Articles > Small Business

Under a Discretionary Trust, Can Beneficiaries Dispute a Trustee’s Decisions?

November 23, 2020   Philip EvangelouRaymond Chbib

The nature and benefits of a discretionary trust have been discussed in a previous article. This article will delve further into discretionary trusts, aiming to address the question of whether a discretionary beneficiary has rights to challenge a trustee’s decision when exercising their discretion to distribute income or capital of the trust. Note that discretionary trusts generally do not deal with explicitly identified beneficiaries but rather a class of beneficiaries. 

Hence, unlike fixed trusts, discretionary beneficiaries do not have a proprietary right in the distributions of the trust but rather only a mere expectation to be considered when the trustee decides to make a distribution from the trust.  

Trust Deeds

A trust deed is a document needed to establish a discretionary trust. The trust deed defines the relationship between the trustee and the beneficiary, specifically outlining the duties and powers of the trustee. A trustee’s exercise of his discretionary powers is generally considered valid as long as it conforms with the trust deed and does not go beyond the powers conferred by the deed. 

Hence, a trustee’s decision is primarily subject to what is set out in the trust deed. Typically, these powers invested in the trustee by the trust deed will be broadly interpreted, which limits beneficiaries in disputing trustee’s decisions. 

Aside from what is contained in the trust deed, the trustee’s exercise of his discretion remains subject to the overriding consideration which is that it must be exercised bona fide for the benefit of the trust. The benefit of the trust is distinguished from the benefit of the beneficiary. 

A Discretionary Beneficiary’s Rights

Discretionary beneficiaries have a right to be considered and right to due administration of the fund. As mentioned, they are not granted a proprietary interest meaning they have no enforceable legal right to any distributions from the trust. This is why it is difficult for a discretionary beneficiary to challenge a trustee’s decision. 

Indeed, while this right to due administration exists,   the trustee is under no duty to disclose to the discretionary beneficiaries the reasons for the manner in which he exercised his discretion.          

Moreover, the right to consideration is more a mere expectation to be considered when the trustee decides to make a distribution, whether income or capital, from the trust rather than an enforceable right. 

When will the Court Step In? 

The exercise of a trustees discretionary powers can only be disputed in regards to good faith, real and genuine consideration and absence of ulterior purpose. Hence, the courts will not control exercise of discretion unless the trustee is acting mala fide or misconceives the nature of the discretion.  This contributes to the nature of discretionary trusts its ability to maximise asset protection.  

Key Takeaway 

Therefore, the trustee is entitled to exercise their discretionary powers as they think fit, subject to the trust deed. Beneficiaries have no enforceable rights to dispute such decisions and courts will not control exercise of discretion unless the trustee is acting mala fide or misconceives the nature of the discretion.  

About Philip Evangelou

phillipPhil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.

About Raymond Chbib

raymond chbibRaymond is a legal intern at OpenLegal, working with our legal content team. He is currently a penultimate student at the University of Technology Sydney, studying a Juris Doctor degree with an undergraduate Bachelor of Global Studies. He is particularly interested in Intellectual Property law and the increasing internationalisation of that area of business.