A very dangerous precedent in discretionary trust law has been established by a recent decision in Victoria. Discretionary trust deeds generally provide trustees with an unlimited discretion to distribute trust income and capital among available beneficiaries as defined by the trust deed. In the past, trustees have relied on the apparently absolute discretion their deeds give them to distribute to selected beneficiaries at the exclusion of others. Trustees have always believed they were free to do this without the need to in any way justify or explain their decision. This is now in serious doubt following the decision of the Supreme Court of Victoria - Court of Appeal in Owies case: Owies v JJE Nominees Pty Ltd [2022] VSCA 142 (20 July 2022).

The case involved distributions from the trustee of a discretionary trust known as the Owies Family Trust established by a couple John and Eva Owies in 1970. The trust deed named the couple’s three children Michael, Deborah and Paul as “primary” beneficiaries and also included other relatives within a “general” class of beneficiaries.

Deborah and Paul successfully argued that the income distributions for the 2015 to 2019 years were voidable on the basis that the distribution decisions of the trustee of the Trust were made on the basis of no real and genuine consideration of Deborah and Paul as potential recipients of distributions.

Note, as the transactions were found to be voidable (but not void), the aggrieved beneficiaries will need to apply to the courts for a separate declaration that a particular transaction was void. Watch this space!

COMMENT: It’s no real coincidence this case emanates from Victoria, the left-wing capital of Australia. Whilst each state has its own trust legislation this case will have relevance everywhere. It seems to be part of a trend that increasingly allows the state to override decisions people make in relation to distribution of their own wealth, whether it be under a trust deed, or under their will. As a result of this case trustees will have very little certainty that their decisions will not be challenged at some point in the future. For instance, will the state override decisions to exclude beneficiaries with addiction or bankruptcy issues, or who are financially irresponsible or pose asset protection risks? This case is likely to have very far-reaching effects and could be another nail in the coffin of discretionary trusts which are already being seriously undermined by Treasury and the ATO.   

WHAT YOU SHOULD DO: The necessary response by trustees will evolve as the industry digests this unexpected decision. At this stage trustees should consider keeping notes demonstrating consideration of the various potential beneficiaries each year, and perhaps noting how distributions are intended to achieve family financial objectives.