When Family Trusts Turn Toxic: Trustee Duties, Distribution Disasters, and Removal Remedies

How the courts respond when trustees fail the beneficiaries who need them most

The family trust is one of the most elegant instruments in the Australian estate-planning toolkit. Flexible, tax-efficient, and capable of sheltering assets across generations, it has become a cornerstone of how families structure their wealth. According to some estimates, there are well over 800,000 discretionary trusts operating in Australia — the vast majority of them family vehicles, established with the best of intentions.

But intentions, as any experienced practitioner will tell you, have a curious habit of failing to survive contact with family dynamics.

When relationships fracture — and they do, with dispiriting regularity — the family trust does not dissolve the conflict. It amplifies it. Assets that cannot easily be divided, trustees who cannot be easily replaced, and beneficiaries who cannot easily be ignored: this is the recipe for some of the most bitter, expensive, and protracted litigation in the country. The courts have spent decades grappling with the consequences, and the picture that emerges is not flattering to the families involved, nor always to the trustees who purported to serve them.

The Cautionary Tale: Owies v JJE Nominees

If you want a single case to illustrate what goes wrong when family dysfunction meets poor trust administration, look no further than Owies v JJE Nominees Pty Ltd [2022] VSCA 142, a decision of the Victorian Court of Appeal that sent ripples through trust law practice across Australia.

The Owies family operated a discretionary trust — unremarkable enough in structure. The trustee, JJE Nominees, was a company controlled by the parents. The beneficiaries included three adult children. Two of them, Eva and Anthony, received distributions year after year. The third, John, received essentially nothing.

The court’s findings were striking. The trustees had not merely preferred some beneficiaries over others — that is, after all, the whole point of a discretionary trust. The problem was deeper: the trustees had failed entirely to genuinely consider John’s position at all. They had, in the language of the judgment, made distributions without giving “real and genuine consideration” to the interests of all eligible beneficiaries.

JJE Nominees was found to have exercised its discretion for improper purposes, and the offending distributions were declared invalid. The case serves as a masterclass in how trustees can get it comprehensively wrong — and how the courts will respond when they do.

The Bedrock Duty: Real and Genuine Consideration

The phrase “real and genuine consideration” may sound like legal jargon, but the concept is straightforward: when a trustee exercises a discretion — such as deciding who receives income or capital from the trust — it must actually think about all the beneficiaries, not just the ones it happens to favour.

This principle has long been established in Australian trust law, with its roots in cases such as Karger v Paul [1984] VR 161, where it was recognised that a trustee of a discretionary trust is not free to distribute arbitrarily or capriciously. The discretion must be exercised in good faith, upon real and genuine consideration of the relevant factors, and in accordance with the purposes of the trust.

What does this mean in practice? It means that each time distributions are made, the trustee should genuinely survey the field of eligible beneficiaries, consider their respective circumstances — financial need, other resources available to them, the purposes for which the trust was established — and make a reasoned decision. The decision need not be explained or justified to beneficiaries. But it must be made properly.

The failure in Owies was not that John was excluded. It was that his circumstances were never meaningfully considered at all. The trustee went through the motions — if, indeed, it even went that far — without engaging in the genuine evaluative process the law requires.

This distinction matters enormously. A trustee who considers all beneficiaries and resolves to distribute to some but not others has acted properly, even if the excluded beneficiary is aggrieved. A trustee who distributes without any genuine consideration of those excluded has acted in breach of trust, regardless of whether the ultimate outcome might have been the same.

The Obligation to Gather Information

You cannot genuinely consider the circumstances of a beneficiary about whom you know nothing. Courts have consistently recognised that trustees carry an obligation to gather sufficient information to enable them to exercise their discretions properly.

This means, at a minimum, that trustees should periodically update their knowledge of beneficiaries’ financial circumstances, health, family situations, and other relevant matters. Where beneficiaries are not in regular contact with the trustee — and in dysfunctional families, this is often the case — the trustee cannot simply shrug and proceed on the basis that it “didn’t hear” from a particular person.

A trustee who makes no enquiry, receives no information, and then exercises a discretion that ignores a beneficiary is not in a position to defend that decision. The information-gathering obligation is not merely administrative tidiness. It is a precondition to the valid exercise of discretion.

In practice, this means that prudent trustees should maintain contemporaneous records of the considerations they undertook before each distribution. Trustee minutes — properly kept, reflecting genuine deliberation rather than rubber-stamped after the fact — are not optional. They are evidence. In litigation, they are often the only evidence of whether the trustee’s decision was made properly or not.

Pattern Evidence and the Accumulation of Failures

One of the most significant features of the Owies decision was the court’s willingness to examine the trustee’s conduct across multiple distribution cycles, rather than treating each year’s decision in isolation.

This approach — examining the pattern of behaviour over time — has become increasingly important in trust litigation. A trustee who consistently excludes the same beneficiary year after year, without any recorded rationale, without any inquiry into that person’s circumstances, and without any change in approach regardless of changing family circumstances, is providing strong evidence of an improper exercise of discretion.

Courts have recognised that a pattern of conduct can demonstrate, of itself, that the trustee has not been performing the genuine evaluative exercise the law requires. It is, as it were, the accumulated weight of doing something wrong repeatedly that becomes the proof of doing it wrongly every time.

For families involved in trust disputes, this has an important practical implication: the relevant conduct is not confined to the most recent distribution. Everything the trustee has done — or failed to do — over the life of the trust is potentially in play.

Void or Voidable? The Critical Distinction

When a court finds that a trustee has exercised a discretion improperly, the consequences depend on an important distinction: whether the offending distribution is void (as if it never happened) or merely voidable (capable of being set aside, but effective unless and until it is).

A distribution that is void ab initio can, in principle, be recovered regardless of what has happened to the assets in the meantime. This creates obvious difficulties where assets have been spent, invested, or passed on to third parties who received them in good faith.

A distribution that is merely voidable can be set aside at the election of the affected parties, but may be ratified or lost if the affected beneficiary delays or acquiesces.

In Owies, the court declared the distributions void, because they were the product of a fundamentally flawed exercise of power — not simply a discretion exercised improperly, but a purported exercise that was not a genuine exercise of discretion at all. The distinction turns on the nature of the failing: was there an actual (albeit flawed) decision, or was there merely the appearance of one?

This distinction has significant consequences for litigation strategy. It determines whether a beneficiary must act quickly to have distributions set aside, or whether those distributions are already invalid without further court intervention. It affects what remedies are available, and against whom.

For trustees and their advisers, the lesson is stark: the law will not treat a purported distribution made without genuine consideration as a valid exercise of power, no matter how it is dressed up.

Trustee Independence: The Problem of Interested Trustees

Family trusts frequently use family members — or companies controlled by family members — as trustees. This arrangement makes practical sense while the family is functioning harmoniously. It becomes acutely problematic when it does not.

A trustee who is also a beneficiary — or who is controlled by a beneficiary — faces an inherent conflict of interest. Courts have been at pains to emphasise that the trustee must act in the interests of all beneficiaries, not in its own interests or those of the faction that controls it. The requirement of trustee independence is not merely procedural. It goes to the legitimacy of every decision the trustee makes.

Where a trustee has a material interest in the outcome of a distribution decision, that interest does not disqualify it from acting — but it does heighten the scrutiny the court will apply if the decision is later challenged. A trustee in this position must be scrupulous about demonstrating genuine consideration of all beneficiaries, meticulous in its record-keeping, and alert to the risk that its judgment is being unconsciously shaped by self-interest.

When independence has been irretrievably compromised — when a trustee is so aligned with one faction of beneficiaries that genuine impartiality is no longer possible — the proper response is removal and replacement, not perseverance.

Removing a Trustee: How It Works in Practice

The removal of a trustee is not a remedy courts grant lightly. But nor is it withheld where circumstances genuinely require it.

Under the Trustee Act 1936 (SA) and its interstate equivalents, courts have a statutory discretion to remove and replace a trustee. The equitable jurisdiction to do so is broader still. The guiding principle is that removal should occur when the welfare of the beneficiaries requires it — not merely because the trustee has behaved badly, and not as a punishment, but because the continuation of the existing trusteeship would be inconsistent with the proper administration of the trust.

Courts have removed trustees in circumstances including: demonstrated partiality toward some beneficiaries at the expense of others; dishonesty or misapplication of trust assets; persistent failure to keep proper accounts; a breakdown of relationship between trustee and beneficiary so severe as to make proper administration impossible; and, as in Owies, a pattern of conduct establishing that the trustee is simply incapable of acting in accordance with its duties.

The question of replacement is as important as removal. Courts can appoint a professional trustee — frequently a trustee company — in place of the removed trustee. This introduces genuine independence and professional administration, but also comes at a cost, both financial and in terms of the loss of family control.

For families considering trust litigation, removal of a trustee is a significant remedy — but it is not a panacea. It does not undo past distributions (absent a void finding), it does not repair damaged relationships, and it does not come cheaply. It is, however, sometimes the only way to restore proper administration and protect the interests of beneficiaries who have been systematically ignored.

Practical Risk Management: What Families and Trustees Should Do

The lessons of Owies and the decisions that surround it are not confined to families already in dispute. They offer practical guidance for every family trust in Australia.

For trustees:

Keep proper minutes of every distribution decision. Record, in writing, the deliberations undertaken, the information considered, and the basis for the decision reached. The minutes need not be lengthy, but they must be genuine. A minute prepared after the fact to justify a decision already made is worse than no minute at all.

Periodically seek information from all eligible beneficiaries — not just those who are in regular contact or are obviously favoured. This need not be an intrusive process, but it must be a real one.

Take independent advice where conflicts of interest arise. If you are also a beneficiary, consider whether you should be making the decision at all, and whether the assistance of a professional co-trustee or adviser would better protect all parties — including yourself.

Be alive to the patterns your decisions create over time. Consistent exclusion of a beneficiary without recorded rationale is an invitation to litigation.

For beneficiaries:

If you suspect you are being systematically ignored or excluded, take advice early. Delay can affect your remedies, particularly where distributions are voidable rather than void. Consider requesting information from the trustee about how decisions have been made — beneficiaries have well-recognised rights to certain information about the trust’s administration.

Document your own circumstances, and any communications (or lack of them) with the trustee. The pattern of your exclusion may be precisely the evidence that establishes the trustee’s breach.

For families establishing trusts:

Choose trustees with care, particularly with an eye to longevity and the possibility of family conflict. Consider including express protections in the trust deed — mechanisms for trustee review, replacement procedures, and dispute resolution processes. Consider whether a corporate trustee, or a professional co-trustee, might provide better governance than individual family members alone.

No trust deed can guarantee family harmony. But a well-drafted deed, with appropriate governance structures, can significantly reduce the risk that ordinary family tension will escalate into the kind of catastrophic, expensive, and relationship-destroying litigation that Owies exemplifies.

Conclusion

The family trust endures because it works — when it is administered properly, by trustees who take their obligations seriously, in families that remain functional enough to allow good governance. When any of those conditions fails, the consequences can be severe.

Owies v JJE Nominees is a reminder that trustee discretion is not absolute, that the courts will examine the substance of trustee decision-making and not merely its form, and that the beneficiaries who are most easily ignored are precisely the ones the law is most concerned to protect.

The duties are clear. The consequences of ignoring them are serious. The costs — financial, legal, and familial — of getting this wrong are, in the truest sense, beyond accounting.

Want to Find Out More?

If you would like advice about the administration of a family trust, or if you are concerned that you are being unfairly excluded as a beneficiary — or that the trustee of your family trust has not been exercising its discretion properly — contact our friendly team.

When it comes to Wills, Probate, Deceased Estates, asset protection and estate planning in Australia, you can trust the oldest law firm in South Australia — Genders & Partners — to guide you through the tough decisions you must make for your family’s future care and welfare.

If you have any questions or would like further information, or a quick phone call to discuss, book a timeslot for a free 15-minute phone consultation.

We can help you to protect yourself and your family. We look forward to being of service.

More Trust and Estate Planning Resources

• FAQs
• Videos — Trusts and Asset Protection
• Articles about Discretionary Family Trusts
• Articles about Estate Planning Trusts
• Articles about Asset Protection and Estate Planning

All these and many more trust and estate planning topics are available for discussion with the oldest law firm in South Australia. Visit our articles page to explore our complete library of estate planning resources.

DISCLAIMER: This article is intended as general information only and does not constitute legal advice. The law relating to trusts is complex and individual circumstances vary significantly. You should obtain specific advice from a qualified legal and taxation practitioner before taking any action in relation to a family trust. Genders and Partners accepts no liability for reliance on this article without such advice.

5 Common Dangers in Using DIY Kits

To access this  infographic click Here

Rod Genders is a senior Australian lawyer specialising in trusts, Wills and estate planning, accident compensation, and probate and deceased estate administration in Adelaide and all over South Australia. His boutique specialist law firm, which was founded on 1848, is one of the oldest and most respected in Australia. Rod is also a prolific author and speaker.  Some of his articles and books on Wills, Probate, Trusts, Estate Planning, Asset Protection and Retirement Planning may be found at www.genders.com.au.

Enjoy this article? Check out the full report containing “A Guide for Beneficiaries of a Deceased Estate in South Australia” from senior Australian lawyer Rod Genders.