“It’s a discretionary trust… I can do what I want”
Trusts law. Just uttering those words to some people and you see their eyes start to glaze over.
Trusts are in abundance in Australia.
Only a few years ago, national income from trusts in one year alone exceeded $340 billion. It’s estimated that there will be over one million trusts in existence in Australia within the next 2 – 3 years.*
As prevalent as they are, it would be a fairly safe bet that most Trustees and beneficiaries have a fairly limited understanding as to exactly what the Trustee can and cannot do.
A significant proportion of the trust disputes we see come about due to that lack of understanding.**
For example, let’s take a trust where the Trustee has the discretion to decide which beneficiary will receive income from the trust.
It is a common misconception that the Trustee (particularly of family trusts) can do ‘whatever they want’, so long as the trust deed permits it.
Even Trustees with discretionary powers have several duties, including:
- The duty to act in good faith: The Trustee must put the interests of the beneficiaries first, and act without regard to self-interests.
- The duty to consider how best to exercise their discretion: This includes obtaining relevant information and considering for example why the trust was made in the first place, or any new circumstances that might have arisen.
- The duty to avoid dictation: The Trustee must resist being dictated to by, for instance, certain beneficiaries.
In the past, there was a general view that courts were reluctant to interfere with an exercise of a Trustee’s discretionary power, but that’s not necessarily the case today.
Take for instance the recent court decision in Re Marsella** which involved a blended family. There, the trust was a superannuation fund established for Mrs Marsella. She and her Daughter were Trustees.
Mrs Marsella passed away, survived by a husband from a second marriage (“the Husband”). At that time, the fund had a balance of around $450,000.
The Daughter (who was now sole Trustee) put her own husband in as co-Trustee and they proceeded to ‘exercise their discretion’ by paying all death benefits to the Daughter.
The Husband argued that the Trustees breached their duty to give proper consideration of how best to exercise their discretion, and the Court agreed. The Trustees were removed and the Daughter was ordered to return funds to the Trust.
Being Trustee of a discretionary trust does not mean the Trustee has been given carte blanche to do what they like.
If there are beneficiaries with concerns as to how a Trust is (or was) administered, they should seek legal advice as there could be remedies available to them, depending on the circumstances.
Meanwhile, Trustees (and their advisors) need to be very careful. If a Trustee is unsure whether a possible action might be in breach of their duties, legal advice should be sought. Otherwise, if a court finds that the Trustee breached their duty, they could have their decision reversed, powers removed and be hit with a very large costs order.
**The next most common reason for the trust disputes we see relate to the trust deeds, due to them being decades old and/or having been drafted by some ‘clever’ person doesn’t know trust law from a can of beans.
** Re Marsella; Marsella v Wareham (No.2)  VSC 65
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