Can you dispute a trust?

A trust exists when the owner of a legal interest in property (real or personal) is bound by an obligation to hold that interest for the benefit of others, and is recognised and enforced in equity. Property is held by its legal owner, the trustee, for the benefit of others, the beneficiaries.. Trusts are commonly used in Australia for asset protection, estate planning, and even tax management. However, trust contests and disputes can arise concerning the management or validity of the trust. 

At AANDI Lawyers, we specialise in dispute and litigation matters in Victoria, including complex trust disputes. This blog will explore the essential aspects of disputing a trust, what it involves, and how we can assist you.

Reasons for disputing a trust

Trust disputes are not only complex but also deeply personal, often involving significant emotional and financial stakes. Understanding the various legal grounds on which a trust can be disputed is crucial for any beneficiary or concerned party. 

Here are some of the key reasons that might prompt you to obtain legal advice:

Mismanagement by Trustees

Breach of Fiduciary Duties

Trustees have duties to avoid a conflict between his or her own interests and with their duties as trustees, and to not take unauthorised profit or benefit from the trust. This means managing the trust assets prudently, avoiding conflicts of interest, and acting with loyalty and impartiality to serve the interests of the trust. When trustees fail in these duties, whether by negligence or intentional misconduct, beneficiaries have the right to challenge their actions. Examples include making risky investments that deplete the trust's assets or favouring particular beneficiaries over others without a valid reason.

Lack of Transparency

A primary duty of every trustee is the duty to account, being a necessary of the trustee’s personal obligation to hold and deal with trust property for the beneficiaries’ benefit. The account must be timely, faithful, accurate and usually supported by documentation. 

Beneficiaries are often entitled to receive regular accounting and updates regarding the trust property and management of the trust. A trustee’s failure to provide these reports might constitute a breach of their duties.

Violations of the Trust Deed

A trustee’s overriding duty is to obey the terms of the trust. The trust instrument (or deed) outlines how the trust should be managed and the trustee’s powers. A failure to fulfil a duty may render the trustee liable for breach of trust. However, there are certain scenarios in which a trustee might not be bound to carry out the terms of the trust, such as if directed by the beneficiaries to this effect. 

Undue Influence or Fraud

Coercion or Duress

Trust funds established under duress, where the settlor was pressured or forced into creating the trust, can be invalidated. It’s crucial to demonstrate that the settlor’s free will was compromised due to threats or undue pressure.

Fraudulent Misrepresentation

This involves a situation where the settlor was tricked into establishing or altering a trust based on false information or misrepresentations. Proving fraud requires showing that the misinformation was knowingly provided to deceive the settlor, which led them to make decisions they would not have made otherwise.

Manipulation of Vulnerable Settlors

Sometimes, trusts are disputed when it's evident that a vulnerable person was manipulated into modifying or creating a trust. This is particularly common in cases where elderly or ill individuals are involved, making them susceptible to influence by those who would benefit unduly from their decisions.

Specific scenarios

Trust conflicts often arise when beneficiaries feel unjustly excluded or when trust terms are changed without their consent or to their detriment. Exclusions might occur due to drafting errors or more concerning circumstances, such as undue influence, where one party may manipulate the settlor to disinherit others. 

Beneficiaries may also challenge uncommunicated alterations that conflict with the trust's established rules or their rights. These changes can range from adjustments in asset distribution schedules to complete shifts in the trust's purposes, particularly if they reduce the intended benefits. 

Such scenarios lead beneficiaries to question the trust's administration's legitimacy and fairness, compelling them to seek legal remedies for perceived violations of their rights or the trustor's original intentions.

Understanding the legal framework

Navigating trust disputes effectively requires a comprehensive understanding of the legal principles that govern such matters in Australia. Trusts, particularly those operating within Victoria, are subject to specific legislative and case law oversight that shapes how disputes are handled and resolved.

Key legal principles governing trust disputes in Australia

Trusts in Victoria are regulated by the Trustee Act, which defines the responsibilities and rights of trustees and beneficiaries. This Act is supported by various federal statutes and case law, creating a comprehensive legal framework. These laws mandate trustees adhere to stringent trust management and fiduciary standards. 

The law offers clear resolution guidelines in disputes, including mediation, arbitration, or court proceedings. Additionally, understanding precedents from previous court rulings is crucial, as these influence the outcomes of similar cases and establish benchmarks for fairness and legal application.

Rights of beneficiaries

Under Australian law, trust beneficiaries have substantial rights that protect their interests. A key right is the "right to account," which grants beneficiaries access to detailed reports on the trust’s financial management and activities. This ensures trustees are accountable, enhances transparency in the trust's administration, and aids in detecting any mismanagement or fraud. If a beneficiary suspects wrongdoing, they can legally request these records to scrutinise the trustee's actions.

This rights framework is fundamental in managing disputes within trusts. Well-informed beneficiaries are more equipped to challenge discrepancies if they believe the trust is not managed according to legal standards or in their best interests. Understanding these rights is crucial for any beneficiary facing or considering a dispute, as it guides their interactions with trustees and informs their legal strategies.

Remedies for breach of trust

A trustee is personally liable to the beneficiaries for any adverse effects of breaches of trust, for which the beneficiary may seek remedy from the trustee. The usual personal remedies include compensation and account of profits. 

A beneficiary may also have recourse by way of a proprietary claim against an asset if a trustee used trust money or property to purchase an asset in the trustee’s own name. A proprietary claim offers advantages over a personal claim against the trustee, such as where a (corporate) trustee is insolvent, or the asset is transferred to someone else, the claim is enforceable against the third party, and any increase in the value of the asset accrues to the beneficiaries.

The process of disputing a trust

Navigating the complex process of disputing a trust requires a structured approach, from initial suspicions to potential courtroom proceedings. Here’s a breakdown of the steps involved:

Initial steps

When you suspect an issue with a trust, such as mismanagement, breach of duty, or misconduct, the first essential step is to seek professional legal advice. At AANDI Lawyers, we are experts in trust disputes and can help you navigate the complexities of formally addressing your concerns. 

We start by reviewing the trust agreement and the specifics of your concerns, advising on the validity of your claim and the best course of action. This includes gathering necessary documents, corroborating any evidence of wrongdoing, and drafting a formal letter to the trustee to outline the issues. 

This initial step is crucial to establish the basis for the dispute and explore the possibility of resolving the issue without resorting to court, which is often more efficient and less adversarial.

Court procedures

If an amicable resolution is not achievable and the dispute escalates to court, the process becomes more formal and structured.

Filing a Claim: The first step in the court process is to file a formal claim with the court. This document will outline the nature of your dispute, the evidence supporting your claims, and the legal remedy you seek.

Case Management: The case will undergo several management hearings before a trial. These are designed to organise the proceedings, set timelines for the exchange of evidence, and provide opportunities for resolving some or all of the issues without a full trial.

Presentation of Evidence: Both sides will have the opportunity to present evidence. This includes documentary evidence, witness testimony, and expert reports, particularly relevant in complex trust disputes involving financial expertise.

Trial: If the dispute cannot be resolved through earlier stages, it will proceed to trial. Both sides present their arguments during the trial, examine and cross-examine witnesses, and make their case to the judge.

Judgment and Appeal: After the trial, the judge will issue a judgment that resolves the dispute. This judgment may include modifications to the trust, removal of trustees, or other remedies. If one of the parties believes there has been a legal error, this judgment can be appealed to a higher court.

Potential outcomes and consequences

Decisions can have far-reaching implications for all parties involved when a trust dispute reaches the courtroom. Understanding these potential outcomes and their consequences is crucial for beneficiaries and trustees.

Possible court decisions

Courts have several options at their disposal when adjudicating trust disputes:

Modification of Trust Terms: A common decision is to modify the terms of the trust. This adjustment is typically aimed at aligning the trust's operations more closely with the settlor's original intent and prevailing legal standards. Such modifications might include changing beneficiary designations, altering distribution schedules, or revising trustee powers to reflect the trust's purpose better and ensure its effective management.

Removal of Trustees: If trustees are found to have breached their duties, the court can order their removal. This decision is usually taken to protect the trust’s assets and the beneficiaries’ interests, ensuring that the trust is managed by someone capable and trustworthy.

Invalidation of the Trust: In cases where fundamental flaws are identified—such as the trust being set up under duress, significant procedural errors during its creation, or clear law violations—the court might invalidate the entire trust. This extreme measure essentially resets the legal arrangements regarding the assets involved, reverting them to the estate or as directed by the court.

Implications for beneficiaries and trustees

The consequences of court decisions in trust disputes can be significant and multi-faceted.

Financial Implications: Changes in trust terms or the removal of trustees can significantly alter beneficiaries' expected inheritances or benefits. For trustees, removal can lead to financial liabilities, especially if their breach of duty caused financial loss to the trust.

Legal Consequences: Trustees in breach of duty may face removal and personal legal liabilities, including compensation claims for any losses incurred by the trust due to their misconduct. Beneficiaries might gain or lose legal rights to assets depending on the court’s decision to modify or invalidate the trust.

Impact on Future Management: Court decisions can redefine how a trust is managed moving forward. New trustees may be appointed, and new management strategies may be implemented, significantly affecting the trust’s administration and the fulfilment of its original purposes.

Each potential outcome carries its own implications, affecting the immediate and long-term interests of all parties involved. Understanding these risks is crucial for trustees to fulfil their duties responsibly. Awareness of these potential outcomes helps beneficiaries assert their rights effectively and prepare for possible changes to their entitlements under the trust.