Court makes orders in family trust case involving beneficiary clauses

A trust deed was drafted. All parties accepted that Mr Bowen and his then wife were intended to be beneficiaries of this family trust.

The deed defined ‘general beneficiaries’ to include ‘the primary beneficiary …’ the schedule to the deed defined ‘the primary beneficiary’ to mean ‘[Mr] Bowen and [his then wife] and the children of [them]’, Mr Figot explained.

“However, there was an error in the drafting of the deed. Namely, another clause in the deed (i.e. cl 1.1) contradicted the identity of the beneficiaries. Clause 1.1 provided that ‘[t]he “primary beneficiary” … means the children of the persons referred to in the schedule hereto’.

“In other words, cl 1.1 appears to exclude Mr Bowen and his then wife from being beneficiaries.”

The issues associated with this could be enormous, said Mr Figot noted.

Justice Lyons noted that the trustee had over the years had distributed income of the trust as though Mr Bowen and Mrs Bowen were in fact primary beneficiaries.

“Naturally, the tax implications of many years’ worth distributions purportedly being made to and declared by a non-beneficiary would be severely negative.

“Unsurprisingly, the trustee wished to address this issue,” Mr Figot explained.

One of the ways the trustee sought to fix the issue was to seek a declaration that on the proper construction of the deed, each of Mr Bowen and his then wife were beneficiaries of the trust. 

The second means was to seek an order for rectification of the deed to the same effect.

While the first means failed, Justice Lyons did grant an order to reform an instrument in which the parties have mistakenly expressed their agreement or common continuing intention.

Justice Lyons was satisfied that this was an appropriate instance for the court to remedy the deed by the doctrine of rectification to reflect the actual common intention, explained Mr Figot.

While Mr Figot said this might be a positive outcome, seeking a court order would have been a costly, stressful and time-consuming exercise.

“Also, the court did not apply the more straightforward of the two solutions. That is, the court did not apply the solution that true construction of the deed at all times was that Mr Bowen and his then wife had always been beneficiaries. Rather, the solution the court applied was the application of equitably remedy,” he said.

“Accordingly, it becomes more vital than ever to ensure that deeds are prepared with absolute skill and precision.”

SMSF professionals using online platforms to generate deeds or variations of deeds without lawyer review or sign-off, he said, should be aware that this could result in a document with deficiencies, which could have negative consequences in the future.