Discretionary family trusts aren’t just for the super wealthy.
They are a common asset protection and tax minimisation tool for thousands of Australian families.
They often include a long list of potential beneficiaries.
It’s probably fair to say that, over the years, trustees have become a bit blasé about strictly observing some of the obligations imposed on them. Mum and dad may run the show, exercising “absolute discretion” and steering funds to whoever they like, including themselves, while excluding other beneficiaries.
But trustees cannot simply treat an apparently broad discretion as a licence to do whatever they want.
A 2022 decision of the Victorian Court of Appeal gave trustees an important reminder about their duties when exercising discretionary powers.
What happened in the Owies family trust case?
In Owies v JJE Nominees Pty Ltd [2022] VSCA 142, the Victorian Court of Appeal considered a dispute involving the Owies Family Trust.
The trust had three adult children as beneficiaries. Two of the children had been repeatedly overlooked when the trustee made distributions from the trust.
The trustee argued that its trust deed gave it broad, “absolute and uncontrolled” discretion over distributions. However, the Court considered whether the trustee had properly exercised that discretion.
The Court found that the trustee had failed to give real and genuine consideration to the circumstances of the relevant beneficiaries when exercising its discretion. The Court also ordered that the trustee be removed.
The decision demonstrates that a broad discretionary power does not mean a trustee can exercise that power without properly considering the circumstances relevant to the decision.
What does trustee discretion mean?
A discretionary family trust generally gives the trustee discretion about which beneficiaries receive trust income or capital and how much they receive.
The trust deed sets out the powers given to the trustee and the people or classes of people who may benefit from the trust.
This can give trustees considerable flexibility. However, the trustee must still exercise their powers properly and in accordance with the terms and purposes of the trust.
The fact that a deed describes a power as “absolute discretion” does not necessarily mean that the trustee can exercise it for any reason or without considering the relevant circumstances.
The Australian Taxation Office provides information about trusts and the tax treatment of trusts and trust distributions.
What did the Court say about family trust distributions?
The Victorian Court of Appeal confirmed that a trustee exercising a discretionary power must give real and genuine consideration to the circumstances relevant to the exercise of that power.
In Owies, the Court considered whether the trustee had enough information about the circumstances and needs of the beneficiaries to make properly informed distribution decisions.
The case therefore provides an important practical reminder for trustees. Before making a distribution decision, a trustee should consider the relevant beneficiaries and the circumstances that matter to the particular decision.
The Court’s decision was based on the particular trust deed and circumstances before it. It was a Victorian decision and should not be treated as a statement of Queensland legislation. However, it provides a useful illustration of the care required when trustees exercise discretionary powers.
Does a trustee have to consider every beneficiary?
The precise scope of a trustee’s obligations depends on the trust deed, the nature of the power being exercised and the circumstances of the trust.
However, a trustee should not simply adopt a fixed rule that automatically excludes particular beneficiaries without properly considering the relevant circumstances.
The Owies decision highlights the importance of the trustee having sufficient information to make an informed decision about the exercise of its discretion.
How much information a trustee needs to obtain will depend on the circumstances. A trustee may need to understand relevant information about the financial position, needs and circumstances of potential beneficiaries before deciding how to distribute trust income or capital.
Can trustees distribute trust income to themselves?
A discretionary trust deed may permit a trustee who is also a beneficiary to receive distributions. However, the trustee must still exercise the relevant power properly and in accordance with the trust deed.
A trustee should not assume that being both a trustee and a potential beneficiary allows them to distribute trust income to themselves without considering the interests and circumstances relevant to the exercise of the discretion.
This is one reason why trustees should understand the terms of their trust deed and obtain appropriate advice when questions arise about distributions.
Why does the trust deed matter?
The trust deed is fundamental to understanding how a discretionary family trust operates.
It establishes the trust’s terms and can define:
- who may benefit from the trust;
- the trustee’s powers;
- how income and capital may be distributed;
- when and how particular powers may be exercised; and
- any specific requirements or limitations that apply to the trustee.
Two family trusts may look similar but have different deeds and therefore different terms and powers.
That is why trustees should not assume that a rule or distribution approach that worked for another family trust will necessarily work for theirs.
What should a trustee consider before making a distribution?
The precise considerations will depend on the trust deed and circumstances. However, trustees should ensure that they understand the power they are exercising and have enough relevant information to make an informed decision.
Practical questions may include:
- Who are the potential beneficiaries under the trust deed?
- What power does the trustee intend to exercise?
- What does the trust deed say about that power?
- Are there circumstances or needs of relevant beneficiaries that should be considered?
- Has the trustee relied on a fixed distribution pattern without properly considering the circumstances?
- Is the proposed distribution consistent with the terms and purpose of the trust?
- Has the trustee kept appropriate records of the decision and the information considered?
The trustee should also take care when the same people control both the trustee and the family members who receive distributions. Personal relationships should not replace proper consideration of the trustee’s duties.
What are the risks of failing to properly exercise trustee discretion?
A trustee who fails to properly exercise a discretionary power may face legal consequences.
Depending on the circumstances, a court may review the exercise of the trustee’s discretion and grant appropriate relief.
In Owies, the Victorian Court of Appeal found that the trustee had failed to give real and genuine consideration to the relevant beneficiaries and ordered the trustee’s removal.
The case therefore provides a useful warning for anyone acting as trustee of a discretionary family trust.
What does the Owies case mean for Queensland family trusts?
Owies was decided by the Victorian Court of Appeal. It does not change Queensland legislation or automatically determine how every Queensland trust dispute will be decided.
However, the underlying issue is highly relevant to trustees generally: a trustee should understand the terms of the trust deed and properly exercise the discretion given to them.
Queensland trustees should therefore consider their own trust deed and obtain Queensland legal advice where they are uncertain about their powers, obligations or proposed distributions.
Should you review your family trust deed?
It might be time to blow the dust off your trust deed and actually review it and its primary purpose.
A review can help you understand whether the trust still operates as intended and whether the trustee’s powers, beneficiary provisions and other terms remain appropriate for the family’s circumstances.
This can be particularly important where the trust has been operating for many years, family circumstances have changed or the people controlling the trustee have changed.
A trust deed should not simply sit in a filing cabinet until a problem arises. Trustees and trust controllers should understand the document that governs the trust and the powers it provides.
Discretionary family trust checklist
If you are a trustee or control a discretionary family trust, consider whether you:
- know who the beneficiaries are;
- understand the trustee’s powers under the trust deed;
- understand the purpose and terms of the trust;
- properly consider relevant beneficiaries when exercising discretionary powers;
- keep appropriate records of trustee decisions;
- review the trust deed when circumstances change; and
- obtain legal advice when you are uncertain about the trustee’s obligations.
Frequently asked questions about discretionary family trusts
What is a discretionary family trust?
A discretionary family trust is a trust where the trustee generally has discretion over which beneficiaries receive trust income or capital and the amount they receive, subject to the terms of the trust deed and applicable law.
Can a trustee distribute trust income to whoever they want?
A trustee may have broad discretion under a discretionary trust deed, but that does not mean they can exercise the power without regard to the terms of the trust or their legal obligations. The trustee must properly exercise the relevant discretion.
What does “real and genuine consideration” mean for a trustee?
“Real and genuine consideration” refers to the requirement for a trustee to genuinely consider the relevant circumstances when exercising a discretionary power. The Victorian Court of Appeal considered this issue in Owies v JJE Nominees Pty Ltd [2022] VSCA 142.
Can a family trust trustee exclude a beneficiary?
A trustee may have the power to distribute trust income or capital to some beneficiaries and not others, depending on the trust deed. However, the trustee must properly exercise the relevant discretion and comply with the terms of the trust.
Should I review my family trust deed?
Yes. A review can help confirm that you understand the trust’s terms, beneficiary provisions and trustee powers. Legal advice can also help identify whether changes to the trust structure or deed should be considered.
Does the Owies case apply to Queensland trusts?
Owies was a Victorian Court of Appeal decision, so it is not Queensland legislation. However, it provides a useful example of the issues that can arise when trustees exercise discretionary powers and highlights the importance of properly understanding and exercising those powers.
Review your family trust
Discretionary family trusts can provide valuable flexibility for Australian families, but trustees need to understand the responsibilities that come with that flexibility.
The Owies decision provides a timely reminder that “absolute discretion” does not mean a trustee can simply do whatever they want.
It might be time to blow the dust off your trust deed and review it, along with the trust’s primary purpose and how the trustee has been exercising its powers.
If you are concerned about your trustee obligations or want to understand whether your family trust still meets your needs, obtaining legal advice can help.
Contact us to discuss your family trust and trustee obligations.