Challenging a trustee: In what circumstances is this possible?
Trustees make decisions in relation to the management and operation of a trust. In the case of a discretionary trust those decisions might involve:
- whether to make a payment,
- who to make a payment to,
- how much money should be paid,
- how to apply capital and income,
- how to invest funds, and
- how to make tax efficient decisions.
Because discretionary trusts will often allow trustees to have complete discretion over the trust funds, this raises the question as to whether legally challenging a trustee is possible.
Historically, discretionary trustees could not be challenged. Cases such as Tempest v Lord Camoys (1882) and Re Gadd (1883) said that the discretion of trustees should not be challenged by the court. However, things have progressed since then and even in the case of Tempest v Lord Camoys the court did say that it could enforce against the trustees to prevent improper exercising of their powers.
Here are some examples of how the current law can be used to challenge the actual substance of a trustee’s decision:
- A trustee’s failure take into account relevant matters, or acting under a mistake or misapprehension. Trustees are required to consider the consequences of their decisions, including things like: the effect on the trust, the effect on other beneficiaries and tax consequences.
- A trustee’s breach of duty of care in the exercise of investment powers. If the trust allows trustees to make investment decisions, then those decisions can be challenged if there has been a breach of duty of care.
- Conflict of interest. This covers several different scenarios, including where a trustee refuses to distribute the trust funds because they will gain from the trust if the beneficiary passes away.
- Duress, undue influence, or misrepresentation. For example, trustees usually have to make decision unanimously, so if one trustee is being coerced into making a decision by another trustee, then that decision can be challenged.
- Fraud on a Power. This includes a situation where the power exercised by the trustee was for a corrupt purpose to benefit the trustee, such as a conflict of interest.