Apr 4

How discretionary are discretionary trusts?

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Family (also often called discretionary ) trusts have been protecting assets, policing family benefit sharing, simplifying inheritance and spreading family income and the tax that goes with it.

On average, many of those trusts can theoretically benefit parents, children , grandparents, grandchildren, siblings and aunts and uncles, all multiplied by two to include their spouses – so, many millions of Australians who could potentially have access to a benefit from a discretionary or family trust.

Yes, theoretically, and yet, the vast majority of those people (“mere objects”) never receive a distribution from the trust.

It used to be thought that the trustee didn’t need to give these “mere objects” a second thought. The trustee was believed to have absolute discretion to decide who received what, if anything, from the trust. So, if somebody did not like the fact they were never considered, bad luck.

A recent  Victorian Court of Appeal decision in Owies v JJE Nominees Pty Ltd (2022) showed this to be not entirely the case .

The Owies Family Trust distributed income every year to parents and one adult child while the other two adult children missed out. The trust was valued at many millions of dollars , so the income was not insubstantial.

When the two adult children who never received anything sued, the trustee argued it had complete and unfettered discretion in making its decisions, which the court could not interfere with. The court agreed, but said it could ensure that the trustee acted appropriately in reaching that decision.

The trustee had to act in good faith, giving real and genuine consideration as to who might receive a benefit and with the trust’s primary purpose in mind.

In particular, a trustee could not adopt a fixed rule for distribution, or simply do what one of the key persons in the trust told it to do.

A trustee must engage in bona fide inquiries about the potential beneficiaries, and must then consider how to exercise discretion in light of the results of those inquiries.

The big question is, of course, how are you going to make that decision when the potential beneficiaries include two parents, two adult children, four grandchildren, four grandparents, umpteen siblings, aunts and uncles and all their spouses?

The court said there was no obligation on the trustee to make a detailed analysis to a level that is unworkable. However, in the circumstances of a family trust, the trustee would be expected to be informed about the differing circumstances, needs and desires of each possible beneficiary. That could still be a lot of work.

That problem is exacerbated by the court’s rejection of the argument that the family members saw one another regularly at various social functions, and could have made a claim for a distribution at those events. The court wanted the trustee to be more formal and proactive in its inquiry.