Discretionary trusts are typically used where a settlor is unsure of the future needs of their beneficiaries. They rely on the trustees to distribute the trust based on the circumstances and needs of the beneficiaries at the relevant time.
Many see discretionary trusts as unattractive due to the lack of certainty they provide to their intended beneficiaries.
Depending on how the trust is written, there will be varying levels of discretion provided to the trustees. Typically, 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
- whether to impose any conditions on the beneficiaries as they see fit.
The chances of a dispute in the event that the trustees choose to distribute the trust fund on an unequal basis therefore seems inevitable.
Trustees can expect beneficiaries who receive nothing at all, or a considerably smaller share than the other discretionary beneficiaries, to demand an explanation for the decisions which have been made.
What is a beneficiary of a Discretionary Trust entitled to?
The idea is for the trust to benefit the named beneficiaries. It is the trustees’ job to ensure that this is carried out in accordance with their fiduciary duties. A discretionary trust is by its name as it is in nature; discretionary. It allows the trustees flexibility when distributing the trust funds, so, in practice, what rights do discretionary beneficiaries actually have if they are not happy with the decisions made by the trustees?
Unfortunately, beneficiaries cannot challenge the decisions made by the trustees’ purely because they feel it is unfair to them. However, trustees owe a duty to all potential beneficiaries and must keep them informed. Therefore, if a discretionary beneficiary is not happy with a decision, they can look to hold the trustees accountable if that decision amounts to a breach of their duties.
What information can a discretionary beneficiary request?
One of the ways in which a discretionary beneficiary 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 straightforward, however.
In the case of Schmidt v Rosewood Trust Ltd [2003] UKPC 26 the Privy Council made clear which documents a discretionary beneficiary of a trust is entitled to see. Out of this case, the following principles have arisen:
- 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.
Whilst discretionary beneficiaries do have some expectation of disclosure and a legitimate interest to see trust documents, there is no automatic right to receive information and documents relating to a trust. The right to disclosure of trust documents will arise in circumstances where there is an identifiable need to hold the trustees accountable. The extent of disclosure will be governed by the Court’s jurisdiction to supervise trustees in the exercise of their duties. As part of this process, discretionary beneficiaries of trust will need to prove that they have a real chance of benefitting under the trust, and that it is proportionate to require disclosure of the information that they are requesting.
For the above reasons, Trustees need to carefully consider any requests for information relating to the trust from beneficiaries and always have in mind their overriding duty to keep the beneficiaries informed.
Conclusion
Although discretionary trusts are not quite as straightforward as some other trust structures, they do have the potential to offer a number of advantages including greater flexibility and some tax advantages.
It is important that discretionary beneficiaries and trustees understand their rights and duties when it comes to a Discretionary Trust so that potential disputes can be avoided, or where unavoidable, can be carefully managed and resolved without the need for court involvement.
If you need advice about beneficiaries of a discretionary trust, please get in touch with our experienced Personal Dispute Resolution team on 03456 465 465 or email enquiries@rotherabray.co.uk.
