The Black Sheep: Managing a Family Trust When Siblings Fall Out

Family discretionary trusts often include all children of a family as beneficiaries, even though control of the trust may ultimately pass to only one or two of them via their appointment as Trustees and/or Appointors.

This can create difficulties where siblings become estranged. For example, two siblings may control the trust as trustees or appointors, while a third sibling has no control but remains within the class of beneficiaries.

The important point is that a sibling does not need to control the trust to have rights in relation to its administration.

Being a beneficiary does not mean being entitled to a share

A discretionary beneficiary generally has no fixed entitlement to the trust assets and cannot simply demand a distribution or insist on receiving an equal share. Their only right is to due administration within the meaning and spirit of the trust.

However, trustees still have obligations concerning the proper administration of the trust. An estranged beneficiary may, in appropriate circumstances, seek information about the trust or challenge the way it has been administered.

This means the siblings in control should be particularly careful to demonstrate that they are administering the trust properly, rather than treating its assets as their own.

Good records are your best protection

If a dispute arises, transactions that occurred many years earlier may suddenly come under scrutiny.

Trustees should therefore maintain meticulous accounting and financial records, including records of distributions, loans, expenses and movements of trust assets. Significant decisions should be supported by appropriate trustee resolutions and contemporaneous documentation.

This is particularly important where trust assets or funds are being used by, transferred to or loaned to the siblings who control the trust.

Be careful when benefiting yourself

Trustees are fiduciaries and must be particularly cautious where their personal interests may conflict with their duties.

Related-party transactions should therefore be properly documented and, where appropriate, supported by independent valuations or professional advice.

A power contained in the trust deed should not be treated as an automatic licence to use trust property for the personal benefit of those controlling the trust.

Don’t simply ignore the estranged sibling

An estranged beneficiary does not necessarily need to receive a distribution. However, trustees should be cautious about adopting a blanket position that the sibling will never benefit simply because of the family relationship.

Trustee decisions should continue to be made in accordance with the trust deed and the trustee’s duties, rather than being driven by personal animosity.

Similarly, if the estranged sibling requests trust accounts or documents, the request should not simply be ignored or automatically refused. The extent of a beneficiary’s entitlement to trust information can be complex, so legal advice should be obtained before responding.

Can you simply remove them as a beneficiary?

Removing the estranged sibling from the beneficiary class may seem like the easiest solution, but it is not necessarily straightforward.

The ability to remove a beneficiary depends on the trust deed and general trust law and can also have tax and duty consequences. Importantly, removing a beneficiary will not necessarily prevent them from questioning how the trust was administered while they were a beneficiary.

Protecting the trustees

Where an estranged sibling remains a beneficiary, the best protection is good trust governance.

Keep accurate accounts, document important decisions, properly record loans and distributions, obtain valuations for significant related-party transactions, manage conflicts carefully and ensure that trust and personal assets remain separate.

Most importantly, remember that lack of control does not necessarily mean lack of rights. An estranged sibling may not be entitled to a share of the trust, but they may still be able to scrutinise how it has been managed. Good records and careful administration can make all the difference if a family disagreement eventually becomes a trust dispute.

To discuss your estate planning needs with one of our experienced Estates team, please contact Solari and Stock on 8525 2700 or click here to request an appointment today.

Article by Nicole Commandeur
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