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A recent case casts further doubt on a trustee’s discretion to distribution income, with implications for every trust.
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When excessive discretion can imperil a trustee
28 October 2022
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The facts: Owies v JJ Nominees Pty Ltd
Each of the five members of the Owies family (mother, father and three children) were objects or beneficiaries of a family discretionary trust.
The trust deed conferred an “absolute and uncontrolled” discretion on the trustee to appoint (or accumulate) income.
In the exercise of its discretion, the (corporate) trustee had never appointed any income to two of the three children of the Owies family: Paul and Deborah. Those two children commenced proceedings against the trustee.
What the court found
Despite the express terms of the trust deed, in exercising its fiduciary duties a trustee must always act “in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred.” [1]
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This means that in the exercise of its apparent “absolute and uncontrolled” discretion, the trustee cannot act arbitrarily or capriciously and must always act in accordance with the purpose of the trust. The purpose of this trust, as evinced by the preamble and the “default clause”, was a desire to make provision for all of the primary beneficiaries.
Moreover, given there were such few beneficiaries, the deed was premised on the trustee being generally informed about the different circumstances, needs and desires of each beneficiary.
Importantly, nowhere in the deed was there any change contemplated should any family bonds become strained or broken.
The court held that the trustee had not given any genuine consideration and had thereby breached its fiduciary obligations because:
- There was no obvious reason why the trustee favoured some beneficiaries over others (it certainly was not based on need)
- The trustee failed to make enquiries of the two children
- The trustee appeared to unacceptably follow the same formula in all relevant years but for the 2019 distribution, where 100 per cent was distributed to the 96-year-old father who was in residential care with no need and who was already owed significant sums from the trust (this 2019 distribution was described by the court as “remarkable”). [2]
Interestingly, the court said that given her needs and lack of resources, Deborah had “strong claims to a favourable exercise of the discretion”. [3] This is somewhat surprising and may be contrary to how many understood a discretionary trust operates.
Despite this, the court did explain earlier in the judgement that the validity of the outcome of the exercise of power is not to be assessed by notions of fairness or reasonableness. [4]
The court also explained that despite the ability of the appointor to replace the trustee, and notwithstanding that the trustee was required to consider the wishes of the guardian, the trustee was nonetheless required to exercise an independent mind. [5]
The interests of the parents (who controlled the trust and were beneficiaries) did not correspond to the best interests of the beneficiaries. [6]
While the trustee breached its duties, given the distributions were made to objects that actually fell within the terms of the trust, they were not automatically void but were instead voidable. [7] However, as the applicants did not seek an order to set the distributions aside – and the application to amend the pleading was refused by the trial judge – the Court of Appeal was unwilling to set aside the distributions. [8]
Given the relations with the trustee and the two primary beneficiaries was irreconcilably damaged from the persistent failure to give real and genuine consideration, the court determined that it was necessary to replace the trustee.
Takeaways
No matter the explicit wording of the trust deed, there are implicit requirements that constrain the discretion of a trustee. In the case of a family trust, it is necessary to give genuine consideration to each of the key beneficiaries around whom the trust is centred, and this may require making enquires, seeking information and possibly taking advice.
The trustee cannot merely implement a fixed formula each period and cannot just follow the desires of the appointor or guardian but must give independent consideration. A family breakdown will typically be irrelevant and will not provide a valid reason to favour some beneficiaries over others.
While there is no requirement for the trustee to give reasons, the reasons can be inferred. Moreover, if reasons are given, they will be examined.
Jeremy Makowski is special counsel in tax at law firm Cornwalls.
[1] Owies v JJE Nominees Pty Ltd [2022] VSCA 142, [85].
[2] 40%, 40% and 20% to the father, the other son (Michael) and mother respectively.
[3] Owies v JJE Nominees Pty Ltd [2022] VSCA 142, [121].
[4] Owies v JJE Nominees Pty Ltd [2022] VSCA 142, [97].
[5] Owies v JJE Nominees Pty Ltd [2022] VSCA 142, [122].
[6] Ibid.
[7] Owies v JJE Nominees Pty Ltd [2022] VSCA 142, [140].
[8] Owies v JJE Nominees Pty Ltd [2022] VSCA 142, [140].
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