Discretionary trusts are a useful vehicle for operating businesses, minimising tax, and providing asset protection. They are also flexible in nature – the trustee has discretionary powers with regards to distributing the net income and capital of the trust. However, the exercise of the discretionary power has been scrutinised in recent years, including in the case of Owies v JJE Nominees Pty Ltd (in its capacity as the trustee for the Owies Family Trust)  VSCA 142 (“Owies”).
My blog will identify the conduct of the Trustee in Owies that lead the Court of Appeal to find the trustees had not exercised their duty to give real and genuine consideration of the positions of the beneficiaries of the trust.
What is a discretionary trust?
Discretionary trusts are established by Deed between the Settlor and the Trustee.
The trustee holds the trust funds on trust for the beneficiaries. Beneficiaries are the object of the trust and have an interest in the trust property. They usually consist of immediate and extended family members, and hence these types of trusts are called “discretionary family trusts”.
Most discretionary trusts also have an appointor. The appointor has the power to appoint and remove a trustee.
Discretion to distribute trust income and capital
The trustee has the power to distribute the net income and capital of the trust to any one or more of the beneficiaries and in such proportions as it sees fit. The discretion is absolute and unfettered.
At the end of each financial year, the trustee will resolve to distribute the net income of the trust fund. Ordinarily, if the trustee has not distributed the income prior to then, a certain class of beneficiaries will take the income by default.
The distribution of income is strategic. Subject to the terms of the Deed, net income of the trust can be split between beneficiaries Further, capital gains and franked dividends can be streamed to beneficiaries, reducing the overall tax position for the trust.
Trustee decision making
The trustees exercise of discretion to distribute net income has been scrutinised in recent years. The court has considered numerous applications by aggrieved beneficiaries, questioning the distribution of trust income because the trustee did not give real and genuine consideration to them as beneficiaries of the trust.
This blog will consider the recent case Owies v JJE Nominees Pty Ltd (in its capacity as the trustee for the Owies Family Trust)  VSCA 142 and in doing so, provide some practical tips for trustees when it comes to the requirement to give real and genuine consideration to the beneficiaries of the trust, prior to making its decision regarding the distribution of trust income.
Owies – The facts
In Owies, the beneficiaries of the trust were from the same family –parents, John, and Eva, and their three children Michael, Deborah, and Paul. The assets of the trust were in the order of $23 million and an annual income in the hundreds of thousands of dollars.
For each financial year from 2011 to 2018, the trustee determined to distribute income to John, Michael, and Eva in the ratio 40:40:20. In none of the years was a distribution of income made to Deborah and Paul.
John and Evan were directors of the corporate trustee, from its registration in 1970 to their deaths in 2020 and 2018 respectively. Michael was director in 2019.
Deborah and Paul had need. Deborah suffered from various medical conditions. Her medical expenses for 13 years exceeded $20,000 per annum. Her taxable income between 2013 and 2017 was between $39,000 and $44,000. It was noted that Paul also had demonstrable need for income, but to a lesser extent than Deborah.
Owies – The outcome
The court held the trustee did not give real and genuine consideration of the positions of Deborah and Paul.
A key consideration for the Court of Appeal’s was that the nature and purpose of the power to distribute income, was to benefit Michael, Deborah, and Paul in equal shares. The trust deed provided that upon the default appointment of income, the three children held the income pursuant to an express trust in equal shares. There was also provision for the children to take the trust fund in equal shares on the vesting date, in absence of a prior determination.
The factors that lead the Court to determine the trustee did not give real and genuine consideration to Paul and Deborah were:
- The trustee made no enquiries of Paul and Deborah.
- There was no obvious reason why the trustee would favour Michael, John, and Eva, when Deborah and Paul had a demonstrable need for income.
- The trustee did not exercise an independent mind – there was an elision between the interests of John and Evan and the best interest of the beneficiaries under the trust.
- There was a history of antipathy between Eva and Paul, and Eva and Deborah – for example, Paul had asked for a copy of the trust deed but was met with resistance.
- There was a pattern of distributions from 2011 to 2018, which was inconsistent with a continuing obligation to consider the distribution of income for each accounting year
Practical notes for Trustees
The first point to note is that trustees should not fret about whether their second-cousin’s spouse will bring an application, questioning why the trustee did not make a distribution to them in 2018.
Owies illustrates that in discharging the duty to give real and genuine consideration, it is critical to identify the nature and purpose of the power to distribute. Trustees need to consider who are the beneficiaries on the default distribution of income and on the vesting date.
Once those beneficiaries are identified, the trustee must make enquiries of the position of those beneficiaries, and factor in that information as part of its decision-making process. Further, the Trustee should obtain legal advice about the most appropriate way to document this process.
Importantly, the trustees must be acting in good faith, responsibly and reasonably at all times.
The team at Perspective Law Pty Ltd can assist to mitigate the risk of disputes regarding trust administration. If you would like to get in touch, please contact us on 07 3839 7555 or email us at firstname.lastname@example.org.