Beware of New Dangers with Trust Distributions from recent Victorian Case
As you may be aware, a recent Court decision in Victoria towards the end of last year has caused concern in the legal world over distributions from discretionary trusts.
Usually we are instructed to set up discretionary trusts for the benefit of a particular client, with the client as trustee and the client and his/her broader family and related entities as beneficiaries.
Practically, the client then tends to treat the trust property, and income derived from it, almost as if it was the client’s own and divide it among the family (or just to himself/herself) as the client sees fit. The client (trustee) generally has not needed to answer to anyone as to the decision they make or how they deal with the trust property/income (provided within the scope of the trust deed) – it is at their “discretion”.
But Trustees may now be at risk when making trust distributions…
In the new case, the dispute before the Victoria Supreme Court was between three children of a family - largely relating to the control of a discretionary trust which was established by the parents in 1970 and which held assets in excess of $23 million.
Two of the children (Paul and Deborah) were estranged from the parents and had been left out of receiving any distributions over the years. They argued that the income distribution resolutions by the trustee were made in breach of trust - because they were made without the trustee giving any genuine consideration to whether a distribution should be made to Paul and/or Deborah.
For the relevant years being challenged, the trustee had distributed most of the income to the parents (John and Eva) and to one of the children (Michael).
The Court undertook an analysis of the actions of the trustee in each relevant year to determine what knowledge the trustee had regarding Paul and Deborah, what their needs were and whether any genuine consideration was given to whether they should receive a distribution. This is an over simplification, but the Court decided that the trustee had an obligation to take positive steps to inform itself about beneficiaries and their needs – and that, in some of the years, the distribution resolutions were voidable as there was no real and genuine consideration of the needs of Paul and Deborah. The Court also ordered the trustee be removed, so that the parents lost control of the trust.
It was recognised that, in the case of some trusts, the number of potential beneficiaries might be very large and a requirement to undertake a detailed analysis of the identity and needs of each is impractical – but it was determined that consideration should at least be given to beneficiaries named in the trust deed (which in this case included Paul and Deborah). Usually the named beneficiaries in our Trust Deeds will be the “Primary Beneficiaries”. Even so, there was no hard line drawn as to how far a trustee needs to go ... and to avoid an adverse court judgment against a trustee for future trust distributions, the general advice now seems to be for the trustee to:
Make enquiries each accounting period on the needs and circumstances for every primary/named/specified beneficiary as a minimum;
Internally document the enquiries and considerations to prove that real and genuine consideration was given;
Do NOT document the reasons for a decision (as there is no obligation on a trustee to give reasons);
Consider removing certain beneficiaries from the trust - subject to review of the trust deed.
It is highly likely that your clients will have discretionary trusts which include their broader family members as beneficiaries – and it may be prudent to have each deed reviewed and remove all beneficiaries other than the immediate family (and companies and trusts they have an interest in) and possibly exclude any “black sheep” beneficiaries who the clients will not want to distribute to – provided that does not trigger any adverse tax or stamp duty implications.
We also suggest that a provision be added to each existing trust deed to say that, when exercising the trustee powers, the trustee does NOT need to consider the needs of all beneficiaries, or the needs of any particular class of beneficiary, and may exercise the trustee’s discretion just based on the trustee’s assessment of the needs of just one or more of the beneficiaries chosen by the trustee. If challenged, this provision may or may not be found valid by a Court but it can’t hurt to have it in there.
This could also capture the drafting of Testamentary Trusts (which are often discretionary trusts) – so you should also consider in light of this decision, whether clients need to update the trust terms in their Wills.
Please contact our office if you would like further advice, assistance to undertake any reviews/amendments of your existing clients’ deeds or Wills and drafting of trustee resolutions.
Please feel free to circulate to your teams.