Removal of Trustees When (Poorly) Exercising Their Discretion

Trusts are set up for the benefit of beneficiaries with the role of trustee being one that requires competence, good judgment, and above all integrity and impartiality. The Court will from time to time use its powers to unilaterally remove a trustee in circumstances where the best interests of the beneficiaries have not been given due consideration. Recent case law considers the approach taken by Judges, which will always be based on the facts and on a case-by-case basis. Below is a summary of two fairly recent cases that resulted in the trustee of a discretionary trust being removed by the Court.

There is a perception that a trustee of a discretionary trust has absolute discretion with respect to the distribution of assets/funds to beneficiaries. Whether a family trust or testamentary trust (as in these cases), trustees have obligations at law to consider the needs of all beneficiaries when making distributions. Moreover, whilst not the issue in these two cases, care should also be taken if decisions are being made purely on a tax basis.

Owies and Owies v JJE Nominees Pty Ltd (ACN 004 856 366) (in its capacity as trustee for the Owies Family Trust) [2022] VSCA 142

Facts: Two beneficiaries of a multi-million dollar trust challenged distributions made to three other family beneficiaries, excluding them. The trust deed gave the corporate trustee “absolute discretion” as to income distribution which is not uncommon. It is important to note that following the death of the parents, the corporate trustee directors were the sibling that had received distributions and the family solicitor. The remaining siblings requested that the trustee be removed on the grounds that despite the trustee’s absolute discretion there was a breach of trust as the trustee did not give due and proper consideration to all of the beneficiaries for the purposes of distributions.

Outcome: The trustee failed to consider the circumstances of the two beneficiaries and should have made inquiries. Additionally as default income beneficiaries, this “reinforces the default structure of the trust deed as one providing for the benefit of the children in equal proportions”. Moreover, a full 100% distribution to the Father in one year was deemed “so extreme and without any evident justification", demonstrating a failure of any real and genuine consideration of the other beneficiaries.

JPD as Guardian v DMS as Trustee [2022] QSC 181

Facts: This case was focused on a testamentary trust and its administration by the (in the end) sole trustee appointed by the deceased Mother of four children. The Father had sole custody of the children and the trustee had made a number of decisions that were 'inconsistent with her obligation to administer the trust for their benefit'. There was significant animosity between the parties and the nature of communication from the trustee was a consideration in the circumstances.

Outcome: The court used its powers to remove the trustee and appoint a new trustee. The Court considered a number of circumstances and in particular, the trustees' communication with the father as well as the trustee's failure to allow the family to move to another city, as well as attempting to force a move of premises. The Court found that the 'trustee’s dual pattern of a lack of respect for the importance of the father’s position in the children’s lives and her disinterest in genuinely attempting to consult him about major decisions bearing upon the children’s ... welfare has adversely affected her approach to properly informing herself as to the children’s welfare.'