Proceed with caution when removing a beneficiary

If a client has had a falling out with a child, spouse or relative and wishes to exclude that person as a beneficiary of an existing discretionary trust, the trustee’s motive may come under scrutiny, as happened in Schreuders v Grandiflora Nominees Pty Ltd [2014] VSC 310. In this recent case, the court ordered the trustee to provide the excluded beneficiary with copies of the documents relevant to the trustee’s decision.Removing a beneficiary from a trust deed

The applicant, Mr Schreuders, was a beneficiary named in the schedule, but no distributions had ever been made to him during the life of the trust. The trustee varied the schedule to the trust deed to remove Mr Schreuders as a beneficiary. When he discovered this, he made an application for preliminary discovery of documents relevant to the trustee’s reason for removing him as a beneficiary, alleging that this may have been done for an inappropriate reason.

Garde J observed that even if Mr Schreuders had been reinstated as a beneficiary, it would not mean that he would ever receive any distribution. Nevertheless, Garde J upheld the associate judge’s decision to order that the trustee provide preliminary discovery of those documents.

It is rarely necessary to remove the name of a beneficiary from the schedule to the trust deed. The only potentially valid reason to do so may be to avoid the beneficiary from having to provide a personal guarantee to the trust’s lender.

It is important to note that:

  • there is no requirement for the trustee of a discretionary trust to make any distribution, and
  • no beneficiary of a discretionary trust, whether named or described, has any legal right to demand a distribution to be made in their favour.

For advice on when it is appropriate to exclude a beneficiary from a discretionary trust, contact us on 9898 6666. We’d be happy to help.