Family Trust disputes – do not ignore The Black Sheep
HARWOOD ANDREWS PRESENTS THE FIRST IN A SERIES OF ARTICLES FOCUSSING ON TRUST DISPUTES
A trust structure is often recommended to individuals and family business owners by their accounting and legal advisors to distribute income tax effectively and safeguard assets.
A family trust structure should function effectively over time, benefitting both the business and family members. However, changed family dynamics and business circumstances can give rise to difficulty.
Business succession and estate planning, sibling rivalry, death, marriage, divorce, intergenerational conflict and a host of other factors can unfortunately trigger a dispute regarding the administration of a family trust structure and its assets.
For example, individual family members may challenge how the income, assets or liabilities of a trust are being managed or distributed, seek access to the financial or other records of the trust or attempt to gain control of a trust and its assets.
Inadequate accounting or legal advice and individual understanding of the nature of a trust structure when established, and associated ongoing obligations and their documentation, can all give rise to a dispute and dramatically affect its outcome.
A recent decision of the Victorian Supreme Court of Appeal provides an important reminder of the consequences of failing to properly understand, and exercise, the obligations of a trustee of a family discretionary trust when distributing income.
Individuals in control of the trustee of a discretionary trust and their accounting advisors should take note.
In Owies v JJE Nominees Pty Ltd [2022] VSCA 142 (Owies), the Court held distributions made by the trustee of a family discretionary trust over a number of years were voidable and could potentially be set aside upon an application by the beneficiaries of the trust to the Court.
The Court found that in exercising its discretion to distribute income in the relevant financial years, the trustee failed to give genuine consideration of, and enquire about, the circumstances of all potential beneficiaries. Where there are a small number of beneficiaries, the Court considered the trustee must make specific enquiries regarding their financial circumstances before making a distribution, even if the family relationship is complex.
The directors of the trustee in Owies made no enquiries of their two estranged children for several years, which was critical to the Court’s conclusion the trustee failed to give real and genuine consideration to the beneficiaries’ financial circumstances. Further, the relationship between the trustee and beneficiaries was irreconcilable, meaning the trustee could not act impartially and appointment of a replacement independent trustee was ordered.
The outcome of disputes relating to discretionary family trust structures is heavily dependent on their factual and other circumstances and individual advice is always required. In making its decision in Owies, the Court had regard to the:
fixed pattern of distribution of trust income by the trustee in previous financial years, demonstrating a failure to give genuine consideration to the best interests of beneficiaries;
strained relationship between the elderly parents and two of their estranged adult beneficiary children;
individual circumstances of the beneficiaries (ill-health, financial position); and
lack of communication with the aggrieved beneficiaries by their elderly mother and associated failure to make proper enquiries regarding their need for a distribution.
To guard against potential future disputes, individuals in control of a trustee and their professional advisors should consider the ramifications of the Owies decision as part of the ongoing administration of the trust when deciding (and documenting) distribution and apportionment of trust income or assets. Family dynamics can change, the obligations of a trustee do not.
Amy Jenkinson
Special Counsel
T 03 5225 5236
E ajenkinson@ha.legal
Thomas Howell
Graduate Lawyer
T: 03 5226 8526
E: thowell@ha.legal
