Sladen Snippet – The Segelov decision: trustee not under a duty to notify discretionary objects of their entitlements

The New South Wales Court of Appeal adopted a traditional and technical approach to the interpretation of the terms of a trust deed when dismissing an appeal in the decision in Segelov v Ernst & Young Services Pty Ltd.

The case concerned the duties of the trustee in administering the Ernst & Young Services Trust, a discretionary trust with a large class of discretionary beneficiaries. The appellant - who had been nominated as a beneficiary of the trust by virtue of being the spouse (at the relevant times) of a partner of Ernst & Young - argued that the trustee:

  1. owed her a duty to inform her upon becoming entitled to a distribution that she was a beneficiary under the Trust;
  2. owed her a duty to ensure that she received the benefit of any distribution to her;
  3. had breached these duties by failing to notify her of her entitlements under the Trust; and
  4. was not entitled to the benefit of the discharge provided by the receipts clause in the trust deed as payments which had been made into joint bank accounts prior to 30 June each year were not payments of “income” of the “Trust Fund” (as those terms were defined in the trust deed).

The Court of Appeal, finding in favour of the respondent trustee held that:

  1. The trustee had a discretion as to how much income (if any) may be applied by the trustee in each financial year, up to the maximum set by the accounting income recorded in the annual accounts, with the word “arising” emphasising that the income from the Trust Fund arises during the course of each financial year. Therefore, the trustee was permitted under the terms of the trust deed to make interim distributions of “income”. Each interim payment into the joint account was a dispositive act and the resolutions passed by the directors at the end of each financial year were confirmatory rather than dispositive of the interim payments preceding the date of the resolutions;
  2. The trust deed did not expressly or impliedly provide for a duty to notify discretionary objects of their entitlement. The primary judge did not err in relying on the relevant clause in the trust deed as excluding any such duty by reason of its terms which provided that payment of income into a joint bank account, without the need for an acknowledgement of receipt of payment by or on behalf of the beneficiary, afforded the trustee a full and final discharge of its obligations; and
  3. The manner in which moneys in the joint bank account were subsequently used by one of the joint account holders does not inform or provide a foundation for a duty of notification arising at an earlier point in time. To impose such a duty of notification in all cases would be to impose a duty without regard to the nature and the terms of the relevant trust and the social or business environment in which the trust operates.

The case was decided on the basis of the specific wording in the relevant terms of the trust deed, and illustrates that it is critically important to ensure that trust deed is appropriately and coherently drafted in order to avoid unintended consequences for a trustee.

To discuss this case, or for any further information please contact:

Renuka Somers
Special Counsel
Sladen Legal
M +61 407 478 592  |  T +61 3 9611 0110
rsomers@sladen.com.au

or

Daniel Smedley
Principal | Accredited Specialist in Tax Law
Sladen Legal
M +61 411 319 327  |  T +61 3 9611 0105
dsmedley@sladen.com.au

Sladen Legal

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