Robert J Garvey, Solicitor

If you control a discretionary trust with absolute discretion to favour yourself or someone else to the exclusion of other beneficiaries, you should still always act with propriety, tact and sensitivity in trust matters. Inflammatory or grandiose statements provide the fuel for disappointed beneficiaries to have a new trustee appointed by Court order.  Take for example this judgment delivered on 4 July 2008 in Perth.

The facts in the Elovalis case were that, in 1980, upon the breakdown of a marriage, the husband (Michael) arranged for a family discretionary trust to be established to hold significant property, including the family home, for the primary benefit of his 2 daughters (Helen and Vicki), with a corporate trustee. Michael’s brother (Chris) was invested with the power to change the trustee. Michael became ill and Chris retired early to move in with and care for Michael for 20 years until Michael died in 2002. Chris stayed on in the home. There were no significant distributions in favour of Helen or Vicki. After some cross words, the daughters asked the Supreme Court of Western Australia to appoint a new trustee to wrest control of the trust from Chris and his brother Steve, who was by then acting as trustee.

Given that Uncle Chris was also a beneficiary of the trust (being part of the wider family group of beneficiaries by virtue of being a close relation to the primary beneficiaries) and that no breach of trust or misconduct by Uncle Steve had been shown, the application was dismissed. Master Sanderson commented that the terms of the trust deed gave the trustee such wide and unfettered powers that Steve could ‘effectively do what he likes’ with the trust property or ‘do virtually anything with it’.

The analysis on appeal nicely sets out the two basics for a Court appointed replacement trustee, which is remedial not punitive. One is the Supreme Court’s inherent jurisdiction to protect the welfare of beneficiaries of a trust. Miller v Cameron 1936 54 CLR 572 is cited as the leading decision. See Latham CJ at 575:

It has long been settled that, in determining whether or not it is proper to remove a trustee, the Court will regard the welfare of the beneficiaries as the dominant consideration (Letterstedt v Broers). Perhaps the principal element in the welfare of the beneficiaries is to be found in the safety of the trust estate. Accordingly, even though he has been guilty of no misconduct, if a trustee is in a position so impecunious that he would be subject to a particularly strong temptation to misapply the trust funds, the Court may properly remove him from his office as trustee.

The other is pursuant to statute for reasons of expediency. The equivalent provision in Queensland is section 80, but the applicable provision to the decision was section 77 of the Trustees Act 1962 (WA):

The court may, whenever it is expedient to appoint a new trustee or new trustees and it is inexpedient, difficult or impracticable so to do without the assistance of the court, make an order for the appointment of a new trustee or new trustees either in substitution for, or in addition to, any existing trustee or trustees, or although there is no existing trustee.

In this context ‘expedient’ is taken to mean ‘conducive to advantage in general, or to a definite purpose; fit, proper, or suitable to the circumstances of the case’. Porteous v Rinehart 1998 19 WAR 495 and Re Estate of Roberts (1983) 20 NTR 13 at 17.

In his judgment, Martin CJ thrashes out that, even if the trust deed allows the trustee to act in spite of a conflict of interest and with the broadest, most unrestrained, absolutist, unfettered discretions, while it is nonsense to speak of impartiality when favouring or choosing between beneficiaries, the trustee must nevertheless not take into account irrelevant, irrational or improper factors or make a decision so unreasonable that no trustee, properly directed, could have made.

The Court concluded the allegations made by the daughters could, if substantiated, establish the trustee “had a closed mind with respect to the exercise of the discretionary powers conferred upon him, or misunderstood the nature of those powers and the obligations to which he was personally subject. If those propositions were made out, they could arguably sustain the removal of the trustee on the grounds of expedience.”