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Lecture 11 Discretionary Trusts

What is a Discretionary Trust?


The trustee enjoys a discretion to select who in the designated class
of potential beneficiaries is to receive any benefit, and to decide the
amount of the benefit to be paid.

Discretionary trusts are coupled with a special power of appointment, as the beneficiaries
are not determined at the creation of the trust, but are left for the trustee to decide. A
discretionary trustee does not have to exercise the power. Many of the rules of mere
powers relating to certainty of objects have been assimilated into the case law regarding
discretionary trusts.
The term does not have a fixed definition; its meaning largely turns on the facts of the case.
CPT Custodian Pty Ltd v Commissioner of State Revenue of the State of Victoria (2005):
Gleeson CJ, McHugh, Gummow, Callinan and Heydon JJ: The term unit trust, like
discretionary trust, in the absence of an applicable statutory definition, does not
have a constant, fixed normative meaning ...

FCT v Vegners (1989):


Gummow J: The expression discretionary trust is used to identify another species
of express trust, one where the entitlement of beneficiaries to income, or to corpus,
or both, is not immediately ascertainable. Rather, the beneficiaries are selected
from a nominated class by the trustee or some other person and this power may be
exercisable once or from time to time.

It has been held that a discretionary trust, strictly so called, of its nature, confers on the
beneficiaries no more than a right of due administration a right that the discretionary
trustee from time to time determines whether or not to make an appointment.
Kent v SS 'Maria Luisa' (No 2) (2003):
Tamberlin and Hely JJ: a discretionary trust has been held to confer on objects
no more than a right of due administration.

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A discretionary trust does not require list certainty of beneficiaries. It is sufficient that we
can state whether someone is or is not a member of the class of beneficiaries. There must
be criterion certainty in favour of a discretionary class per McPhail v Doulton (1971). There
needs to be way to determine whether or not to make an appointment. The members of
the class are eligible objects of a power, rather than beneficiaries in the strict sense. They
have no beneficial or equitable interest in the trust property.
Kennon v Spry (2008):
French CJ: [the trustee] was not obliged to distribute to anyone. The default
distribution gave no more than a contingent remainder.

A beneficiary of a so-called discretionary trust will have an equitable proprietary interest in


the assets of the trust fund only if the provisions of the trust instrument create that result.
Kent v SS 'Maria Luisa' (No 2) (2003):
Tamberlin and Hely JJ: it can be a little misleading simply to accept that for all
purposes the Unit-holders in a particular trust have a proprietary interest in each of
the assets comprised in the trust Hence it may be unsafe to proceed from the
premise that because each Unit-holder has an equitable interest in each asset of the
Fund to a conclusion that the sole Unit-holder must be the equitable owner of each
asset. It all depends upon the terms of the trust.

Appointors
The use of the discretionary trust provides a very flexible means of holding property while
nevertheless retaining considerable control over its disposal. Thus the settlor can settle
property on a discretionary trust whose primary beneficiaries are members of a family with
patriarch or matriarch enjoying a continuing control as appointor or protector of the
trust, and thus able to change the trustee as occasion demands. An appointor can remove a
trustee and appoint a new trustee. An appointor is:
Hon Justice Peter Nygh and Andrew Cotter-Moroz: normally the person who has
the greatest immediate interest in the affairs of the trust [or] an individual such as
an accountant or relative who may in other ways be beholden to the person with
ultimate control over the trust.

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What is the Duty of a Discretionary Trustee?


To survey the field of potential beneficiaries from time to time: (Re Hays Settlement Trust).
The trustee is not bound to execute the trust.

The trustee, being confided in a fiduciary capacity,


cannot exercise their discretion other than bona fide
for the purposes and objects of the trust

In Re Hays Settlement Trusts (1981) Megarry VC:


A mere power is very different. Normally the trustee is not bound to exercise it,
and the Court will not compel him to do so. That, however, does not mean that he
can simply fold his hands and ignore it, for normally he must from time to time
consider whether or not to exercise the power, and the Court may direct him to do
this. So where he does exercise the power, he must, of course (as in the case of all
trusts and powers) confine himself to what is authorised, and not go beyond it. But
that is not the only restriction It is not enough for him to refrain from acting
capriciously; he must do more the duties of a trustee which are specific to a mere
power seem to be threefold. Apart from the obvious duty of obeying the trust
instrument, and in particular of making no appointment that is not authorised by it,
the trustee must, first, consider periodically whether or not he should exercise the
power; second, consider the range of objects; and third, consider the
appropriateness of individual appointments.

Discretionary trustees must consider:


1. Periodically, whether or not they should exercise the power
2. The range of objects
3. The appropriateness of individual appointments

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Is a Discretionary Trustee Obliged to Give Reasons for a Determination?


There is no obligation on a trustee to give reasons for an exercise of discretion, provided it
is not being exercised capriciously.
See Curwen v Vanbreck (2009), citing McGarvie J in Karger v Paul (1984):
Redlich and Bongiorno JJA and Hansen AJA: ... with one exception, the exercise of a
discretion in these terms will not be examined or reviewed by the courts so long as
the essential component parts of the exercise of the particular discretion are
present. Those essential component parts are present if the discretion is exercised
by the trustees in good faith, upon real and genuine consideration and in
accordance with the purposes for which the discretion was conferred. The
exception is that the validity of the trustees reasons will be examined and reviewed
if the trustees choose to state their reasons for their exercise of discretion...
It is an established general principle that unless trustees choose to give reasons for
the exercise of a discretion, their exercise of the discretion cannot be examined or
reviewed by a Court so long as they act in good faith and without an ulterior
purpose ... For reasons given above, I would add the further requirement, so
obvious that it is often not mentioned, that they act upon real and genuine
consideration.

While decisions are normally not examinable, there is an exception where the trustee has
given reasons per Karger v Paul (1984). If they give reasons, the Court may consider
whether the trustee exercised their discretion with real and genuine consideration.
Exercise of the discretionary power must be:
1. In good faith (bona fide)
2. With real and genuine consideration
3. In accordance with the purposes of the trust

This is a broad test, so it is not hard for trustees to pass.

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Discretionary Trust and Access to Documents


Beyond the trust deed itself, other documents may become relevant to the exercise of the
trustees discretion. In some cases, this may take the form of a confidential memorandum of
wishes left by the settlor. See Hartigan Nominees v Rydge (1992):
Mahoney JA: It is, of course, clear that the wishes of a settlor, as appearing from
the trust instrument, may be taken into account. What is in question is the wishes of
the settlor, expressed outside the terms of the trust. Those wishes must, of course,
not be inconsistent with the purposes of the trust as appearing from its terms.
It would, I think, be strange if the trustee could not have regard to such
matters...The assumption has been that precatory trusts may be taken into account
or put into effect notwithstanding that they impose no obligation upon a trustee;
there would appear to be no reason in principle why a non-binding wish expressed
in the trust document should be given effect but such a wish outside it must be
ignored.

In Hartigan Nominees v Rydge (1992), it was held that there is no right to the documents.
Furthermore, letters of wishes are not binding, since they are merely precatory. On the
other hand, the trust deed is binding. A memorandum of the settlors wishes is still relevant
and can be followed, but the trustee should not abandon their own independent discretion
and judgment.
In Silkman v Shakespeare Haney, the court found that a beneficiary has no equitable
proprietary interest in trust documents so as to give rise to a right of production and
inspection, but an order may be made as part of the courts inherent jurisdiction to
intervene in the administration of trusts. Silkman v Shakespeare Haney (2011),
Hammerschlag J considered the two key approaches:

Londonderry

Schmidt

The Londonderry decision attributes a beneficiary's right to inspect trust documents held
by the trustee to an equitable proprietary interest. The underlying idea is that such
documents are themselves either trust property or are so closely related to trust property

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that they may be characterised as documents in which the beneficiary has such an interest.
In Re Simersall; Blackwell v Bray (1992) Gummow J described this right as proprietary in
nature although falling short of a full beneficial interest.
On the Londonderry approach the plaintiff need do no more than establish that the
defendant is her trustee and that the documents sought are trust documents. The relief is
as of right and does not require the exercise of any judicial discretion.
However, in Schmidt v Rosewood Trust (2003) the Privy Council declined to follow
Londonderry. Taking a more principled and correct approach, it held that a trustee has no
equitable proprietary interest in documents so as to give rise to a right of production and
inspection but that an order for inspection and production of documents by a trustee may
be made at the instance of the beneficiary.
The Schmidt decision allows the plaintiff to apply for an order for
inspection of the documents, which is at the discretion of the court.
There is no right of access.

The case gave no guidance about the discretion, although it is important to note that
discretionary objects have more tenuous claim than fixed objects. The nature of the
document and matters of confidentiality would be relevant to the discretion.
Avanes v Marshall (2007) followed the Schmidt approach. This did not abrogate the
trustee's duty to keep proper accounts and the beneficiary's right to inspect them. However,
no appellate authority in Australia has squarely considered whether the Londonderry
approach or the Schmidt approach should now be followed.
In Schmidt v Rosewood Trust Lord Walker did, however, consider that there was support for
its approach in Hartigan Nominees v Rydge (1992). Rouse v IOOF Australia Trustees (1999)
referred to the two lines of authority, finding it unnecessary to resolve whether one or the
other should be followed because the issue there before the Court was whether a trustee
had a discretion to decline to provide information.
A trustee may be entitled to decline to provide information to particular beneficiaries
inspection when the trustee has reasonable grounds for considering that to do so will not be

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in the interests of the beneficiaries as a whole, and will be prejudicial to the ability of the
trustee to discharge its obligations under the trust. The availability of the discretion will
depend on the facts of the case.
The Londonderry approach has jurisprudential difficulties which the Schmidt approach does
not have, including:

ascribing a workable and principled definition of the term trust documents

divining the nature of the beneficiary's so-called proprietary interest in such


documents.

Hartigan Nominees v Rydge articulated this difficulty by describing this trail as unhelpful if
not false; that on the Londonderry approach a discretionary beneficiary who has no lesser
interest in the due administration of the trust (but who has no proprietary interest in the
assets) should, illogically, be denied disclosure; that authorities which have taken the
Londonderry approach have limited the beneficiary's right to disclosure by reference to the
interests of third parties in maintaining confidentiality.

There is no problem with a settlor giving some indication of the


way they wish the discretion to be exercised by the trustee,
whether in the trust instrument, or in a confidential memorandum
~ Hartigan Nominees v Rydge (1992)

It is difficult to reconcile this limitation with the principle for which Londonderry stands; and
reconciling a beneficiary's entitlement to documents such as a settlor's statement of
intention or a constituent trust deed with the fact that these instruments are themselves
not assets or appurtenant to assets of the trust.
It is always possible, and advisable, to seek a judicial advice from the court.

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Advice from the Court


When there is a contentious matter brought before the court, the trustees costs will usually
be paid and they will be held to be acting reasonably. The law is preconditioned on the fact
that most trustees are volunteers, and are protected by the law if they were acting honestly
and reasonably.
It is important to join all interested parties to a case, or at least serve them. It is important
to have a real contradictor to the submission. There must be scope for controversy. Trusts
Act 1973 (Qld) s 97:

Thus, the trustee is indemnified if they act in accordance with the directions of the court.
Ban v Public Trustee Qld (2015) per Gotterson JA: The Lord St Leonards Act applied in NSW,
and when Queensland became a state in its own right, with its own legislature, Lord St
Leonards Act was reproduced in the Trustees and Executors Act 1897 (Qld), s 45.
From an early time the court held that the process was not applicable where there were
disputed questions of fact, nor to advice as to which of two conflicting claims to property is
valid. Thus the summary nature of the relief was emphasised: questions before the court
could only be on agreed facts, to determine the consequences of them.
Judicial advice proceedings should not be used to settle disputes between parties to a trust.

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See Trusts Act 1973 (Qld) s 96:

This power is not just from the statute, it is found in the equitable jurisdiction of the court.

Nature of the Jurisdiction


In Coore v Coore (2013) the following key points were identified:
1. It is quite inappropriate to read provisions conferring jurisdiction or granting powers
to a court by making implications or imposing limitations which are not found in the
express words.
2. Nothing in the provisions limits their application to non-adversarial proceedings, or
proceedings other than those in which the trustee is being sued for breach of trust
or one remedy sought is the removal of a trustee from office.
3. There are no express words in the New South Wales equivalent to s 96, and no
implications that automatically preclude a court from giving judicial advice. There is
nothing which limits the application of the section to non-adversarial proceedings.
4. The applicant must point to the existence of a question respecting the management
or administration of the trust property or a question respecting the interpretation of
the trust instrument
5. The procedure has a summary character designed to assist the courts
administration of trusts by orders less extreme than a general administration order
6. The section operates as an exception to the courts ordinary function of deciding
disputes between competing litigants and affords a facility for giving private advice
7. The context in which Lord St Leonards Act was enacted, and the onerous obligations
on trustees, meant that it was understandable that the legislature should enact

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provisions enabling trustees to take advice before embarking on any course which
might carry a risk of incurring costs.
Obtaining judicial advice resolves doubt about whether it is proper for a trustee to
incur the costs and expenses of prosecuting or defending litigation.
8. It should not be regarded as rare or difficult for a trustee alleged to have committed
a breach of trust to obtain assistance under the Trusts Act in relation to the defence
of the proceedings

Provision is made for a trustee to obtain judicial advice about the prosecution or
defence of litigation in recognition of both the fact that the office of trustee is
ordinarily a gratuitous office and the fact that a trustee is entitled to an indemnity for
all costs and expenses properly incurred in performance of the trustees duties.
~ Macedonian Church (2006)

Judicial advice is given in the best interest of the trust, not the adversarial parties, per
Marley v Mutual Security Merchant Bank and Trust (1990). It should be given under
circumstances where the trustee is in genuine doubt regarding the question before the
court, per Re Australian Pipeline (2006).
The jurisdiction under s 80(1) is an exception to the courts ordinary function of deciding
disputes between competing litigants. Its source lies in the equity and trusts jurisdiction of
the courts.
If all that is at stake in proceedings is the liability of a trustee personally to make good the
consequences of what is alleged to be the trustee's breach of trust, that would be a
powerful reason to make no order permitting such a trustee to defend the suit at the
expense of the trust fund.

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Appointment of a New Trustee by the Court


Under the Trustee Act 1973 (Qld), the court may appoint a new trustee whenever is it
expedient to do so.

The statutory jurisdiction reflects the inherent jurisdiction of the court, per Vagliviello v
Vagliviello (2003). The court can appoint and remove a trustee, even when there is an
appointor who is capable or willing to appoint a trustee: Pope v DRP Nominees (2000).
The word expedient has wide meaning, and may mean advantageous or merely
appropriate or suitable to the circumstances of the case, per Pope v DRP Nominees Pty Ltd
(2000). For example, if the trustee is convicted of a crime, expresses a desire to be
discharged, or becomes bankrupt, it may be expedient. However, the court will not
exercise this power lightly, per Re Whitehouse (1982). See also Elovalis v Elovalis (2008):
Martin CJ: These various decisions establish that the jurisdiction to remove a
trustee and appoint a substitute can be exercised whenever it is expedient to do
so, in the sense described in the cases, and without it being necessary to establish
bad faith, misconduct, or breach of trust.

The jurisdiction to remove a trustee is exercised with a view to the interests of


the beneficiaries, to the security of the trust property and to an efficient and
satisfactory execution of the trusts and a faithful and sound exercise of the
powers conferred upon the trustee.
In deciding to remove a trustee the court forms a judgment based upon
considerations, possibly large in number and varied in character, which combine
to show that the welfare of the beneficiaries is opposed to his continued
occupation of the office. Such a judgment must be largely discretionary. A trustee
is not to be removed unless circumstances exist which afford ground upon which
the jurisdiction may be exercised.
~ Dixon J, Miller v Cameron (1936)

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The Court may make an order appointing a new trustee either in substitution for or in
addition to an existing trustee. This power will be exercised in respect of a trustee who acts
in antagonism to the trust, per Applegarth J in Verhelst v Tondeleir (2015). Hostility or
friction between the trustees and beneficiaries is not of itself a reason for removal of the
trustees: Letterstedt v Broers (1884), but it is a factor, and may have particular significance
in the case of a family trust where the relationship between the parties has broken down
completely: Smith v Smith (2006).
Where the court decrees that some proper person be appointed as trustee, it does not
take away the power of appointment under the instrument, but after the decree the power
may only be exercised subject to the supervision of the court. If the appointor repeatedly
nominated improper persons, it would amount to a refusal to exercise the power, and the
court could then makes its own appointment, per In re Gadd (1883).
Courts will hesitate to appoint trustees in cases where the appointor has not exercised their
power, although it may do so where the applicant has applied to the court for other
purposes and a refusal would save no expense to the trust estate: In re Tunstall (1921).

The Court will have regard to:


1. The wishes of the settlor in the trust instrument
2. That the trustee is not appointed to promote the interests of
some beneficiaries over others
3. Whether it would promote or impede the execution of the trust,
including their professionalism and any intimacy with the
beneficiaries
~ Scaffidi v Montevento Holdings (2011), citing Re Tempest (1866)

The second point relates to conflict of interest per Re Cunningham's Settled Estates (1909).
Consequently, the court would not appoint a beneficiary, or a close relative of a beneficiary,
particularly if there is ill-feeling amongst the beneficiaries per Johnstone v Johnstone (1902),
nor would they appoint a fiduciary of a beneficiary: In re Spencer's Settled Estates (1902).
If the court does itself appoint, the statutory power once exercised overrides the
appointors power to appoint per Elovalis v Elovalis (2008).
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Costs in Trust Matters


In Re Buckton (1907), three types of disputes involving trustees were outlined:
1. An action brought by trustees relating to the construction of the trust instrument or
some other question arising in the course of an administration, called trust disputes.

Usually a dispute between two beneficiaries concerning rights or


construction under the trust.

Unless the trust instrument provides otherwise, the trustee should bring
the dispute to court for resolution, but in the proceeding they are not
entitled to favour one party over another by advocating a party's cause.

The costs of all parties are treated as necessarily incurred for the benefit
of the estate and are ordered to be paid out of the fund either on a
solicitor and client or indemnity basis.

2. A trust dispute in which the application is made by someone other than the trustee
(usually a beneficiary) but raises the same kind of issue as in the first class and would
have justified an application by the trustees.

The same rule in relation to costs applies because the application is for
the benefit of the estate.

3. A beneficiary brings a hostile claim against the trustees (for example as to the
propriety of any action taken or omitted to be taken) or another beneficiary.

As between the parties the costs in this kind of case are treated in the
same way as in ordinary litigation: they follow the event.

However, if the trustee properly (not necessarily successfully) defends the


claim for the benefit of the estate they will be entitled to their costs out
of the estate to the extent they are not recovered from the other party.

An exception to the first type is the case of a timid trustee who unnecessarily approaches
the court for advice when the answer to the problem raised by the dispute is sufficiently
clear, per Sons of Gwalia Ltd v Margaretic (2006). That is, they are a repeat offender or
becoming vexatious, but this is rare.

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When a trust dispute has come about because there is a dispute between two beneficiaries
concerning the construction of the trust instrument or their respective rights in the trust
estate, the duty of the trustee as the trustee for all beneficiaries is to treat the beneficiaries
impartially and remain neutral.
Certainly, as a rule, a trustee is allowed his costs out of the trust estate if his
conduct has been honest, even though it may have been mistaken. In the
ordinary case a trustee brings or contests legal proceedings on behalf of the trust
and not on his own behalf. He is often a necessary party to proceedings where he
ought to be present even though he may do no more than submit to the
judgment of the Court. In such a case the trustee receives his costs.
The position is admittedly different in a case of misconduct.
~ Latham CJ, Miller v Cameron (1936)

Settlor as Appointor
A settlor will often establish a discretionary trust reserving to himself or herself power as
appointor to appoint new trustees as they wish. Although this is technically within the scope
of the power per Montefiore v Guedalla (1903), it should only be exercised to that end in
'exceptional circumstances' or 'special circumstances. See also In re Christina Brown (1921).
Indeed, the power to appoint trustees may be construed as a 'fiduciary power' per In re
Skeats' Settlement (1889):
Kay J: The ordinary power of appointing new trustees, under a settlement such as
this is, of course imposes upon the person who has the power of appointment the
duty of selecting honest and good persons who can be trusted with the very difficult,
onerous, and often delicate duties which trustees have to perform. He is bound to
select to the best of his ability the best people he can find for the purpose
In my opinion it would be extremely improper for a person who has a power to
appoint or select new trustees to appoint or select himself, for that principal reason.
Has, then, the practice of such a person appointing himself been sanctioned by
conveyancers or the profession in general? The answer must be, certainly not.

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Even if it is not a fiduciary power, it must be exercised bona fide per Re Burton (1994). The
trustee is the 'archetype' fiduciary: Maguire v Makaronis (1997).
The minimum duty is to perform the trust honestly and in good faith, for the benefit of the
beneficiaries: see Armitage v Nurse (1998). The discretion is to be exercised by reference to
the objects and purposes of the trust, having regard to the competing interests of the
potential beneficiaries, and without taking into account improper, irrelevant or irrational
considerations. The discretions must be exercised personally and not in conjunction with
somebody else, see Elovalis v Elovalis (2008).
If, on the proper construction of the instrument, the power of the appointor to remove and
appoint trustees may be exercised for the purpose of controlling the trust estate for the
appointor's benefit, the trust property may be regarded as effectively owned by the
appointor, or property in which the appointor has a contingent interest: Australian
Securities and Investment Commission v Carey (No 6) (2006).
It is not proper to appoint new trustees without communicating with beneficiaries and
hearing their objections, at least where it is likely that they would oppose the appointment:
Marshall v Sladden (1849). However, beneficiaries cannot dictate or control the exercise of
the power: In re Brockbank (1948).
I have no hesitation in saying that the appointment of [the new trustee],
without communication with the Plaintiffs, was improper The trustees must
have known that the Plaintiffs would, and with just reason, have opposed
such an appointment. It was made obviously at Sladdens instance, in order to
keep the trust more completely under his dominion. This is not the course
which trustees ought to pursue.
~ Marshall v Sladden (1849)

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