Court cracks down on income payments by family trusts

set up to protect family assets, improve tax outcomes and inheritance planning.

They are called “discretionary” because the trustee has the power to decide how much beneficiaries get from a trust and when they get it. All capital and income is distributed at their discretion.How this discretion should be used is an issue that arises in a controversial decision involving John and Eva Owies, both medical doctors, who had three children, Michael, Deborah and Paul.

The parents were estranged from Paul and Deborah so between 2011 and 2018 income distribution for the trust was 40 per cent each for John and Michael with the remainder to Eva. “The purpose of the trust was to provide for the primary beneficiaries in an even-handed, impartial way, in a fashion that is more constrained than the whims, passions and strong feelings, both favourable and adverse, that can underpin a parent/child relationship,” the court ruled.

The traditional role of the trustee has been to follow the trust terms, be loyal to the beneficiaries, invest prudently, make required distributions and approve accounting and annual reports. Ensure that the terms, purpose and administration of the trust are fit for purpose. For example, should the trust be retaining capital for future generations?

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