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Family Trusts: Where Detail Is Paramount

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By Farah Nathar, Lawyer, MST Lawyers

Disputes over trust assets can tear families apart. A recent case in the Supreme Court of Victoria has put the spotlight on many of the issues associated with establishing and maintaining Family Trusts and the importance of obtaining appropriate estate planning advice.

The events leading to the proceedings in Trani v Trani are somewhat complicated. However, the scenario is unfortunately not that uncommon. In summary, mum and dad set up a Family Trust (holding a number of investment properties) primarily for the benefit of their three adult children.

Eventually, mum and dad passed away, and the relationship between two of the children (the brothers) and the other (the sister) broke down. The financial position of the Trust became precarious. Disputes arose around the control of the Trust. The children were unable to agree on whether and how to end the Trust and distribute the Trust Assets. 

Ultimately, with only the brothers in control of the Trust, they decided to end the Trust and distribute the balance of the assets between the two of them equally; to the exclusion of their sister. However, their resolution contained a clerical error, and therefore the brothers could not lawfully distribute the assets. The brothers applied to the Court for rectification of the resolution, i.e. to amend the clerical error allowing them to exclude their sister from the distribution of the Trust assets.

The Court agreed that the remedy of rectification was appropriate in the circumstances in order to give effect to the brother’s intentions. However, it found that the resolution had been made in bad faith and for an improper purpose and therefore was unlawful.

Generally, in the context of a Discretionary Trust, it is very difficult for a beneficiary to challenge a Trustee’s decision. Trustees are not necessarily obliged to justify their decisions, and no adverse inference can be drawn from their failure to do so. Thus, beneficiaries can often find themselves in an unsatisfactory and frustrating position when they find themselves at odds with a decision made by a Trustee.

In this case, as the brothers were required to give evidence about the circumstances leading up to the resolution in order to succeed in the rectification application, their state of mind and the circumstances surrounding their actions came under scrutiny. In light of the evidence, the Court found that they had failed to give real and genuine consideration to the beneficiaries of the Trust and that their animosity primarily motivated their decision to exclude their sister.

Ironically, had the brothers not needed to bring the rectification application in the first place, they may well have been able to remain under their ‘shield of silence’ and get away with their actions!

This case highlights the importance of obtaining sound legal and financial advice in establishing and administering Trusts, particularly when disputes between beneficiaries and Trustees arise. Trust Deeds are often complex, and the duties of Trustees can seem onerous a non-professional Trustee. It is also critical to consider Family Trusts in your overall succession plan, in particular, the issue of who will be in control of the Trust when the founders of the Trust die.

MST  Lawyers can assist you when preparing or reviewing your Will to ensure that all succession issues are considered and dealt with in the best way possible for your circumstances.  For more information, contact our Wills & Estates team by email or phone +61 3 8540 0200.