Thinking | 18 February 2022
Do you have trust issues? Trustee discretion
Over 700,000 – that’s the number of trust structures in Australia. These essential tax planning and asset protection tools have become an integral part of everyday practice for professional advisors. In the past, it may have been easy to gloss over many key trust responsibilities. However, a number of recent cases have highlighted the practical issues that can come up.
Over the coming weeks, we will outline several trust issues that are becoming increasingly litigated. We will also provide practical tips for advisors and trustees to avoid or minimise what can be costly issues.
First off, let’s talk about trustee discretion. It is becoming increasingly important for trustees to understand their roles and responsibilities as trustee, and what they should consider to properly exercise their discretion.
Acting in good faith and with real and genuine consideration
The trustee is responsible for the day-to-day operation of the trust, how funds are invested and – crucially – how distributions are made. It can be difficult to manage these matters, along with family or business dynamics. Often there are competing interests, giving rise to potential tensions between trustee and beneficiaries. If not handled well, these tensions can escalate into conflict, and – as we have seen more frequently in recent years – litigation.
Trustees of discretionary trusts generally have broad discretionary powers. Despite this, they have an overriding duty to act honestly and in good faith. They must also have a real and genuine consideration of the interests and needs of any eligible beneficiaries, in accordance with their discretion under the trust deed.
A trustee must give proper consideration to relevant matters and, importantly, also exclude irrelevant material.
While not bound to exercise a discretion, a trustee must consider whether, in the trustee’s judgement, the discretion ought to be exercised.
Must a trustee give reasons for a decision?
A trustee is not obliged to give reasons for a decision.
Where the trustee does not provide reasons, the exercise of an absolute and unfettered discretion is examinable only as to good faith, real and genuine consideration and the absence of ulterior purpose, and not as to the method and manner of exercise.
When can a trustee’s decision be challenged?
If a Court finds a trustee’s discretion was not properly exercised, it can overturn the decision of the trustee, and potentially remove the trustee.
A Court is only concerned to ensure that the discretion of a trustee was exercised properly, not to examine how it was exercised. It will not impugn the exercise of discretion on the basis that the decision made fell short of what was appropriate and sufficient or to find that the trustee was wrong in their appreciation of the facts or made an unwise or unjust decision in the circumstances.
The case of Marsella v Warehamn (No 2)  VSC 65 dealt with the exercise of discretion involving the trustee of a self-managed superannuation fund, and the payment of a superannuation death benefit. In this case, the trustee was found to have acted with ‘ill informed arbitrariness and that this amounted to the trustee exercising its discretion as trustee in bad faith’, making the decision of the trustee invalid. A number of subsequent Victorian cases have confirmed the importance of the trustee being properly informed and acting in good faith when exercising discretion.
Key takeaways for trustees
To reduce risks when exercising discretion, trustees should as a minimum:
- inform themselves of all matters relevant to the decision being made;
- understand the terms of the trust deed; and
- be aware of the financial circumstances and needs of the beneficiaries.
Once these factors have been considered, the trustee should record, in writing, the steps they took and information they considered when exercising their discretion (but at the same time, not documenting the underlying reasons for that decision). When unsure, obtaining legal advice on the decision-making process and properly documenting the process can safeguard the trustee against future claims, and in doing so avoid expensive and time-consuming litigation.
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