Preparing Trust Resolutions: What does giving “real and genuine consideration” to beneficiaries actually mean?

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Before the end of each financial year, a trustee must prepare resolutions to distribute trust income. Failure to do so will generally result in default beneficiaries (as defined in the relevant trust deed) becoming entitled to that income or the trustee being assessed for that income.

Although preparing resolutions should be done in close consultation with the trust deed and with great skill, it was typically done relatively close to the end of the year. Resolutions were not invalid merely because they were prepared at the last minute. However, we all received a sobering reminder two years ago.

Duty to give due consideration

In Owies v JJE Nominees, the Victorian Supreme Court of Appeal confirmed that trustees must give ‘real and genuine consideration’ to the needs of beneficiaries before distributing income.

In that case, a beneficiary who was in financial and personal distress challenged several years of trustee distribution resolutions. The trustee was in the habit of making the same large distributions to the same three beneficiaries. Further, the beneficiaries were wealthy and in no need of further money. All the other beneficiaries of the trust generally received nothing, notwithstanding that they were in far poorer circumstances.

The court found that the distributions were voidable. It did this on the basis that the trustee had not given due consideration and made investigations into the affairs of all beneficiaries before making its distribution, and so was not exercising its powers in good faith.

What’s the lesson?

The lesson is to get started now.

The requirement to give real and genuine consideration imposes on trustees a procedural obligation that involves considerably more time than it takes to prepare just written resolutions. It is an obligation to find out how a beneficiary is doing, and then consider whether they require some money from the trust. It is not something that can be done at the last minute.

This lesson is probably more important where trusts have beneficiaries that might challenge income distributions. This may be particularly likely in the context of family disputes. Ironically, it could be that Owies compels trustees to talk to the family members that they would most like to avoid.

The ATO has also provided a Resolution Checklist as a guide to other issues trustees must consider.

Aintree Group Legal will be happy to discuss your family trust needs. Contact us today.