Hayley Mitchell, partner with Cooper Grace White Lawyers, said many decisions trustees make will involve an exercise of discretion.
“It will depend on the trust deed, but those decisions can include things like trust distributions, whether they’re changing the terms of the trust deed or adding or removing beneficiaries of trusts.”
She said trustees of SMSFs will be exercising discretion often, especially in deciding how to pay a death benefit.
“It also extends to whether the trustee should look at exercising a discretion so, the first question isn’t whether how much income the trustee distributes, but whether the trustee distributes any income at all, for example,” she said.
Ms Mitchell said whether a trustee has absolute discretion is determined by the terms of the trust deed and typically with a family discretionary trust, many will specifically state that “a trustee has absolute and unfettered discretion”.
“But, that doesn’t mean the trustee can do whatever they like without properly considering the purpose of the trust and the range of beneficiaries,” she said.
“When a trustee is making a decision, they really need to give genuine consideration to the beneficiaries, the purpose of the decision and the purpose of the trust.”
Trustees of discretionary funds must also meet other conditions if they are to avoid decisions being challenged by beneficiaries.
Part of the duties of a trustee is to act honestly and in good faith for the “proper purpose of the trust” which extends to not benefiting people “who are not objects or beneficiaries of the trust”.
Ms Mitchell said beneficiaries might challenge the decision of the trustee if they think that the decision was made without a proper purpose or without having genuine consideration for those issues.
“If a beneficiary is disappointed by a decision of the trustee, they could apply to the court seeking for the trustee to be removed and if they’re successful in that application, they might also have their costs paid,” she said.
“Typically, you won’t see the court substituting the trustee’s decision. The court may determine that if the trustee had made a decision without proper purpose, for example, they might unwind that decision, but they won’t then substitute it for a different one. The only outcome that we usually see in these cases is the removal of the trustee, and an appointment of an independent trustee.”
