A discretionary family trust generally gives a trustee discretion to distribute the income or capital for the benefit of one or more beneficiaries at the exclusion of others.
On 21 July 2022, the Supreme Court of Victoria Court of Appeal handed down its decision in Owies & Owies v JJE Nominees Pty Ltd  VSCA 142 which highlights the emerging pattern of scrutiny by the Court of a trustee’s exercise of its ‘absolute’ discretion.
In 1970, Dr John Owies (John) and Dr Eva Owies (Eva) establish a discretionary family trust for the benefit of their family. John, Eva, and their three children, Michael, Deborah and Paul were the named beneficiaries of the trust. The trustee was JJE Nominees Pty Ltd (Trustee).
The family trust was established by a conventional trust deed where the Court observed that it conferred discretionary powers on the Trustee for the distribution of the net income in each accounting period. In default of such distributions, the net income was to be held on trust in equal shares for Michael, Deborah and Paul.
The estimated value of the trust was $23 million which attracted substantial income for each financial year. The dispute concerned distributions made between 2011 and 2019. During this period, the Trustee distributed all of the net income, with one exception, as follows:
- 40% to John;
- 40% to Michael; and
- 20% to Eva.
The exception was in 2019 where 100% of the income was distributed to John.
No distributions were ever made to Deborah or Paul except for a capital distribution of an apartment made to Deborah in 2019.
The proceedings were commenced by Paul and Deborah against the Trustee. Michael was later joined.
By commencing the proceedings, Deborah and Paul sought:
- To challenge certain purported variations to the trust deed that altered the identity of the Guardian and Appointor;
- A declaration that there had been invalid distributions of the income pursuant to the terms of the trust deed;
- Declarations that the Trustee had failed to give a ‘real and genuine consideration’ to the objects of the trust, therefore, resulting in a breach of trust;
- The removal of the Trustee, on the basis of the breaches above, and the declaration that the appointment of Neville Sampson as the director of the Trustee, a solicitor for John and Eva, as a director, was void.
The trial judge made the following decisions:
- The purported variations to the trust deed were invalid and the appointment of Mr Sampson was defective;
- The distributions in each financial year were valid;
- The Trustee failed to give ‘real and genuine consideration’ as follows:
- in 2015 and 2016, to Paul and Deborah;
- in 2018, to Deborah;
- The Trustee gave ‘real and genuine consideration’ as follows:
- in 2017 and 2019, to Paul and Deborah; and
- in 2018, to Paul;
- The Trustee should remain.
Deborah and Paul sought leave to appeal the trial judge’s decision. They appealed the decision on 11 grounds which were grouped into ‘three issues’:
- Paul and Deborah contended that the trial judge erred in concluding that the Trustee had given ‘real and genuine consideration’ to their position in 2017 and 2019;
- Appropriate relief where there is a finding of a failure to give real and genuine consideration; and
- That his Honour erred in refusing to remove the Trustee.
In relation to the first issue, the Court found that whilst the terms of the trust deed provided a broad discretion to the Trustee in terms of distribution of the net income in each accounting period, it observed that the discretionary power is not without its limitations.
The Court of Appeal Judges stated:
“In considering the nature of the power to distribute annual income, the starting point must be the nature and purpose of the trust having regard to the terms of the trust deed. The trust deed is by settlement, and as the preamble records, the settlor ‘being desirous of making provision for the Primary Beneficiaries and the General Beneficiaries.”
Given the terms of deed, the Court stated that it would have been expected that the class of beneficiaries would primarily revolve around Michael, Deborah and Paul.
The Court highlighted that a Trustee would be expected to discharge its duties to provide ‘real and genuine consideration’ by informing itself about the differing circumstances, needs, and desires of each beneficiary.
The Court noted that the failure to give ‘real and genuine consideration’ to Paul and Deborah was made more obvious by the extreme nature of the distribution made in 2019 where 100% of the income was distributed to John, who at that point was aged 96 years, in full time residential care and had no need for the income.
However, the Court found that the breach of trust in failing to give real and genuine consideration to the exercise of the power rendered the distributions made to John, Eva, and Michael voidable rather than void.
In relation to the second issue, as no order was sought that those distributions be set aside and no challenge was made on the appeal to the judge’s decision to refuse leave to amend the pleading to seek such relief, the Court was unable to grant orders that the Trustee pay Paul and Deborah one third of the annual income for the years in which there was a breach of trust.
If an order had been sought that the voidable distributions be set aside, the Court may have done so.
In relation to the third issue, the Court stated:
“In our view, the trustee has, over a number of years, failed to act impartially, failed to give real and genuine consideration to the interests of two of the primary beneficiaries, and relations between the beneficiaries and those involved in managing the trustee are, at least from this vantage point, irreconcilably damaged, such that it is not in the best interests of the beneficiaries for the trustee to continue in office”.
Accordingly, it was ordered that the Trustee be removed.
This case highlights the emerging pattern of scrutiny by the Court and how trustees should act more prudently when exercising discretions provided to it by the trust deed. The consequences of failing to follow the terms of the trust deed, or breaching any of the trustee’s duties, could include reversal of decisions dating back a significant number of years and removal of the trustee, and appointment of an independent trustee.