Fractured Families & Trusts
If your farming business involves a family trust of sorts, it is very likely that the trust is a discretionary trust. That is, the trustee has full discretion in distributing the trust income amongst beneficiaries, often in a manner which offers the greatest tax advantage.
However, the extent of this discretionary power has been challenged in a Victorian case, Owies v Owies [2022] VSCA 142. The Owies Family Trust was settled in 1970’s and had an estimated value of $23 million. The primary beneficiaries were John and Eva, the parents, and their kids, Michael, Paul and Deborah, as general beneficiaries.
Between 2011 and 2019, a pattern began to emerge. 40% of the trust income was distributed to John and Eva whilst the remaining 20% went to Michael. This is because Paul and Deborah became estranged from the parents and Michael, only making contact a few times a year, only on important occasions such as when John went to hospital and later aged care.
However, despite this falling out, Paul and Deborah were still beneficiaries of the Trust. They bought an action against the Trustee of the trust as they had not received any distributions from the trust between 2011 and 2019.
But, does a trustee of a discretionary trust not have full discretion in the distribution of trust income?
Yes, of course. However, the trustee must give ‘real and genuine consideration’ to the position of each of the beneficiaries before making any distributions. The courts also inferred that the purpose of this trusts default structure was to provide the benefit to the children in equal shares. Not that they must award distributions in equal shares to the children, but when exercising their powers, the trustee must take into account this default structure of the trust.
The courts looked at the evidence, points of contract between each of the parties and inferred that the trustee has not given real and genuine consideration to Paul and Deborah’s position as there had not been sufficient contact between the parties. As such, the court ordered the trustee to be removed and an independent trustee appointed.
There are a few key take-aways of this case:
The trustee still has full discretion when making distributions, they must however, show they took real and genuine consideration to each of the beneficiaries before doing so. This does not require them to explain their justification of awarding a distribution of a certain amount. Instead, they must show they contacted the beneficiaries and got an update on their position in life.
The importance of thorough estate planning. It is not stated which industry the family was involved in. However, if they were a farming family and Michael was in the process of taking control of the farm, he has lost all control over the trust as an independent trustee was appointed.
We can assist if you require advice in respect of Estate Planning.