So you’ve decided the best thing to do to protect your hard earned assets is to put them in a Trust.
But what happens when things turn sour and the Beneficiaries want to know what’s in the Trust and what they’re entitled to. Are they entitled to know all about the Trust and its affairs?
This issue comes up more than most people realize. It especially raises its head when Beneficiaries are fearful and suspicious which can occur if there is limited communication between Trustees and Beneficiaries.
Historically, it has been thought that a Beneficiary’s right to information stemmed from whether they were a Fixed or a Discretionary Beneficiary.
Fixed Beneficiaries had an entitlement to Family Trust assets pursuant to the Trust Deed provisions. Therefore, it was argued they had an entitlement to view Trust documents and to receive disclosure of Trust information.
Discretionary beneficiaries on the other hand had no entitled to Trust assets. All they possessed was a right to be considered by the Trustees when the Trustees exercised their discretion with respect to the paying out of capital, income and /or the allocation of assets.
Accordingly, it was supposed Discretionary Beneficiaries had no power to demand to see Trust information or to view Trust documents.
Recent case law has now clarified the basis on which a Discretionary Beneficiary may seek disclosure of Trust documents and this has nothing whatsoever to do with whether they are a Fixed or a Discretionary Beneficiary. Rather, the approach has been to apply to the Court’s on the basis that the Court has an inherent jurisdiction to administer Trusts.
Using this approach, the Courts have said that they possess inherent jurisdiction to supervise and if necessary, to administer Trusts. Beneficiaries of both classes have a right to approach the Courts to seek discourse of a Trust’s documents and it will be for the Courts to determine whether they will exercise their inherent jurisdiction or not.
This of course means that the right of a Beneficiary to view Trust documents is at the discretion of the Courts.
The Courts have said that when they are considering exercising their discretion they will be mindful that they are engaging in a balancing exercise, balancing the competing interests of different parties (eg: trustees and beneficiaries and third parties) and will take into account various issues including personal and commercial confidentiality, parties privacy, consequences of disclosure, etc.
Types of information that Courts have approved for disclosure include:
- Deeds of Trust;
- Deeds of Variation of Family Trust Deed provisions;
- Deeds of Changing of Trustees;
- Deeds of Resettlement;
- Legal opinions relating to the interpretation of a Trust Deed’s provisions;
- Legal opinions with respect to a Beneficiary’s rights;
- Valuations of assets of the Trust;
- Financial accounts of the Trust.
This is some information that Beneficiaries are not entitled to see. For example, the Courts have ruled beneficiaries are not entitled to view letters and notes from Settlors, Memorandum of Wishes, Trustees reasons for decisions made and motives of Trustees.
Because the Trust’s financial statements may be viewed by a Beneficiary under a Court Order, it is important to deal with allocation of income each and every year.
Any income that has been allocated to a Beneficiary and shown as such in the financial statements, may be called by that Beneficiary to be paid to them upon them becoming adults.
The best way to avoid any type of disagreement is communication. If full communication is made with a Beneficiary, whether they are a Fixed or a Discretionary Beneficiary, then there will be no mystery or reason for distrust to arise.
Whilst Trustees are not legally required to show Beneficiaries all Trust documents, it is in our view, sensible to be clear with Beneficiaries when they ask about a Trust’s affairs. Failure to do so will simply create suspicion and tension.
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