You may have seen some recent headlines regarding the ATO’s of family discretionary trusts. But what’s not made the headlines are the numerous legal issues that arise in the context of discretionary trusts. During 2025, we have dealt with a number trust issues and controversies. To help you (or your clients) avoid these challenges, we’ve put together this update to wrap up 10 trust issues of 2025.
1. Trustee’s Power to Distribute
Although a discretionary trustee has the overall power to decide how the assets of the trust should be distributed, there are still limitations on how that power is exercised. These limitations include having to genuinely consider all the potential beneficiaries and make decisions in good faith according to the properly constructed terms of the trust. In exercising discretion a trustee has duties to:
- understand the financial position of each beneficiary;
- consider each beneficiary’s relationship to the trust;
- assess if there are any special circumstances;
- balance the needs of present and future beneficiaries;
- review past distributions and patterns; and
- identify any conflicts of interest.
In our experience, allegations that trustees have breached these duties are most typical in the context of family trusts, where a more relaxed approach is often taken. While this approach may seem convenient, it makes proving compliance problematic, especially when dissatisfaction among family members due to unequal distributions is so common. In our experience, trustees should never take a relaxed approach, no matter the context, as it is usually the catalyst to significant trust disputes.
Trustees of family trusts (or any discretionary trust) need to understand their obligations concerning distributions and keep proper records of the steps taken to comply. Failing to do so can result in disputes escalating unnecessarily into legal action that could have been avoided with clearer compliance and documentation from the beginning.
2. Regularly Reviewing Trust Deeds
Have you ever had a holiday booked months in advance only for everyone’s priorities and schedules to change causing arguments over refunds and timing? That’s how trust disputes often begin – with trust deeds drafted years ago that no longer reflect what anyone really wants, or the current needs of the beneficiaries. We have seen that when this happens it often leads to uncertainty where outcomes may appear to be inconsistent with what was intended, posing risks of legal disputes. Like any long-standing agreement, trustees should regularly review that the trust deed reflects its current intention and make changes when needed. We would recommend that the best course of conducting that review is to seek professional legal advice to obtain reassurance that the trust will operate smoothly.
3. Trustee’s Safety Net of Indemnity
Trustees are generally protected from having to personally pay costs they incur in managing a trust appropriately – in legal terms, they have a right of indemnity. To secure this right, trustees should include clear clauses identifying the indemnity in the trust deed and keep a detailed record of all costs incurred relating to their administration of the trust.
An issue that sometimes arises (and which arose for us this year) is where a new trustee (successor) replaces an old trustee and the successor is not obliged to protect the former trustee’s indemnity. To avoid this, trustees who are to be replaced or step down should check that any expenses or debts are paid from the trust before being removed or stepping down.
4. Betray your Duties and Forfeit your Title
In Australia, courts won’t hesitate to step in when a trustee isn’t doing the right thing. If there’s serious misconduct where the beneficiaries’ interests are being harmed or the trust simply isn’t being run the way it should, the court can step in and remove the trustee.
Think of situations where a trustee uses their powers unfairly. For example, handing out distributions in a way that favours one person without good reason, or ignoring the needs of others altogether. Sometimes, it’s just a case of failing to manage the trust properly. In those circumstances, the courts have the authority to step in and appoint someone more suitable as trustee.
5. Can a Trustee use trust funds to pay Lawyers
Trust disputes can get expensive surprisingly quickly, and many trustees don’t realise that their legal fees aren’t automatically covered by the trust. Its not a given – and far from it.
Whether a trustee can pay legal costs from the trust depends on a few things:
- what the trust deed actually says;
- why the costs were incurred;
- whether the expenses were genuinely necessary or proper;
- if there’s any conflict of interest; and
- whether the trustee has been acting responsibly.
Sometimes the trust deed spells out what can and can’t be paid for especially when it comes to legal costs tied to disputes, or challenges. So, before assuming the trust will handle the legal bill, it’s worth taking a look at the deed and the circumstances.
6. Unsure what to do? Just ask the court
Trustees often have to make tough calls about the costs involved in running a trust and it is not always straightforward. What seems reasonable to a trustee might look unnecessary to a beneficiary. We have seen that this is where many disagreements often start, especially around whether certain costs can be reimbursed.
When trustees become unsure, they can ask the court for guidance. The court’s advice isn’t technically the final word, but it does act like a safety net. It gives the trustee confidence that they’re on the right track and are making decisions in line with their duties.
Following the court’s directions also helps show that any legal costs were reasonable and can properly be paid from the trust, reducing the risk of the trustee being personally liable.
7. Out with the old, and in with the new – Protecting former trustees
When a trustee resigns or is replaced, issues often arise around what the former trustee is entitled to. That might include their right of indemnity as we mentioned above, any beneficial interest they hold in the trust assets, or their right to have enough assets preserved to cover those entitlements.
What many people don’t realise is that a new trustee doesn’t have a duty to protect the former trustee’s rights. That’s why any trustee planning to retire or hand over the role needs to actively safeguard their own rights. How can they do this? By making sure the transition is properly documented and ensuring there’s a clear and complete handover of the trust’s assets and records.
8. Keeping the Record Straight
Keeping accurate, consistent records of trustee’s decisions is one of the simplest and most effective ways to properly manage a trust. Trustees should make a habit of documenting key decisions, especially anything to do with income or capital distributions, through formal minutes or written resolutions. Not only does this show that decisions were made carefully and for the right reasons, it also creates a paper trail of how the trust has been run over time. We have seen this year that when trustees fail to have proper documentation, it creates more issues and increases the complexity of any legal dispute.
9. Intervening in Beneficiary Disputes
Disagreements between beneficiaries are not uncommon as we’ve seen over the course of this year. Family dynamics, clashing expectations, and heightened emotions can all add fuel to the fire. Trustees need to stay impartial even when tensions run high.
The challenge is that the more a trustee gets pulled into the conflict, the harder it becomes to remain neutral. But on the other hand, stepping back completely isn’t an option either because if a trustee ignores a dispute, the trust becomes impossible to manage, and it opens the door to allegations of breaching duties.
To navigate this balance, trustees should focus on clear communication and transparent explanations for their decisions. If the situation becomes too heated, it’s important to seek professional legal advice.
10. A Recovery Plan for Lost Deeds
From time to time, our team encounters situations where disputes escalate because a trust deed has gone missing. Unfortunately, original deeds are occasionally lost and cannot be located, which can make proper trust administration challenging. When this happens, the safest and most reliable approach is to go to the court for guidance on how to deal with the lost deed. To obtain that guidance, the trustee needs to show a few things:
- that the original deed did exist;
- that it has genuinely been lost; and
- that the version they want to rely on is an accurate reflection of the deed’s terms.
The court will then look at all the evidence and decide whether the proposed deed appears to be the correct one, or otherwise indicate to the trustee how the trust should be properly managed, including whether or how a new deed should be executed.
Disclaimer
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.