18 September 2022
#Private Client Practice, #Superannuation, Funds Management & Financial Services
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In Owies v JJE Nominees Pty Ltd [2022] VSCA 142, the Victorian Court of Appeal has recently ordered the removal of a trustee from a family discretionary trust. The dispute involved two beneficiaries challenging distributions made by the trustee of the Owies Family Trust, a discretionary trust established by Mr and Mrs Owies in 1970. The trust held assets in excess of $23 million.
The two disgruntled beneficiaries, Paul and Deborah, two of the children of Mr and Mrs Owies, successfully argued on appeal that the trial judge erred in finding that the resolutions of the trustee, JJE Nominees Pty Ltd, for the distribution of income, were made with the trustee giving genuine consideration as to whether a distribution should be made to each of them.
For the years in question, the trustee allocated the trust income to Mr and Mrs Owies, as well as to one of their children, Michael, but not Paul and Deborah. In 2019, all of the income was distributed to Mr Owies. The Court of Appeal found that the distributions made between 2015 and 2019 were voidable (but not void) on the basis that the distribution decisions were made with no real and genuine consideration of Paul and Deborah as beneficiaries of the trust. The Court of Appeal also made orders removing the trustee and appointing an independent trustee to control the trust.
The Court analysed the actions of the trustee in each year to determine what knowledge the trustee had regarding Paul and Deborah, what their needs were and whether any genuine consideration was given as to whether they should receive a distribution.
The Court of Appeal found that despite the terms of the trust deed providing the trustee with absolute discretion to distribute the income of the trust, there was still an obligation upon the trustee to take positive steps to inform itself about beneficiaries and their needs. The Court found in favour of Paul and Deborah noting that when exercising its discretionary powers, the controlling mind of the trustee must set aside all personal emotions and make all reasonable enquiries to ensure that it is acting in good faith and with real and genuine consideration.
The decision challenges the position that trustees of a discretionary family trust have absolute discretion to distribute income for the benefit of one or more of the beneficiaries of the trust in preference to others, without first informing itself of the needs of each beneficiary.
It is likely that challenges to the exercise of discretion by trustees of discretionary trusts and self-managed superannuation funds will continue to be a significant risk to trustees without appropriate steps being taken by trustees prior to exercising discretion under the terms of the trust deed. Appropriate advice should be obtained to ensure the risks of such claims are reduced, prior to distributions being made.
Authors: Kylie Wilson & Jessica Borg
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