We strongly recommend that if you currently have a Trust, that your Deed be reviewed.
In July 2022, a Court (known as “Owies Case”) unwound a Trustee’s Family Trust distribution on the basis that 2 adult children weren’t properly considered.
As a result of this Court decision, you may need to update your Discretionary Trust Deed to remove certain beneficiaries to prevent them from applying to the Courts to force the Trustee to distribute trust income to them.
WHAT HAPPENED IN “OWIES CASE”?
In Owies Case, some of the potential beneficiaries of a Discretionary Trust (who were named in the Trust Deed as a primary/default beneficiary) challenged the distributions that a Trustee had made. The Court held that a Trustee needs to give “real and genuine” consideration to the personal circumstances of potential beneficiaries of a trust when making distributions.
The Court found that the decision of the corporate Trustee (controlled by the parents of the family) of a Discretionary Trust to not properly consider two of their children (who were estranged from them) when making annual income distributions from the trust was voidable.
WHAT THIS MEANS FOR YOU
A named default Beneficiary in your Trust could decide to take Court action against the Trustee if they feel they haven’t been properly considered by the Trustee in relation to the annual distribution of profits from the Trust.
For example, assume an adult child has a drug or alcohol problem or are “estranged” from the family. They could decide to demand income from a Trust where they are included as a named Beneficiary – and the Courts may back them up after the decision in Owies Case.
To avoid any “disgruntled” beneficiaries from claiming they did not receive their fair share of Trust income, it is now important that Trustees consider the terms and purpose of each Trust as well as how it is administered to assess whether it can achieve the goals of the parties involved – especially the names beneficiaries to the Trust.
As a Director of a Corporate Trustee / Trustee, you will need to review the following:
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- Reconsider the Primary/Default Beneficiaries in a Trust. All named beneficiaries in the Trust Deed need to be considered by the Trustee each year prior to making a final decision about income they will receive. It may be prudent to amend the Trust Deed to remove certain primary/default beneficiaries.
- The Purpose of the Trust. Is it to provide for Trust Beneficiaries or to retain capital for longer term generations. Does the Trust Deed need to be amended to reflect any change in purpose?
- How the Trustee exercises their discretion. Each year Trustees will need to seek information from default beneficiaries before exercising their discretion with income allocation.
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An update of your Trust Deed to remove specific primary/default beneficiaries will mean that the removed beneficiaries will not be able to question or take action against the Trustee following Owies Case, and they will not be able to demand funds from your Trust.
If this is an area of concern for you, please contact our team to discuss it further. Our assistance will give you peace of mind that your Trust assets will be as secure and protected as is possible.
We will liaise with our recommended expert asset protection and Trust Lawyers to arrange for your Trust Deeds to be legally reviewed and updated.
This is a great opportunity for a “clean slate” update of everything in your Trust Deed and will include a review of:
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- Previous Deeds of Variation to ensure they are valid
- Vesting date
- Income and Capital provisions
- Trustee powers
- Trustee and Appointor mechanisms for change
- AASB 2020-02 (requirement to prepare General Purpose Financial Statements)
- Signing of the Trust Deed
- Clerical issues
- Beneficiaries and removal if necessary
- Foreign person exclusion
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