2019, the trustee distributed 100% of the net income of nearly $1 million to John who at that time aged 96 years and living in residential care. In April 2019, a distribution of capital in the form of a residential unit in which Deborah lived, was distributed to Deborah.

Issue before the Court

Paul and Deborah argued that the income distribution for the years 2015 to 2019 were voidable on the grounds that the trustee’s decision on the distribution was made on the basis of no real and genuine consideration of Paul and Deborah.

Decision of the Court

The Court held that the trustee had failed to give real and genuine consideration of Paul and Deborah’s circumstances for the years 2015 – 2019.

Real and Genuine Consideration

The courts finding was based on the following assessment:

  • the trustee had made no enquiries of Paul and Deborah;
  • no obvious reason why the trustee would favour John, Eva and Michael when Paul and Deborah had demonstrated a need for income;
  • there was a conflict of interest between John and Eva’s and the beneficiaries’ interest under the trust;
  • The history of antipathy between Eva and her children which reflected the trustee’s actions;
  • the income distributions between 2015 – 2018 was a settled ratio which is inconsistent with the trustee’s continuing obligation to consider the distribution of income for each accounting period; and
  • The extreme nature of the distribution made in 2019 made it obvious that the trustee failed to give real and genuine consideration to Paul and Deborah;

Summary

The decision in Re Owies did not result in a change in law. It reinforces the trustee’s real and serious obligations to genuinely consider the beneficiaries of a discretionary trust when making a distribution. Breakdown in family relationships should not have any affect on the trustee’s duty of inquiry of taking positive actions to properly inform itself before exercising its discretionary powers.

Points to Consider

  • As a starting point, always consider the nature and purpose of the trust by reading and understanding the terms of the trust deed, identifying who the beneficiaries, potential beneficiaries and default beneficiaries are;
  • Avoid relying on a fixed formulae for distribution;
  • Trustee should make active enquiries regarding the circumstance of each of the main beneficiary;
  • Trustee to keep documentary records of the enquiry process.

If you have any queries regarding any of the points discussed above, please do not hesitate to contact us on (03) 9039 2142.

By | 2024-05-21T12:42:00+10:00 May 21st, 2024|Uncategorized|