What rights does a beneficiary of a Discretionary Trust actually have?
7 May 2021
A Discretionary Trust allows trustees greater flexibility when distributing the trust fund; they have the power to distribute the trust fund to either all, some, or just one of the beneficiaries, and in whichever amounts they see fit.
Although, to some, this can appear an unattractive and absurd model, settlors seeking to prepare for the unknown future needs of their beneficiaries commonly use discretionary trusts in the belief, and hope, that at the time of distribution the trustees will make the best decision based on the current circumstances.
Each trust is different in relation to exactly how much discretion the trustees have; however, broadly speaking the trustees will have the power to decide:
- what gets paid out (income or capital of the trust)
- which beneficiary or beneficiaries they wish to make payments to
- how often the payments are made; and
- any conditions to impose on the beneficiaries as they see fit.
The chances of a dispute arising should the trustees choose to distribute the trust fund on an un-equal basis may therefore seem inevitable. At the very least, trustees can expect beneficiaries who received either nothing at all, or a considerably smaller share than their counterparts, to demand answers and justifications for the decisions which have been made.
What is a beneficiary of a Discretionary Trust entitled to?
The purpose of all trusts is to benefit the named beneficiaries, and it is the trustees’ job to ensure that this is carried out in accordance with their fiduciary duties. However, the very nature of discretionary trusts is to allow the trustees flexibility when distributing the funds, so, in practice, what rights do discretionary beneficiaries actually have if they are not happy with the trustees’ decision?
The short answer is that beneficiaries cannot challenge the trustees’ decision simply because it appears to them to be grossly unfair. However, trustees owe a fiduciary duty to all potential beneficiaries and must keep them informed, so if a beneficiary is not happy with a trustees’ decision, they can look to hold the trustees to account if they have breached their duties.
What information can a beneficiary request?
One of the ways in which a beneficiary of a discretionary trust may look to challenge the exercise of the trustees’ discretion is to request information and documentation in relation to the trust and the decisions which have been made in relation to the distribution of the trust fund. This is not always a straightforward exercise and the 2003 case of Schmidt v Rosewood redefined which documents the beneficiary of a trust is entitled to have sight of. As a result of this Privy Council ruling the following principles have emerged:
- trust documents, including Deeds of Appointment and Variations to the trust, should generally be disclosed if requested
- trust accounts should be disclosed
- settlors’ letters of wishes remain confidential documents and there is no presumption to disclose them although consideration should be given on a case by case basis
- beneficiaries are entitled to see legal advice provided it is paid for by the trust fund
- beneficiaries may not see legal advice relating to trustees’ disputes with beneficiaries; and
- if trustees have a controlling shareholding in a company then company documents may be subject to disclosure
- trustees do not need to disclose information regarding ‘why’ they have made certain decisions.
However, whilst beneficiaries do have an expectation of disclosure and a legitimate interest to see trust documents, there is no automatic proprietary right to receive information and documents relating to a trust. Rather, the right to disclosure will arise in circumstances where there is an identifiable need to hold trustees to account; the extent of any disclosure will be governed by the Court’s inherent jurisdiction to supervise trustees in the exercise of their duties. As part of this process, beneficiaries of a discretionary trust will need to prove that they have a real chance of benefitting under the trust, and that it is proportionate to warrant the disclosure of the information that they are requesting.
In practise, trustees need to consider any requests for information relating to the trust from beneficiaries very carefully and be conscious of their overriding duty to keep beneficiaries informed.
Although perhaps not as straightforward as some other trust structures, Discretionary Trusts can, and do, offer a number of advantages including a greater degree of flexibility and certain tax advantages. However, it is important that beneficiaries and trustees understand their rights and duties when it comes to a Discretionary Trust so that potential disputes can be managed and, hopefully, avoided.
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We understand that trusts can often appear complicated and daunting on the surface, and our specialist Contentious Trust and Probate Team at Birketts are well equipped to offer advice and assistance to both trustees and beneficiaries. If you have any queries please do get in touch with a member of our team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at May 2021.