by John Wojtowicz (Director - Law Central Legal)

A trustee of a trust has many duties. The fiduciary obligations of a trustee are well known and the courts have set down a steady set of rules over the years on how trustees should conduct themselves when administrating the affairs of the trust. Commonwealth and state legislation add another layer of duties or obligations for the trustee to abide by in addition to the equitable principles set down by the courts.

One duty that is less well known but can have far reaching consequences is the duty of the trustee not to fetter his discretion. This duty has its origins in the English courts of equity and has been an established rule of law for over a century.

In essence the duty requires the trustee to not bind themselves to make a decision at some time in the future. In the 1902 decision of Re King the court held that the "trustees ought, as far as possible, to keep their discretion open and unfettered."

If the trustee enters into a legally binding agreement that forces them to act in a particular way or if the trustee, that has discretionary power, decides how it will exercise its power in the future, then such a decision will in all probability constitute a breach of their duty to act in an unfettered way. It is then open to a party, normally a beneficiary of the trust, to challenge the trustee’s action. Previous court cases have involved executors (trustees) of an estate, testamentary trusts and discretionary trusts.

Exceptions to the rule that allow the trustee to delegate their discretion include:

1. Statutory exception - most state trustee acts have exceptions;
2. Delegation that is allowed under the trust deed or instrument; and
3. Court order - the Supreme Court in all states has broad powers to regulate the affairs of a trust.

It should be noted that a trustee can appoint agents to perform certain tasks, with the most common example being the appointment of tax agents to ensure the trustee meets its obligation under the tax legislation.

We note that the principle needs to be considered in the context of the relevant governing trust deed: Queensland Local Government Superannuation Board v Superannuation Complaints Tribunal [2014] FCCA 2473 Judge Burnett at [41].

SMSF

SMSF deeds normally have a provision for a beneficiary to make a binding death nomination (“BDN”) to certain persons. The BDN constitutes a fetter on the trustee’s discretion as this would force the trustee to distribute the fund’s wealth on the terms set out in the BDN as opposed to the trustee exercising his discretion as to how any death benefit is to be paid.

BDNs are permissible if the SMSF deed allows for them.

Trusts with discretionary trust powers

The most common trusts in Australia with provisions containing discretionary trustee powers are discretionary or family trusts, with a touted number of over 800,000 being established in Australia. The increased popularity of testamentary trusts (with discretionary trust type features) as an asset protection structure (see Issue: 509 for commentary on these trusts) are another common example, albeit not in the same numbers as discretionary trusts.

The discretionary powers of the trustee in both these forms of trust are, to a certain degree, similar insofar as they relate to the distribution of income or capital under the trust. As the beneficiaries of these trusts are at the whim of the trustee as to what income and capital they may receive in any particular tax year, it is sometimes the case that they endeavour to influence the trustee to take a predetermined course as to how future distributions are to be made. Any arrangements made to have legal effect in the future in relation to distributions can result in the trustee’s actions being unenforceable and subject to a court challenge by other beneficiaries to the trust.

In the case of Karger v Paul (1984) VR 161 a case was brought by a beneficiary (Karger) of an estate seeking relief against the trustee in connection with the administration of the estate.

In this case the trustee had an "unfettered discretion to pay or transfer the whole or part of the capital of the estate" to a Mr Smith (the deceased’s husband). The trustee, in administering the estate, transferred all of the estate to Mr Smith.

The plaintiff, Karger, had a contingent interest in the estate.

Karger alleged that the executors "acted wrongly in paying and transferring the estate because in doing so they did not act honestly and in good faith, they acted without any fair and proper consideration as to whether they should do so and they therefore acted in breach of trust." The result of the transfer "deprived her of her entitlement under the will."

The court, in its judgment, stated that "it is an established general principle that unless trustees choose to give reasons for the exercise of discretion, their exercise of the discretion cannot be examined or reviewed by a court so long as they act in good faith and without an ulterior purpose" and that the trustees "act upon real and genuine consideration."

Interestingly, the plaintiff submitted that it was implied that she was "given a fair opportunity of making representations" to the trustees "before they exercised their discretion". The court rejected this argument with his honour McGarvie J seeing "no good reason for importing rules of natural justice into the exercise of discretion by the trustees of the will".

The court ultimately held that they were not satisfied "that the trustees or either of them failed to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which it was conferred."

We note the interesting case of Dagenmont Pty Ltd v Lugton [2007] QSC 272 which involved an arrangement under deed to pay an amount of trust income to a certain beneficiary each year. Gold and Platinum members can read about this case in the platinum section below.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin

Related documents:

• Family Trust
• Self Managed Superannuation Fund Deed
• SMSF - Update Rules
• Change Trustee of Family Trust
• Trust Distribution Minutes Library for 2018/19 - Multi-Use
• Trust Distribution Minutes Library for 2018/19 - Single-Use

Related webinars:

• Webinar - Accessing Company & Trust Documents in Family Law
• Webinar Recording - Small Business Tax and Financial Risks
• Webinar Recording - Fixing Family Trust Deeds
• Webinar Recording - Beneficiary Entitlements in Trusts