Estrangement and family trusts: what are the limits to a trustee’s discretion?

By David Dickens, Bianca McCormack and Caroline Sakinofsky

The trustee of discretionary family trusts has broad powers to decide how income and capital of the trust is distributed among beneficiaries. But the exercise of the trustee’s discretion is subject to limitations. We examine a leading authority in this area, the Owies case, and explain the implications for trustees and beneficiaries.

Background

Discretionary family trusts are widely used in Australia. Limitations to a trustee’s discretion include that trustees do not enjoy unfettered discretionary power to deliberately exclude particular beneficiaries, even if those beneficiaries have a fraught relationship with the trustee.

The leading authority in this area, Owies and Owies v JJE Nominees Pty Ltd [2022] VSCA 142, is often referred to by parties seeking to challenge or defend distributions made by a trustee of a discretionary trust, and has been cited in several subsequent decisions.[1]

We have previously reported on the importance of retaining essential trust documentation (Trust lost and found) and the circumstances in which a challenge can be made by a beneficiary (Overview of challenging a trust).

Owies: a case study

Owies involved five family members (mother, father and three children) who were the objects or beneficiaries of the Owies Family Trust. JJE Nominees Pty Ltd was appointed trustee when the trust was established on 30 November 1970 (Trustee). At the time of trial, the trust had significant assets of around $23 million and an annual income of hundreds of thousands of dollars.

Deborah and Paul (two of the three children) commenced proceedings against the Trustee on the basis that the Trustee had not validly distributed the income of the trust, essentially because no income distributions were made to Deborah or Paul from 2011 to 2019. Michael (the third child) was later joined to the proceeding, at his instigation, as the director of the trustee and holder of one of the two shares in the trust.

The family

The Court heard that Paul and Deborah were estranged from their parents, a dynamic which the Court of Appeal referred to as a ‘history of antipathy’ between them.[2] This dynamic did not dissuade the Court from considering the evidence brought in relation to financial need on the part of Paul and Deborah.

The evidence was that there were various periods in which the two children resumed contact with their parents, during which the parents were informed of the children’s financial position. For instance, Paul went through a difficult time in 2010 to 2013 when he was looking to purchase a home, and Deborah was unwell for much of her adult life and could only work part-time as a result. At times Deborah’s medical expenses exceeded her income.

In contrast, the third child, Michael (who was appointed as a director of the Trustee on 20 November 2020), as well as the parents (who were directors of the Trustee from its incorporation until their deaths in 2018 and 2020), had no comparable need for the income during these financial years.

The Trustee

The Court found that, by virtue of the children’s sporadic contact with their parents, as directors of the Trustee, the Trustee was well informed about Paul and Deborah’s needs. The Court also found that the Trustee did not take an informed view in exercising its distribution discretion in respect of both children.[3]

Notably, the Court commented that, even where familial bonds become strained or broken, ‘the purpose of the trust remains to provide for the family as a whole, and the trustee is not relieved of its obligation to property inform itself‘.[4] This was especially relevant where the Trustee was managed by a family relative who was seen to have a ‘controlling hand’ over the trust.

Findings

The Court held there had been no real and genuine consideration by the Trustee as to the needs of Paul and Deborah and that the Trustee was not informed to an extent that enabled it to make a genuine decision. Specifically, the Court found that for certain periods where the children did not have contact with their parents, there was a lack of information shared between the trustees and the beneficiaries, and during those periods the Trustee should have made further enquiries.

On that basis, the court removed JJE as the Trustee and appointed an independent trustee in its place. The Court also found that the continuation of any trust in which Michael had a controlling hand was untenable.

The Court found that the distributions made to Michael and the parents were voidable. However, it did not declare the distributions to be void, as Deborah and Paul had not sought an order to this effect.

Implications

The Court’s analysis of the facts confirms that in family situations where discretionary trusts are in place, information can be passed between family members to assist with the knowledge of the trustee, and the knowledge of directors (as family members) of the trustee will be imputed to the trustee.[5] 

The Court observed that it is not its role to determine the weight a trustee should have attributed to relevant matters in exercising its discretion. Rather, the Court will review the efficacy of the distributions made by a trustee and may look at the enquiries the trustee made, the information it had and its reasons for exercising the discretion.

As such, a trustee should make direct enquiries with beneficiaries, to be informed to an extent to make genuine decisions.[6] Specifically, in Owies, the Court found that consideration should have been given to the beneficiaries’ taxable and disposable income and the health of the beneficiaries at the time the distributions were made.