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Trusts Litigation

Trust litigation is any type of legal dispute over the creation or operation of a trust. Trust law cases will typically involve a dispute between the trustee and the beneficiaries of the trust. For a beneficiary, trust litigation will often focus on accessing assets from a trust or requesting the removal of a trustee who has not fulfilled their fiduciary duties. This article defines trusts litigation and explains some common causes for trust disputes.

What Is A Trust?

A trust is a legal relationship where a designated trustee holds valuable assets for the benefit of certain individuals, known as beneficiaries. The trustee holds the legal title of assets, while the beneficiaries hold an equitable interest in the assets contained in the trust.

Trustee Legal Responsibility

A trustee has a “fiduciary” duty to act at all times in the best interests of the trust and the beneficiaries, to carry out the purpose of the trust and put this obligation before their own self-interest. When a trustee acts outside their fiduciary obligations or contrary to statutory provisions, this can give rise to trust litigation.

Common Reasons For Trusts Litigation

Legal disputes can arise over a trust for a variety of reasons, including:

  • A beneficiary of a trust believes that a trustee is acting outside their authority or not discharging their duties properly;
  • A beneficiary and trustee disagree over how clauses in a trust deed should be interpreted;
  • A trustee has been negligent in their fiduciary duties; and/or
  • A trustee is in dispute with another trustee over the operation of the trust or disagrees over the interpretation of a trust deed.

Trusts litigation can also revolve around the very existence of a trust. The courts have found some trusts to be fraudulently created to hide assets or shield beneficiaries for some reason. If the trust was created for an unlawful purpose, it can be held to be defective, and therefore invalid in the eyes of the law. For instance, a court can invalidate a trust if the person was under undue influence or lacked testamentary capacity when they created the testamentary trust.

Outcomes Of Trusts Litigation

The beneficiaries of a trust can commence a court proceeding if a trustee has breached his or her fiduciary or statutory obligations. The remedies may include:

  • Equitable compensation for any financial loss suffered due to the trustee’s breach;
  • When a trustee has improperly disposed of a trust asset, the beneficiary can seek an order that the asset be transferred to the beneficiary (the remedy of tracing);
  • When the trustee has gained benefit from a breach, they can be forced to pay damages in the form of an account of profits;
  • A new remedial constructive trust can be created to remedy the breach when the breach occurred.

Case Study of trusts litigation

In Wallerstein v Bedington [2012], the Queensland Supreme Court found that a trustee had failed to perform his duties and ordered him to pay compensation to the beneficiaries of the trust. In this trusts litigation, the court examined a dispute over a testamentary trust and found in favour of the three beneficiaries who had been denied their rightful entitlement. The trustee was holding trust shares and money until the beneficiaries turned 18. The two adult beneficiaries were claiming their entitlement, and the third was seeking to remove and replace the trustee from their role.

In this trusts litigation, the trustee disputed the plaintiff’s claims and argued that they had already received their full entitlement in the form of wage “advances” from his own company and school fee payments. However, it was shown that the trustee failed to keep estate monies separate from his own company accounts.

The court was not satisfied that the wages paid to the beneficiaries were advances from the trust, even though the beneficiaries were never employees of the trustee’s company. The trustee failed to keep accounting records that noted these wages as trust payments. Instead, the company payment records recorded the beneficiaries as employees several times. The court also rejected the defendant’s claim that the school fees were paid from the trust fund, as they were reimbursed from the trustee’s company account, and there was no formal agreement to that effect. Therefore, the court found that the trustee did not act within his discretion to make payments for the benefit of the beneficiaries when he paid for their school fees or paid their wages.

Ultimately the court determined that the plaintiffs were entitled to payouts from the trust, including a compound rate of interest, as the trustee had used trust funds for his own business. The minor beneficiary requested that the trustee be removed and replaced according to the allowance in the will. The court agreed that there was a clear case for the removal of the trustee as he had failed to keep reliable accounts of the trust and had not kept his own finances separate from trust monies. The trustee was removed from the position and ordered to pay the plaintiffs’ legal costs on an indemnity basis.

This case highlights one form of trust litigation and the possible remedies available to beneficiaries when a trustee fails to act diligently in their duties. Disputes between trustees and beneficiaries are quite common, but this is a complex area of law, and anyone who is considering trust litigation should obtain legal advice as soon as possible. The solicitors at Armstrong Legal have extensive experience in advising on trust law and pursuing trusts litigation. Please get in touch with the team today on 1300 038 223 for help navigating trusts litigation.

Dr Nicola Bowes

This article was written by Dr Nicola Bowes

Dr Nicola Bowes holds a Bachelor of Arts with first class honours from the University of Tasmania, a Bachelor of Laws with first class honours from the Queensland University of Technology, and a PhD from The University of Queensland. After a decade working in higher education, Nicola joined Armstrong Legal in 2020.

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