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Dissatisfied beneficiaries: challenging discretionary trustees

Feature Articles

Cite as: (2009) 83(02) LIJ, p. 54

Courts have limited powers to overturn discretionary trustees’ decisions and must deal only with flaws in the process, not the merits, of the decision making.

By Dr John Glover

Discretionary trusts have a variety of uses. Beneficiaries may be dissatisfied with trustees’ determinations for a number of reasons. Our interest here is on a personal level, with such things as superannuation payouts, shares in family wealth and fulfilment of a testator’s wishes, and we will not be concerned with the discretionary trust’s commercial uses.

Family and superannuation trusts are the primary sources of discretionary determinations that lead to individuals’ aggravation or disappointment. Correspondingly, this article examines the possibilities of legal recourse to review or overturn decisions taken within these private wealth structures.

Nature of judicial intervention

Courts do not question the merits of a discretionary decision taken by trustees – a “principle of non-interference” is applicable1 – rather flaws in the decision-making process must be shown to attract judicial intervention. Processes rather than outcomes describe the law’s concern with trustees’ discretionary decisions.

A leading statement of the courts’ restricted supervisory jurisdiction over trustees was given in Re Beloved Wilkes Charity,2 a 19th century House of Lords decision. Trustees for a charity were given the task of occasionally selecting a “poor lad” for education as a clergyman. Preference was directed to be given to candidates from specified parishes. One year the trustees nominated a lad who was not from a specified parish. No reason was supplied. The plaintiffs, concerned members of a specified parish, sought to overturn the decision and substitute another candidate. He was a lad, they said, who was better qualified. Lord Truro LC firmly denied the parishioners’ claim was maintainable. Courts do not review a decision by trustees simply because it was or might have been mistaken. “[I]t is to discretion of the trustees that execution of the trust is confided.” The discretion must be exercised “with an entire absence of indirect motive, with honesty of intention, and with fair consideration of the subject”.

Where trustee discretions are enlarged by words like “absolute”’ or “uncontrollable”, the principle of non-interference is particularly enlivened. At the same time, truly absolute and uncontrollable discretions cannot be given to trustees. Honesty, integrity and fairness in the processes by which discretions are exercised are always reviewable. Trustees must act responsibly, as befits trustees, and follow the terms of instruments empowering them.

Absence of reasons

While trustees are required to take reasonable steps to inform adult beneficiaries of the existence and terms of a trust, they are under no duty to give advice or explanations to beneficiaries concerning their rights.3 Trustees are not required to disclose to beneficiaries their motives and reasons for exercising discretionary powers.4 When reasons are given they may be reviewed by the court. Sufficiency of the reasons to justify trustees’ determinations will then be examined.

This article assumes the normal case for Australian family trusts, which is that no reasons are provided by trustees for the exercise of their discretions.

“Uncontrollable” trustee discretions?

Discretionary trust deed precedents usually confer dispositive discretions phrased to be “absolute”, “uncontrollable” or otherwise unrestricted.5 Law, then, has an austere regime for regulating the device.6 Discretionary powers to distribute income or capital, without more, can be challenged only by alleging the trustee’s bad faith or improper motive.7

Even where trust instruments confer discretions with little guidance as to how they should be exercised, trustees cannot treat the powers as “at large”. In all cases, trustees must take into account the views of settlors or trust creators.8

Sometimes trust creators’ views are committed to writing;9 at other times, their views are expressed informally. Relevant directions or wishes informing trustees’ discretions may be associated with tax avoidance, family security, or the dynastic urges of trust creators.

Trustees must actively seek information which informs the exercise of their discretions. Refusal to consider any or all of the needs and wishes of trust creators is not consistent with the exercise of an informed discretion in respect of any given distribution.10

Exercises of discretionary powers can be challenged correspondingly. Trustees may be argued to have given no, or not sufficient, consideration to the purposes for which the powers were conferred by trust creators and thereby have failed to act “upon genuine consideration”.11

The following three headings describe the non-excludable jurisdiction of the courts over discretionary trustees’ discretions.

Ultra vires – excessive execution of powers

Powers and discretions of whatever kind are liable to review on grounds of excessive exercise. Trustees cannot exceed the powers given to them. Terms of discretions are critical. Arguments for dissatisfied beneficiaries under this head reason from the terms of decisions made rather than the processes of decision-making.12 Reasons for decision are not directly relevant.

Example:

Trustees with an “absolute and uncontrollable” discretion to benefit any one or more of the children of X, or the students of a certain school, act invalidly when they benefit a child of Y, or the students of a different school.

Improper delegation of the power to advisors or other third parties is not permitted. “[I]t is for advisors to advise and trustees to decide”.13 An advisor’s or other third party’s decision is invalid for the simple reason that it is not the decision of the person entrusted with the power.

Example:

The corporate trustee of a family trading trust relinquishes its decision-making to the board of a company which conducts another family business. Directors of both companies include the same family members and some additional persons in each case. Correspondence is re-directed accordingly. The corporate trustee may act invalidly if it can be shown to merely endorse decisions taken by the board of another company.

Exercises of powers cannot impose unauthorised conditions on persons benefited. Conditions cannot be created or imposed by the exercise of a power unless the trustee is specifically authorised by the trust deed, or other instrument.14 If the power does not authorise the annexure of a condition, the condition can be ignored and the disposition will take effect absolutely.

Example:

A trustee exercised an “absolute and uncontrollable” power to distribute a fund by dividing it between a class of six children equally. The share of one child was held on trust until that child attained the age of 30 years – at which time the share would pass to the other children if that child’s conduct had proven “unworthy” in the meantime. Such a condition is void and unenforceable. The child’s share becomes absolute as soon as it is created.15

Bad faith

“Bad faith” is an elastic term. Orthodox equitable references of the term fall within a broad spectrum: at one extreme, bad faith may be constituted by a deliberate deception for personal gain; at the other extreme, it can exist without any personal dishonesty and equal the failure to observe an equitable rule or standard.16

Fidelity to the purposes of the trust creator must be maintained. Regardless of whether they stand to gain personally, trustees are in bad faith when they exercise their discretion improperly. For example, they cannot make a discretionary appointment to a permitted object of the power with the intention of benefiting a non-object.

Example:

Trustees possess an “absolute and uncontrollable” discretion to benefit a class of persons including Adam, an adult male. Adam announces that if the power is exercised in his favour, he will give most of the distributed amount to his parents. Neither parent is an object of the power. Appointments made to Adam are void, in these circumstances, if it can be shown that the trustees were aware that the parents would be the likeliest persons to benefit. Discretionary distribution to Adam in the trustees’ knowledge that Adam was under very strong social or moral pressure to benefit his parents as a consequence would also be invalid.17

Powers enabling trustees to exclude beneficiaries from classes of eligible beneficiaries cannot be exercised for ulterior or improper purposes. Trustees’ exercises of exclusion powers for the purposes of perpetuating family conflict or frustrating beneficiaries’ applications to see trust documents will be invalidated.

Example:

Adam, a trust beneficiary, makes a formal request to see trust documents. The trustee does not accede to the request and shortly after exercises her “absolute and uncontrolled” power to exclude Adam as a beneficiary (with the consent of trust guardians). Proceedings are commenced. The trustee admits under cross-examination that one of her purposes in exercising the exclusion power was to frustrate Adam’s discovery request. The exclusion will be overturned.18

Charitable preferences of trust creators must be adhered to.

Example:

Trustees, on the occurrence of certain events, are given an “absolute and uncontrollable” discretion to pay the residue of a trust fund to any charity which they may select. The trust creator was a practising Christian and former council member of a private school. However, the trustees ignore these indications of the creator’s charitable interests and pay the residue of the fund to an animal liberation charity. Trustees may be acting capriciously or in bad faith in this event.19

“Real and genuine consideration”

“The court will interfere where a clear case is made out that [a] discretion is not exercised upon a real and genuine consideration of the matter entrusted to the trustee’s discretion.”20

Discretionary trustees have independent discretions to exercise. Regardless of how “absolute” or uncircumscribed a discretion is, trustees cannot act as “mere ciphers” who implement the decisions of others. This allegation is related to, but short of, nullity by reason of delegation as discussed under the previous heading.

Example:

Trustees exercised their discretion over several years by signing documents prepared by the family accountant and making income appointments without sufficiently comprehending what the documents contained. The trustees, in this event, had failed to exercise the discretion entrusted to them and their determinations were nullities.21

In the absence of reasons for the trustees’ decisions, it is often difficult to identify the information to which the trustees paid regard in the exercise of their discretion. A high, but not insurmountable, hurdle stands in the way of the dissatisfied beneficiary who wishes to make a claim under this heading.

Trustees’ decisions will be overturned, regardless of reasons, if it can be said that no reasonable trustee “would” have decided as the trustees did. It is not sufficient for dissatisfied beneficiaries to show that trustees did not have a piece of evidence before them which bore on, or “might” have affected the determination which the trustees made.22

Discretionary trustees do not always have “uncontrolled” discretions. Some discretions are exercisable only after some preliminary matter has been taken into account. The discretion is then reviewable on the basis that there has been no proper consideration of the preliminary matter.

Example:

Discretionary trustees were empowered to distribute such annual sums as were appropriate in their opinion to the testator’s widow and the children of the family, taking into account the widow’s needs and alternative means of support. Over a number of years, large amounts were distributed to the widow without the trustees making any inquiry as to her means. Substantial alternative means were possessed by the widow. The court inquired into what materials the trustees considered. The trustees, it was found, failed to take into account matters which the terms of the discretion required them to take into account. A different trustee determination “would” (or must) have been made if the trustees had known the true position. Administrators of the estate of the widow were ordered to repay $520,612 to the trustees.23

Even if a discretion is totally “uncontrolled”, it may be clear from the facts that a crucial consideration was overlooked when the discretion was exercised. No reasonable trustee would have intended the consequences of the power’s exercise. A nullity results.

Example:

A trustee exercises a power to appoint the income or capital of a trust to a new trust of which the appointee is a beneficiary. An advancement is made by way of sub-settlement. However, the appointee acquires no benefit as the sub-trust is invalid due to an unforeseen application of the rule against perpetuities. The discretion, in this event, is not validly exercised.24

Further to the last example, terms of the “no reasonable trustee” principle are unclear. On one view, an unauthorised exercise of trustees’ dispositive power always occurs where trustees fail to take into account relevant considerations, or take into account irrelevant considerations.25 The consequences are significant. Trustees’ determinations in exercise of their discretions may be overturned and otherwise binding dispositions reversed. This, it has been suggested, makes trustees members of “a new class of incapacitated persons, like children, or feeble minded adults”.26

Example:

Trustees of an off-shore trust created by a person exempt from capital gains tax determined to distribute trust property to the resident beneficiaries of a discretionary trust. The off-shore trust had accrued gains of £35m. A “catastrophic” charge to capital gains tax occurred. However, application of the Hastings-Bass principle saved the solicitors concerned. It was concluded that if the trustees had been aware of the capital gains consequences they would not have gone ahead with the distribution. The appointment was therefore a nullity.27

Conclusion

Dissatisfied beneficiaries can challenge the exercise of trustee discretions on the foregoing three bases. It does not matter that discretions are “uncontrolled” or that reasons for the decision are not given. “Ultra vires” allegations look to whether trustees have kept within the terms of their discretions, including the width of classes of eligible appointees. “Bad faith” claims are protean. Trustees who profit by their decisions, directly or indirectly, are always in bad faith. They may also be in bad faith where they ignore the wishes of trust creators and follow other promptings. Finally, trustees must give “real and genuine consideration” to the exercise of their discretions. Even where trustees give no reasons for their decision, dissatisfied beneficiaries may claim lack of consideration where trustees have acted as “no reasonable trustee” would have done.


DR JOHN GLOVER is an associate professor in the Faculty of Law at Monash University and a member of the Victorian Bar.

1. See G Thomas, Thomas on Powers (1st edn), Sweet & Maxwell, London, 1998, at [6-204].

2. (1851) 3 Mac & G 440; 45 ER 330 at 333.

3. See Thomas, note 1 above, at [6-243B].

4. See Re Londonderry’s Settlement [1965] Ch 918 (CA), at 931 per Harman LJ, at 935-936 per Danckwerts LJ, at 937-938 per Salmon LJ.

5. Most discretionary instruments take this form: see Thomas, note 1 above, at [6-211]; also see Esso Australia Ltd v Australian Petroleum Agents’ & Distributors’ Association [1999] 3 VR 642 at 655-656 per Hayne J.

6. Textbooks are not consistent in describing the duties of a trustee with discretionary powers: compare J Heydon & M Leeming, Jacobs Law of Trusts in Australia (7th edn), LexisNexis, Sydney, 2006 at [1608]; H Ford, W Lee & M Bryan, Principles of the Law of Trusts, Lawbook, Sydney (on-line) at [12770]; and Thomas, note 1 above, at [6-210].

7. The orthodox view: see Attorney General v Breckler (1999) 197 CLR 83, at [7] per Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ; Re Londonderry’s Settlement, note 4 above, at 936-937 per Salmon LJ; Gisborne v Gisborne (1887) LR 2 App Cas 300 (HL) at 305 per Lord Cairns LC.

8. See Ford & Lee, note 6 above, at [12770], citing the family trust case of Re Manisty’s Settlement [1974] Ch 17 at 26 per Templeman J. For tax reasons in Australia, trust settlors are usually not trust creators and serve only in a nominal capacity.

9. As in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405.

10. See Maciejewski v Telstra Super Pty Ltd (1998) 44 NSWLR 601 at 603-604 per Young J – a superannuation case.

11. See Karger v Paul [1984] VR 161 at 164 per McGarvie J.

12. See Thomas, note 1 above, at [8-01]–[8.36].

13. As Robert Walker J remarked regarding a charity trustees’ discretion in Scott v National Trust for Places of Historical Interest or Natural Beauty [1998] 2 All ER 705 at 717.

14. See Thomas, note 1 above, at [8-04], citing Burleigh v Pearson (1749) 1 Ves Sen 281, at 282 per Lord Hardwicke.

15. See Butler v Butler (1880) 7 LR Ir 401.

16. See Thomas, note 1 above, at [6-201]–[6-206], and M Cullity, “Judicial review of trustee discretions” (1975) 25 Univ of Toronto L Jo 99, 103.

17. See Wong v Burt [2004] NZCA 174, [27] per Hammond J for the Court, discussed in Ford & Lee, note 6 above, at [12830].

18. See Curwen v Vanbreck Pty Ltd [2008] VSC 338 at [83]. In the absence of the admission, the Court, a little surprisingly, declined to find that resisting discovery was one of the trustee’s purposes in excluding the beneficiary.

19. See Ford & Lee, note 6 above, at [12800].

20. See Sinclair v Moss [2006] VSC 130 at [17] per Byrne J, citing Telstra Super Pty Ltd v Flegeltaub (2000) 2 VR 276 (CA) at [26] per Callaway JA – a superannuation case.

21. See Turner v Turner [1984] 1 Ch 100 and Thomas, note 1 above, at [6-129].

22. See Esso Australia Ltd v Australian Petroleum Agents’ & Distributors’ Association [1999] 3 VR 642 at [41] per Hayne J; also Mettoy Pension Trustees v Evans [1991] 2 All ER 513; [1990] 1 WLR 1587 at 1624-1625 per Warner J; and Breadner v Granville-Grossman [2001] Ch 523 at 542-543 per Park J.

23. See Sinclair v Moss [2006] VSC 130 at [78] per Byrne J; also Elovalis v Elovalis [2008] WASCA 141 at [51] per Martin CJ.

24. See Re Hastings-Bass [1975] 1 Ch 25 (CA), which concerned a power of advancement under a large family trust – a substantial charge to estate duty was avoided when the trustees’ determination was nullified. See also Re Pilkington’s Will Trusts [1964] AC 612.

25. See Re Hastings-Bass [1975] 1 Ch 25 at 41 per Buckley LJ (for the Court).

26. The view of Sir Robert Walker (now Lord Walker) in “The limits of the principle in Re Hastings-Bass” (2002) 13 KCLJ 173, at 183.

27. See Abacus Trust Company (Isle of Man) v NSPCC [2001] STC 1344; [2001] WTLR 953. Walker J, note 26 above, at 178 commented waspishly: “I must resist the temptation to ask where, on a scale of one to ten, you would place the catastrophe of participating in accrued capital gains of £35m, even after capital gains tax”.

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