In a legal update last year, I wrote about the case of Mercanti v Mercanti on the matter of control and succession of discretionary family trusts. That illustrated an example where a challenge to the passing of control was unsuccessful.
In a recent Supreme Court of Victoria decision of Trani v Trani decided in 2018, there was a successful challenge to a trustee’s decision about distribution of trust assets. Such cases are unusual and difficult to win because of the well established principles that:
- the exercise of the discretion of a trustee is examinable only as to good faith, real and genuine consideration and absence of ulterior purpose;
- a trustee does not have to disclose its reasons for exercising its discretion in a particular way; and
- unfairness and unreasonableness are not sufficient grounds to successfully challenge.
The onus or burden of proof is very much on the challenger.
The basic facts
The facts are very ordinary and typical of the family situations lawyers and accountants have before them on a regular basis. Mr & Mrs Trani built up considerable family wealth from a pizza business. After they sold the business they put much of this wealth into a discretionary family trust. They had two sons, Marco and Luciano, and a daughter, Patrizia. Their company, Latina Investments Pty Ltd, was the trustee of the trust. All three children were appointed directors of Latina. However, Luciano became the sole shareholder. After Luciano and Marco fell out with their sister over the funeral arrangements for their mother, Luciano lawfully exercised his powers as sole shareholder to remove Patrizia as a director of Latina. This put him and Marco in control of Latina. They proceeded to sell all of the trust assets and decided to distribute the net proceeds equally between themselves, before winding up the trust and deregistering Latina.
Patrizia applied to the court to invalidate the distributions on the grounds that the resolution of Latina was motivated by bad faith, the trustee having failed to give real and genuine consideration to her.
The court found that the resolution was defective for technical reasons. However, Luciano and Marco were successful in obtaining rectification of the resolution to give effect to their intent. Despite this, Patrizia succeeded in her claim to have the rectified resolution invalidated. The court agreed that the decision to distribute the capital to themselves was motivated by bad faith and that the trustee had failed to give real and genuine consideration to Patrizia. Patrizia was able to establish this through evidence of:
- the breakdown of the relationship between her and her brothers and their animosity towards her;
- the trustee selling one of the trust properties for substantially less than offered by Patrizia’s defacto partner;
- prior to the relationship breaking down there was an acceptance that the trust was intended to benefit all three of them equally in accordance with their parents’ wishes;
- the minute of the resolution to distribute the assets, which had been prepared by the trust’s lawyers and accountants, did not accurately record what Luciano and Marco actually said and did at their meeting;
- the trust’s accountant gave evidence contradicting Luciano and Marco; and
- Luciano and Marco did not give credible evidence about their relationship with their sister and their motives.
The trustee’s decision was overturned and instead there was an order to distribute the assets (what was left of them) equally between the 3 siblings. The technical deficiency in the trustee’s resolution required Luciano and Marco to give evidence to obtain rectification of the deficiency. This opened them up to cross-examination that put into evidence their bad faith and failure to properly consider Patrizia.
Overview and conclusion
Trani v Trani highlights that the exercise of a trustee’s discretion can be successfully challenged, if there is enough evidence to establish bad faith and lack of proper consideration of the interests of a disgruntled beneficiary. This evidence has to be found outside the minutes, resolutions and records of the trust, as these are not normally able to be scrutinised. It also highlights the importance of technical correctness of meetings and minutes of trustee’s resolutions in accordance with the applicable trust deed and the duties of trustees.
The case is also another illustration of the need for careful estate planning and use of strategies for effective control and succession of family trusts to protect against unplanned outcomes. There are a range of strategies that can be used to ensure that parents’ wishes must be followed. Unfortunately, legal action such as that brought by Patrizia, is rarely successful or economic and is not one of these strategies we would recommend when there are better choices that can be made at the beginning.
The succession of family trusts (and also superannuation funds and benefits) if very much part of what we assist with in our wills and estate planning practice. Megan Horsell, an experienced wills and estates lawyer, has recently joined Lynch Meyer and is also available to advise and assist with any wills and estates matters.