Trusts can be a powerful tool for preserving and distributing family wealth. The Owies Family Trust, with its generous asset base and complex beneficiary structure, appeared to be a model of financial planning. However, the estrangement of key family members in 2011 set off a chain of events that challenged the very essence of trust law.

This was a Victorian court of appeal case.

It considered the Owies Family Trust, established by John and Eva in the 1970s.  It was prepared on typical terms with broad beneficiary classes.  The trust was controlled by John and Eva as directors of corporate trustees, and as appointees and guardians for the trust.

The primary beneficiaries of the trust were John and Eva’s children, Michael, Deborah and Paul. General beneficiaries were relatives of the children, including John and Eva.

The value of the trust was around $23 million.  Its income was around a few hundred thousand a year, and typically it distributed that income in set amounts between the beneficiaries. 

In 2011, things changed:  Deborah and Paul became estranged from the parents and later sued in relation to the discretionary distributions which had largely ignored them from 2011 onwards.

They were statute barred in respect of their claims before 2014, but their claims for the 2015 to 2019 years were heard.

In 2015, 2016, 2017 and 2018, the trust distributions changed so Michael (son) received 20% of the trust income, and the parents each received 40% of the trust income, and then loaned it back.

In 2019, John (dad) received 100% of the income.  Deborah (estranged daughter) received a capital distribution of the flat that she had lived in since the 1980s.

What was the case about?

In this case, the issues were that:

1. There was no obvious reason to exclude distributions to Paul or Deborah, when distributions in previous years had been made on set ratios to all the children.

The only explanation was the antipathy between the parents and children.

2. There were no inquiries of Deborah or Paul after they became estranged.

The sudden estrangement meant information was lacking and there was no knowledge of the position of the children. 

3. The failure of the trustee to make inquiries therefore equalled failure to give genuine consideration to their needs and what distribution ought to be made in the trust.

The Court held that the trustees made distribution decisions without genuine consideration of potential recipients of income (Deborah and Paul) in the 2015 to 2019 years while they were estranged from the parents. As a result, the distributions were voidable.

This was a victory on paper only for Deborah and Paul. The distributions were voidable not void, and an alternate distribution structure had not been adequately argued by them to achieve a different distribution result.

Important findings: roles of Trustees

The Court held that:

1. Trustees are not required to give reasons for decisions.
2. Trustees must assess the needs of the beneficiaries before exercising their discretion (and while they are not required to distribute on a needs basis, they should consider those needs in exercising that discretion).
3. Trustees acting inconsistently with their duties can be removed.
4. The exercise of discretion is not to be reviewed by courts provided that the components in exercising that discretion are present:
   • that the discretion was exercised in good faith;
   • it was exercised on real and genuine consideration;
   • it was exercised in accordance with the purpose for which the discretion was conferred.

The case cited with approval Karga and Paul [1984] VR 161.

The court also quoted with approval Attorney General (Cth) and Breckler [1999] 197 CLR 83:  “where a trustee exercises a discretion, it may be impugned on a number of different bases such as that it was exercised in bad faith, arbitrarily, capriciously, wantonly, irresponsibly, mischievously or irrelevantly to any sensible expectation of the settler, or without giving a real or genuine consideration to the exercise of the discretion.  The exercise or a discretion by trustees cannot of course be impugned on the basis that their decision was unfair or unreasonable or unwise.  Where a discretion is expressed to be absolute, it may be that bad faith needs to be shown.”

It also quoted, with approval from Finch and Telstra Super Proprietary Limited [2010] 2424 CLR 254 saying “the decision of a trustee may be reviewable for want of properly informed consideration.  If the consideration is not properly informed, it is not genuine”.

What about broad classes of beneficiaries?

Some trusts understandably have a very large number of potential objects.  Where a discretionary trust requires consideration of the identity and needs of each, determining distributions could be unworkable.  Citing Re Hay’s Settlement Trust [1981] 3 ALL ER 786, the court noted the approach to be taken is to:

1. consider what persons or classes of persons are objects of the power;
2. consider the width of the field and thus whether a selection is to be made merely from dozen or instead from thousands or millions;
3. once the trustee has applied his mind to the size of the problem should he then consider individual cases whether, in relation to other possible claimants, a particular grant is appropriate.

It further confirmed:

1. An unstated premise on which the trustee should be discharging its duties is with information about the different circumstances needs and desires as relates to each beneficiary, incidental to family bonds, underpinning the trust and explaining its purpose.
2. Importantly, where bonds are strained or broken, the purpose of the trust to provide for the family does not necessarily change: nor does the trustee’s obligation to inform themselves also change.
3. It is not therefore adequate for a trustee to decline to make any distribution without first informing themselves of the circumstances of each potential individual person.

Takeaways

Trustees should:

1. Be careful when considering distributions showing favouritism or exclusion: while permissible, they are risky and in the wrong circumstances can be set aside.
2. The trustee should make active inquiries regarding each beneficiary’s circumstance, so that before they exercise their discretion, they have the information needed for that exercise to be valid.
3. Beware of sudden changes and exclusions in trusts in absence of some reason for the change – it may indicate a failure of genuine consideration.
4. Records should be kept to the reason for the change where those changes are significant.
5. Ex spouses who remaining members in discretionary family trusts still require consideration for distribution, even where the parties intend them not to receive any future benefit from the trust. Orders phrased as noting that they should ‘not be considered for distribution’ arguably prevent the Trustee exercising their obligations correctly.

Compare this to risks of resettlement.  Consider whether there should be a distribution of capital of the trust and creation of new trusts, and whether any consequent tax implications are worth undertaking.

Consider asking beneficiaries to give to the trustee each year a short note of their circumstances.  In a family environment, this may be as straightforward as an email once or twice a year.

This article is intended to provide general information only.  Specific advice should be sought as to the potential impact this case may have on your family law matter.

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Disclaimer

This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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