Overview of challenging a trust

By McLane Edinger and Andrew Meiliunas 

Can a trust be challenged?

Yes. There are a range of circumstances giving rise to challenging a trust. Often a dispute arises between the trustee and a beneficiary of a trust, or between the beneficiaries themselves.

What types of trusts can be involved in a challenge?

Any type of trust can be the subject of a dispute. Common types of trusts involved in a challenge are:

• family trusts;
• testamentary trusts;
• SMSFs and other superannuation funds;
• charitable trusts;
• unit trusts; and
• other pooled investments.

What are some common challenges involving a trust?

Although the law continues to evolve, presenting new challenges to a trust and the parties involved, disputes can often arise from any of the following scenarios:

• a trustee has breached its duties to beneficiaries;
• a beneficiary is looking to replace the trustee and / or take control of the trust;
• when exercising a discretion relating to the trust’s operation (including the payment of distributions), the trustee hasn’t acted in good faith and with real and genuine consideration of a particular beneficiary (or beneficiaries);
• a trustee favoured one or more of the beneficiaries over others;
• a trustee improperly sold, transferred, used or devalued trust assets;
• a trustee acted in bad faith, in conflict or with bias;
• the trustee treated the assets of the trust as if they were their own;
• a beneficiary is looking to access trust information;
• the payment of superannuation death benefits, including the validity of death benefit nominations;
• the interpretation of a trust deed or formation of a trust; or
• the variation of a trust may be outside the variation powers within the trust deed, or otherwise invalid.

How to challenge a trust?

Trust disputes can be particularly complex as they often involve numerous areas of law, including trust, equity, succession, commercial, tax, and superannuation.

Achieving a commercial outcome rather than going to Court may avoid unnecessary legal fees and emotional stress.

If you are unable to achieve a commercial outcome with the trustee of the trust, it may be appropriate to commence legal proceedings, which will depend on the circumstances.

It is recommended that you obtain legal advice at an early stage, particularly given a trustee, acting as a fiduciary, needs to ensure any settlement reached would not be considered a breach of trust, given a trustee has obligations to all beneficiaries of the trust.

Is there a time limit to challenge a trust?

Statutory limitation periods often apply. However, the answer will depend on the type of trust and the circumstances, including the cause of action, relief sought and any equitable doctrine that may apply.