Two recent High Court cases have shown that the Court is often not willing to intrude on trustee decision-making power if the decision was made reasonably.

The Trusts Act allows beneficiaries of a trust to apply to the Courts to review a trustee’s act, omission, or decision on the basis that it was not reasonable in the circumstances.

Where the beneficiary can successfully establish a reasonable dispute, the onus shifts to the trustee to show the Court that the decision was, “…reasonably open to the trustee in the circumstances.”

If the Court finds the trustee did not act reasonably, it can:

• set aside the decision;
• direct the trustee to act otherwise;
• restrain the trustee from making a specific action; or
• make any other order the Court considers necessary.

This right of review is a tool for beneficiaries to hold trustees to account, given trustees are holding assets for the benefit of the beneficiaries ultimately.

First Judgment

A father passed away, with three children (one of whom had a child). He had set up an extensive family trust before passing away, and made certain wishes clear with respect to the trust’s income, and eventual windup.

He said the trust’s income should be split into seven equal shares. Two shares to each of his three children, and one share to his grandchild.

He said when the trust was wound up the trust fund should also be split into seven equal shares, two for each of his three children, and one share for his grandchild, and any other grandchildren who were living at the time and reach the age of 20.

The year after the father passed away, the trustees allocated the 1/7^th share of the trust’s capital (approximately $4 million) to the grandchild.

A few years later two further grandchildren were born. The trustees reviewed their earlier decision, and continued to hold the $4 million for the grandchild, but decided that any additional capital would be divided equally between the three grandchildren.

Practically, this meant that while the initial grandchild would receive approximately $4.2 million (including interest), the remaining two grandchildren would only receive approximately $240,000 each.

The remaining two grandchildren’s father applied to the Court, challenging the trustee’s decision, citing that:

• they had failed to consider the relevant considerations.
• the decision was unreasonable; and
• the decision was perverse.

The Court disagreed, citing that the trustees accurately considered the Trust Deed and guidance from the late father, pointing to the fact that they voluntarily undertook to review the decision when two more grandchildren had been born who were not alive when the trust was distributed according to its terms.

The Court further held that the trustees adequately considered the needs of the two younger grandchildren as there was no evidence which suggested that they would suffer any material detriment from this decision.

It took specific note of the duty on trustees of impartiality, explicitly stating that exercising this duty does not require equal treatment of beneficiaries, nor does it require distributions to be equal.

It was a key aspect of this family trust that it was a discretionary trust, where trustees have powers of absolute discretion over the operations and distributions to beneficiaries of the funds in light of the Trust Deed.

The Court ultimately found against the son, ruling that the trustees had reasonably carried out their duties to reach their decision.

Second Judgment

A doctor passed away leaving five children. One of his children was a sickness beneficiary, with a fairly weak financial position.

In light of this, the father had left him half of his estate in his Will, with the remaining half to be split between the rest of the four children. The estate was initially valued at approximately $800,000, but due to lasting disputes regarding the estate, this was ultimately depleted to $300,000.

The father’s trust, on the other hand, listed all five children as beneficiaries. The children collectively agreed that the trust fund should be fully distributed.

Although the son who was a sickness beneficiary, alongside his sister who was also not financially stable, wanted a greater share of the trust to reflect their financial disparity with the other siblings.

The trustees disagreed that this should be taken into account and decided ultimately to split the trust fund into five equal shares, amounting to approximately $360,000 each, subject to equalisation to take into account any prior distributions.

The son who was a sickness beneficiary was predominantly affected by this, as this meant he would only receive an approximate $220,000 from the trust (albeit he had received half of the estate under the Will as well).

He brought a late application to the Court to review the trustees’ decision, where the issue focused on whether the proposed distribution of the trust funds was reasonably open to the trustees in the circumstances.

The Court found that it was reasonable for the trustees to administer the trust separately from the estate. This remained true, even though in the present circumstances the trustees had not taken into account the reduced value of the estate.

The Court considered that there was no corresponding memorandum to suggest that the trust should be dealt with in the same manner that the estate was (i.e. to benefit the son more than the others).

The Court noted that while the trustees could have made considerations to accommodate the son’s position, the fact that they chose not to was well reasoned and within the terms of the Trust Deed in light of the present circumstances.

The Court ultimately found against the son, holding that the proposed equal distribution of the trust funds was reasonably open to the trustees in the circumstances.

Are there any lessons to learn from these cases for trustees and beneficiaries?

These cases show that the Court looks closely at each family’s circumstances and that the Courts are reluctant to override trustee decisions where they are reasonably made.

The trustees in these cases had documented their decision-making well and had fully considered all circumstances. Trustees should always ensure they document their reasoning for making any decisions in writing in case their decisions are challenged.

Not all trustees make well-reasoned decisions, so it is important for beneficiaries to be aware of these powers of review by the Courts.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.

Claire Tyler and Raiyan Azmi