Guess Who's Coming to Dinner? The Beneficiaries!

Family TrustSo you’ve decided the best thing to do to protect your hard earned assets is to put them in a Trust or Family Trust. This way, asset protection will prevail and the assets will be available for you, your children and other Beneficiaries to enjoy.

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. The order of the day is thus good dialogue between everyone which tends to foster good will and trust. In the event however that the Beneficiaries do want to know about the Trust, what information are the entitled to see?

Legal Basis of Beneficiaries' Rights

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 Trust assets pursuant to the Trust Deed provisions. Therefore, it was posited, Fixed Beneficiaries 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.

The Courts have also noted that they will be mindful that Trustees are not obliged to disclose to Beneficiaries their reasons for exercising their discretionary powers. This is important as it could have an impact on what documentation is released to a Beneficiary to view.

In some circumstances the Courts have pronounced, disclosure may be limited and safeguards may have to be put into place.

What Information are Beneficiaries Entitled to View?

Types of information that Courts have approved for disclosure include:

  • Deeds of Trust;
  • Deeds of Variation of 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.
Some information 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.

Beneficiaries Rights to Demand & Receive Payments

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.

Accordingly, only income that is to be spent on them should indeed be allocated to them in the financial accounts. Failure to allocate income in this manner may result in a Beneficiary requiring a Trustee to pay them the surplus income that appears as a credit in their Beneficiary account shown in the financial accounts of the Trust.

Summary

I believe that one of the best ways of avoiding 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 my view, sensible to be clear and honest with Beneficiaries when they ask about a Trust’s affairs. Failure to do so will simply create suspicion and exacerbate tension.





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