Trustees are on notice to exercise “real and genuine consideration”, or risk a breach of fiduciary duty.
2022 was the year of “real and genuine consideration” for trust cases and Victoria was the hotspot with Re Owies coming shortly after Marsella.1
This article does not delve into the nuances of either matter, but rather provides practical guidance on the measures trustees ought to take to ensure compliance with their fiduciary duties in review of these cases.
The Re Owies case
By way of background, Re Owies concerned a dispute over the administration of an inter vivos family trust. The main issues in the case included the proper interpretation of the trust deed, the powers and responsibilities of the trustees, and the rights of the beneficiaries to information and accountability.
On appeal, the trustee was successfully removed on the basis that over a number of years it had failed to act impartially and give real and genuine consideration to the interests of two primary beneficiaries, and that the relationship between the trustee and beneficiaries was irreparably damaged such that it was not in the best interests of the beneficiaries for the trustee to continue in office.2
The Marsella case
In Marsella, a daughter and her husband were trustees of the deceased mother’s self-managed super fund. As trustees they exercised their discretion to pay the entirety of the mother’s death benefit to the daughter trustee, thereby wholly excluding the deceased’s husband (being the daughter trustee’s stepfather).
The removal of the trustees was upheld on appeal on the basis that they exercised their discretion without real and genuine consideration of the interests of the dependants of the fund and that the trustees’ decision be set aside.
What is ‘real and genuine consideration’?
“Trustees must act in good faith, responsibly, and reasonably. They must inform themselves, before making a decision, of matters which are relevant to the decision.”3 This extends past simple matters of fact to seeking professional advice when required.4
In Re Owies, the trustee failed to exercise “real and genuine” consideration as the trustee had not adequately informed itself of the circumstances of two primary beneficiaries before exercising discretion to distribute from the fund.5 The trustee failed to investigate or inquire and instead relied upon strained (and at times estranged) familial relationships within the trust.
Similarly, in Marsella there was no evidence that the trustees made inquiries about potential beneficiaries of the death benefit and the court found it “extraordinary” that the deceased’s “husband of more than 30 years received no amount despite his limited financial means”.6
A trustee must properly inform itself of the size and scale of the trust, nature of relationships within the trust, and the purposes of the trustee’s power.7 This obligation is universal to all trustees, however the extent of the obligation depends on the circumstances and nature of the trust.8
In short, trustees must carefully consider all relevant factors and information before exercising discretion. This includes the terms and purposes of the trust and the best interests of the beneficiaries. The trustee must be an “independent mind” unswayed by personal interests or biases or influenced by any improper motives.9
Steps for trustees to ensure ‘real and genuine consideration’
- Read the deed
Read the deed, read the deed, read the deed! The trustee must familiarise themselves with the terms of the trust deed to ensure they understand their powers, the breadth of their discretion, and that their ongoing decisions are consistent with the purposes of the trust.10
- Seek professional advice
The trustee ought to seek professional legal, financial, and accounting advice so that the trustee may make informed decisions based on accurate and current information with an ongoing awareness of their obligations and duties as trustee.
In Marsella, conflict may have been avoided had appropriate expert advice been sought, received, and followed.11
- Regular review and update of deed
The trustee (in conjunction with their professional advisors) should regularly review the trust deed and make any necessary variations to ensure it continues to serve the best interests of the beneficiaries as a whole.
- Document the decision-making process
The trustee should keep a written record of inquiries made, steps taken, and information reviewed. This documentation may be critical evidence the trustee acted with real and genuine consideration and fulfilled their duties should the trustee find themselves in a Re Owies review in the future.
The trustee is not obliged to release their reasons for discretionary decisions to beneficiaries.12 The trustee ought to carefully consider whether it releases its reasons as to do so may subject the reasons to review of validity.13
If you prepare end-of-year financial material, now may be the time to update your precedents, review deeds, and consult with your clients to consider what inquiries ought to be made on a case-by-case basis. When preparing distributions also bear in mind that a uniform distribution pattern may indicate a lack of real and genuine consideration by the trustee.14
- Act impartially and in good faith
This ought to go without saying, but the trustee must act without bias or personal interests, and ensure their decision-making is not influenced by improper motives. They must act in good faith and in the best interests of the beneficiaries.
In Marsella the trial judge noted that the daughter trustee had acted with misapprehension as to her duties as trustee and her position of conflict.15
- Interests of beneficiaries
The trustee must consider the interests of all beneficiaries and ensure that their decisions are in the best interests of the beneficiaries as a whole. In some cases, the sheer number of potential beneficiaries makes a detailed analysis of the identity and needs of each beneficiary unworkable.16
In those circumstances, the trustee ought to consider the range of potential beneficiaries and how to properly exercise their discretionary power in good faith before making a decision.17
Risks of failure to act with ‘real and genuine consideration’
- Void or voidable decisions
Trustees who make decisions without real and genuine consideration may find that their decisions are void or voidable. This may result in the trust incurring unnecessary costs, delays and legal disputes, all of which can undermine the effectiveness of the trust.
- Removal of trustee
As seen in Re Owies and Marsella, failure to exercise real and genuine consideration may result in removal of trustee. Where a trustee has exercised their discretion the soundness of their decision is not reviewed for “fairness and reasonableness”.18 Bad faith may need to be shown and a “grotesquely unreasonable result” may evidence a miscarriage of duty.19
- Personal liability
Trustees who make decisions without giving real and genuine consideration to the relevant factors are in breach of their fiduciary duties. Where trustees have acted in breach of their duties they may be held personally liable for losses suffered by the trust or beneficiaries resulting from the trustee’s breach of duty.
- Damaged reputation
Trustees who fail to act with real and genuine consideration may damage their own reputation and the reputation of the trust. This can have serious consequences for the reputation and credibility of the trustee and the trust, and may impact their ability to carry out their duties in the future.
The principle of ‘real and genuine consideration’ is not new.20 However, the recent decisions of Re Owies and Marsella have reminded trustees to ensure they employ (and retain evidence of!) real and genuine consideration when exercising their discretionary powers.
It is imperative that trustees properly inform themselves as to the terms and purposes of the trust, the scope of their discretion and duties, and the circumstances of beneficiaries. Not to do so risks a breach of fiduciary duty and, ultimately, removal from office.
Jacqui Thomas is the Director of Sun Wills and Estates, Sunshine Coast.
1 Owies v JJE Nominees Pty Ltd  VSC 716 and  VSCA 142; Wareham and Anor as trustees of the Swanson Superannuation Fund v Marsella  VSCA 92.
2 Owies v JJE Nominees Pty Ltd  VSCA 142 .
3 Scott v National Trust for Places of Historic Interest or Natural Beauty  2 All ER 705, 717.
5 Owies v JJE Nominees Pty Ltd  VSCA 142 .
6 Wareham and Anor as trustees of the Swanson Superannuation Fund v Marsella (2022) 61 VR 262 .
7 Owies v JJE Nominees Pty Ltd  VSCA 142 .
8 Finch v Telstra Super Pty Ltd (2010) 242 CLR 254 ; Owies v JJE Nominees Pty Ltd  VSCA 142 .
9 Owies v JJE Nominees Pty Ltd  VSCA 142 .
10 Failure to review the trust deed is noted in Marsella .
11 Wareham and Anor as trustees of the Swanson Superannuation Fund v Marsella (2022) 61 VR 262 –.
12 Re Londonderry’s Settlement  Ch 918, 936.
13 Karger v Paul  VR 161, 163–166.
14 In Re Owies there was a distribution pattern of 40:40:20 between three beneficiaries: Owies v JJE Nominees Pty Ltd  VSCA 142 , , .
15 Marsella v Wareham (No.2)  VSC 65 .
16 Owies v JJE Nominees Pty Ltd  VSCA 142 .
18 Attorney General (Cth) v Breckler (1999) 197 CLR 99.
19 JD Heydon and MJ Leeming, Jacobs’ Law of Trusts in Australia (LexisNexis Butterworths, 8th ed., 2016) 327 [16-08], see also Wareham and Anor as trustees of the Swanson Superannuation Fund v Marsella (2022) 61 VR 262 .
20 See in particular Karger v Paul  VR 161.