Family Trusts and the rights of discretionary beneficiaries
The term ‘family trusts’ often refers to a form of discretionary trust in which the beneficiaries of the trust have no fixed entitlements to either income or capital. For the purpose of this article, we will refer to discretionary trusts as family trusts. The trustee of a family trust generally has full discretion over who receives income and capital of the trust and how much.
So, if the trustee is the one calling the shots, what rights do discretionary beneficiaries have in relation to family trusts?
You have a right to insist that the trustee exercise their discretion
- That is, you have a right to require the trustees to consider whether to exercise their discretion to make a payment or distribution in your favour.
- Courts were previously reluctant to intervene in the exercise of a trustee’s discretion in such areas.
- However, some recent decisions have indicated, that unless the trustee gives “real and genuine consideration” to a potential beneficiary then there is a risk that their decisions could be set aside.
- Note: a discretionary beneficiary doesn’t have a right to see the reasons for the exercise of discretion, this includes documents such as minutes or letters containing those reasons.
You can insist on the proper administration of the trust
- Trustees have special obligations known as ‘fiduciary obligations’. This means that they must properly manage the trust fund, exercise of the trustee’s powers and discretions in good faith and not place themselves in a position of a conflict of interest (unless the deed specifically allows for this).
You have a right to see the accounts of the trust
- At law, discretionary beneficiaries do have a right to see the accounts of the trust, this includes profit and loss statement, balance sheets, tax returns and minutes of meetings.
- We note, that the trust deed may limit the types of documents that the trustee is bound to provide to the beneficiaries.
You are entitled to call on unpaid distributions
- If the trustee has decided to make a distribution to you as a discretionary beneficiary, then you do obtain a proprietary interest in the trust to the extent of that distribution, even if the distribution has not been paid yet.
- This kind of unpaid distribution is known as an ‘unpaid present entitlement’ (UPE).
- A beneficiary is entitled to call upon the trustee to pay any UPEs and can take legal action to enforce the payment if this does not occur.
You do not own the assets of the trust
- The Trustee holds the assets of the trust on trust for the beneficiaries.
- This means that discretionary beneficiaries do not have an ‘ownership stake’ in the assets of the trust.
- Discretionary beneficiaries merely have a right to be considered for payment.
- However, once a distribution has been decided upon then the beneficiary gains a proprietary interest, to the extent of the UPE or distribution the trustee has decided to make.
You cannot control the trustee
- The trustee is bound to act in the best interests of the trust and its beneficiaries.
- The power to control (or remove) the trustee is set out in the trust deed and is usually exercised by persons acting as the appointor and/or guardian of the trust.
- In some cases, the consent of the primary beneficiaries of the trust is required for some of the decisions of the trustee.
- Discretionary beneficiaries are not usually involved in the management of the trustee.
You cannot vest or close the trust
- Discretionary beneficiaries cannot ask the trustee to end or vest the trust.
- Only in a trust where there is a closed category of potential discretionary beneficiaries and the trustee is obliged to distribute all the income each year (see the trust deed), can this occur.
- A closed category means a situation where there are no further potential beneficiaries (such as grandchildren or nieces and nephews etc). In practice this is rare.
So what if you have a trustee that is falling short? What can you do?
The court has an inherent jurisdiction to require trustees to do certain things.
A discretionary beneficiary can make an application to the court for an order that the trustee take certain action or undertakes certain steps, such as the provision of documents. A discretionary beneficiary can also make a claim to enforce payment of an UPE by a trustee.
Often, a difficulty that beneficiaries face in the family trust space, is that they are unaware of who exactly the trustee is (ie a person or a company) and are therefore not sure who to take action against to remedy a situation. In such cases then pre-action disclosure may be necessary to obtain this information.
If you have a question about family trusts you are involved in or have a dispute with a trustee, we recommend you contact one of our lawyers for a discussion. At Lynn & Brown Lawyers we have a team of professionals experienced in this area who can assist with your enquiry.
About the author: After completing a double degree Bachelor of Arts (Politics and International Relations) and a Bachelor of Law, Matthew Gunn was admitted into the Supreme Court of Western Australia in 2016.