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Fettering One’s Discretion

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.

12/07/2017

A trustee of a trust has many duties. The fiduciary obligations of a trustee are well known and the courts have set down a steady set of rules over the years on how trustees should conduct themselves when administrating the affairs of the trust. Commonwealth and state legislation add another layer of duties or obligations for the trustee to abide by in addition to the equitable principles set down by the courts.

One duty that is less well known but can have far reaching consequences is the duty of the trustee not to fetter his discretion. This duty has its origins in the English courts of equity and has been an established rule of law for over a century.

In essence the duty requires the trustee to not bind themselves to make a decision at some time in the future. In the 1902 decision of Re King the court held that the "trustees ought, as far as possible, to keep their discretion open and unfettered."

If the trustee enters into a legally binding agreement that forces them to act in a particular way or if the trustee, that has discretionary power, decides how it will exercise its power in the future, then such a decision will in all probability constitute a breach of their duty to act in an unfettered way. It is then open to a party, normally a beneficiary of the trust, to challenge the trustee’s action. Previous court cases have involved executors (trustees) of an estate, testamentary trusts and discretionary trusts.

Exceptions to the rule that allow the trustee to delegate their discretion include:

  1. Statutory exception - most state trustee acts have exceptions;
  2. delegation that is allowed under the trust deed or instrument; and
  3. court order - the supreme court in all states has broad powers to regulate the affairs of a trust.

It should be noted that a trustee can appoint agents to perform certain tasks, with the most common example being the appointment of tax agents to ensure the trustee meets its obligation under the tax legislation.

SMSF

SMSF deeds normally have a provision for a beneficiary to make a binding death nomination (“BDN”) to certain persons. The BDN constitutes a fetter on the trustee’s discretion as this would force the trustee to distribute the fund’s wealth on the terms set out in the BDN as opposed to the trustee exercising his discretion as to how any death benefit is to be paid.

BDNs are permissible if the SMSF deed allow for them.

Trusts with discretionary trust powers

The most common trusts in Australia with provisions containing discretionary trustee powers are discretionary or family trusts, with a touted number of over 500,000 being established in Australia. The increased popularity of testamentary trusts (with discretionary trust type features) as an asset protection structure (see Issue: 509 for commentary on these trusts) are another common example, albeit not in the same numbers as discretionary trusts.

The discretionary powers of the trustee in both these forms of trust are, to a certain degree, similar insofar as they relate to the distribution of income or capital under the trust. As the beneficiaries of these trusts are at the whim of the trustee as to what income and capital they may receive in any particular tax year, it is sometimes the case that they endeavour to influence the trustee to take a predetermined course as to how future distributions are to be made. Any arrangements made to have legal effect in the future in relation to distributions can result in the trustee’s actions being unenforceable and subject to a court challenge by other beneficiaries to the trust.

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Conclusion
It is important when establishing a trust, whether during one’s lifetime or at the time of death through a will, that consideration be given as to whether, in establishing the terms of the trust, that the trustee when exercising some or all of his powers under the trust has an unfettered discretion.

Once an unfettered discretion is created in the trust, the trustee, in exercising that discretion, cannot do so in a predetermined fashion. Beneficiaries in such cases have a right to be considered by the trustee, with the trustee exercising their discretion in good faith and upon real and genuine consideration.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.

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