Rights of a Beneficiary under a Discretionary Trust

Rights of a Beneficiary under a Discretionary Trust A PAPER BY PAUL ANDERSON APRIL 2010

Rights of a Beneficiary under a Discretionary Trust

Summary A recent decision from the Victorian Court of Appeal has explored the right of a beneďŹ ciary under a discretionary family trust to challenge the decisions of the trustee.

Who Does This Impact?

The trustees and beneďŹ ciaries of discretionary trusts.

What Action Should Be Taken?

The trustee should ensure that its exercise of a discretion, which is otherwise unchallengeable, is not motivated by an operative or actuating purpose which is improper.

Contents:

TURKSLEGAL

Trust Deed

2

Facts

2

Arguments

3

Legal Principles

3

Decision

4

Conclusion

4

PAPER

Rights of a Beneficiary under a Discretionary Trust

by Paul Anderson

The recent Victorian Court of Appeal decision of Curwen v Vanbreck Pty Limited (‘Vanbreck’) is an interesting exploration of the rights of a beneficiary under a discretionary family trust to challenge a decision of the trustee.

Trust Deed The WS and NR Harvey Family Trust was established by Deed dated 5 June 1981.The trustee was Vanbreck.

Vanbreck The directors of Vanbreck were initially William Harvey and his wife, Nancy Harvey.

The Deed contained standard powers enabling the trustee to divide capital and income between the beneficiaries in such proportions as the trustee thought fit in its absolute discretion.

The Principal Beneficiaries were defined as the children and grandchildren of William and Nancy. Secondary Beneficiaries were defined as the descendants of the Principal Beneficiaries, the spouse, widow or widower of any Principal Beneficiary or descendants thereof and William and Nancy.

Clause 20(1) of the Trust Deed was in the following terms: The Trustee for the time being may at any time and from time to time prior to the Vesting Day by Deed whether revocable or irrevocable appoint that any person who would otherwise be a Beneficiary for the purposes of this Deed shall be excluded from the class of Beneficiaries.

Clause 17 further provided: Subject always to any express provision to the contrary herein contained, every discretion vested in the Trustee shall be absolute and uncontrolled and every power vested in it shall be exercised at its absolute and uncontrolled discretion….

Facts William and Nancy had two daughters, Prudence and Sandra. The plaintiffs in the proceedings were Sandra, her husband, Charles, and her two children, Nigel and Hamish, all of whom were beneficiaries as defined in the Trust Deed.

In 1987, there was a falling out between Sandra and her parents and sister. Legal proceedings instituted by Sandra were settled in March 1990, on terms which included transfer to Sandra of certain property and payment to her of the sum of $800,000. In the same year, Vanbreck executed a Deed pursuant to Clause 20(1) of the Trust Deed, excluding Sandra and Charles as beneficiaries.

On 15 June 1990, Prudence was appointed a director of Vanbreck. On 24 March 2000, Nancy ceased to be a director of Vanbreck.

In August 2005, William entered a nursing home and on 7 December 2005 signed a letter of resignation as director of Vanbreck prepared by Prudence. Prudence became sole director and secretary and effectively controlled the company.

William died on 14 June 2007. It was common ground that he had been suffering from Alzheimer’s dementia for the last two years of his life.

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Rights of a Beneficiary under a Discretionary Trust

by Paul Anderson

Until March 2006, Hamish had been actively involved in farming and business activities of the family and had resided with Prudence and Nancy for some period. However, in March 2006 Nancy and Prudence had a serious argument with Hamish, as a result of which he left the property and ceased residing there.

In May 2006, Sandra began visiting her father at the nursing home.

On 6 October 2006, solicitors for Sandra wrote to Vanbreck seeking access to the ‘Trust documents including the Trust Deed and the relevant books of account, including in particular, the balance sheet of assets and liabilities’.

Solicitors for Vanbreck replied that any rights Sandra might have had in relation to the Trust were expunged by the Deed of Settlement dated March 1990. Sandra’s solicitors then replied that they now acted for Charles and Nigel and renewed the request for access to the Trust documents on their behalf.

Following a period of stalling and prevarication by the solicitors for Vanbreck, Vanbreck Vanbreck executed a Deed pursuant to Clause 20(1) of the Trust Deed, excluding Hamish and Nigel as beneficiaries of the Trust. Vanbreck then refused to provide the requested access to the Trust documents to Nigel and Hamish on the grounds that they were no longer beneficiaries.

Arguments The plaintiffs instituted legal proceedings claiming that the Deed excluding Hamish and Nigel was void ab initio by reason of bad faith. Alternatively, it was executed with an ulterior motive or purpose, namely to prevent Hamish and Nigel from gaining access to the Trust documents.

Vanbreck’s response was two fold. Firstly, the Deed was not executed in bad faith or with an ulterior motive. Instead, it was executed to correct Vanbreck’s mistaken belief that Hamish and Nigel had been excluded as beneficiaries in 1990 by the Deed then executed pursuant to Clause 20(1) that excluded Sandra and Charles.

The request for access to the documents was the occasion for the Trust Deed to execute the Deed of Exclusion but was not a reason for deciding to do so.

Secondly, in any event the trustee had an absolute and unfettered discretion in exercising its powers under the Trust Deed as set out in Clause 17.

Legal Principles The Court of Appeal summarised the relevant legal principles as follows.

A beneficiary of a discretionary trust has a right to inspect Trust documents.

Generally speaking, with one exception, the exercise of a discretion by a trustee will not be examined or reviewed by a Court so long as the discretion is ‘exercised in good faith, upon real and genuine considerations, and in accordance with the purposes for which the discretion was conferred.’

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Rights of a Beneficiary under a Discretionary Trust

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The one exception was if the trustee gives reasons for the decision. Then the validity of the trustee’s reasons will be examined by the Court.

However, there is no legal obligation on a trustee to give reasons for a decision.

Absent the giving of reasons by the trustee, a power must still exercised by a trustee for the purpose for which it was conferred. The power of exclusion in Clause 20(1) was conferred to enable a trustee to determine whether each of the listed beneficiaries ought to be entitled to a possible distribution of trust property. The power is not conferred to enable a trustee to prevent a beneficiary having access to trust documents. An exercise of the power in Clause 20(1) for such a purpose would be improper and invalid.

The trustee then argued to be improper, the purpose of preventing a beneficiary from having access to Trust documents must be the ‘primary or dominant purpose’ of the trustee. The Court disagreed and held that it was enough if the improper purpose was ‘an operative or actuating purpose.’

Decision The Court reviewed all of the evidence.

There were numerous arguments both ways but none of them telling.

However, one significant difficulty for the appellants was the absence of any evidence that the trustee wished to conceal information contained in the Trust documents. There was no allegation of ‘mismanagement or misfeasance which might have motivated a decision to withhold access to the Trust documents’. The appellants were relying upon circumstantial evidence to establish a fraudulent or improper purpose. It does not follow that a consequence of an action constitutes a reason or purpose for the action.

Neither at trial nor on the appeal did the appellant’s case rise higher than the suggestion that, because the Trustee’s decision was made in the context of the beneficiaries’ request for access to the documents, that must have been a reason for the exercise of the power of exclusion. The trial judge was unpersuaded that the request for access to the documents was anything more than the occasion for the Trustee to consider the exercise or the power of appointment.

The Court agreed with the Trial Judge and dismissed the appeal.

Conclusion The decision highlights the difficulties facing a beneficiary of a discretionary family trust in ‘dispute’ with the trustee. Even if the appellants had succeeded in overturning their exclusion as beneficiaries, it is hard to see how their cause is advanced in a broader sense. It is true that they would then have been entitled to access to trust documents including accounts but, absent evidence of mismanagement, that could have proved a hollow victory. For the beneficiaries to receive any financial benefit from the Trust whether in the form of income or capital, the trustee would still need to exercise a discretion in their favour. The decision in this case in no way alters the general principle that the exercise of such a discretion by a trustee is absolute and unfettered.

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Rights of a Beneficiary under a Discretionary Trust

by Paul Anderson

For more information, please contact: Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au

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