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The rights of discretionary beneficiaries

  • Do you have to tell discretionary beneficiaries that they are beneficiaries of a family trust?  
  • Do you have to give beneficiaries a copy of the financial statements?
  • Can they demand money from the trustees?

These are just a few of the questions which may arise for trustees concerning the rights of discretionary beneficiaries of a family trust.

There is little doubt that in order for a beneficiary to be able to hold trustees to account for the management of the trust, the beneficiary needs to know that he or she is in fact a beneficiary and who the trustees are. A trustee is under a duty to take reasonable steps to inform beneficiaries of the trusts in their favour. What amounts to reasonably practical steps will depend on the circumstances. It would not seem sensible to require trustees to ascertain the identity of every possible beneficiary under a discretionary trust for a very wide class of beneficiaries and inform them individually of the existence of the trust.[1]

The law is unclear about what information a trustee must give beneficiaries. The duties of trustees in this regard are governed by case law and the duty is linked to the related duty of a trustee to maintain proper accounts and records.

In Rauch v Maguire [2] the High Court considered the duties of trustees to disclose documents when requested to do so by a beneficiary. Justice Asher said:

“As part of [the] duty to account, the trustee must on a reasonable request, disclose trust documents to a vested or discretionary beneficiary, unless there is good reason not to do so. On this basis the accounts of a trust would be generally disclosed on the direct request, as would documents relating to the assets of the trust and trustee’s actions in relation to those assets.” [3]

While the law remains unclear on this point, our view is that, on request, trustees should disclose at a minimum a copy of the trust deed and financial statements to a beneficiary. However, as regards information that may be considered confidential or otherwise sensitive, the law is best described as controversial and has been the subject of several significant court judgments in recent years.

In Schmidt v Rosewood Trust Ltd [4] Mr Schmidt sought disclosure of trust accounts and documents about assets of two trusts. The Privy Council considered the right to seek disclosure of trust documents as one aspect of the Court’s inherent jurisdiction to supervise and, if necessary, intervene in the administration of the trust. However, it did not follow that a beneficiary would be automatically entitled to trust information. The purpose of providing information was to enable beneficiaries to ensure accountability by the trustees for their administration of the trust in accordance with the trust instrument. In some cases it may be inappropriate for a beneficiary to have access to trust information.

Schmidt v Rosewood was followed by the New Zealand High Court decision in Foreman v Kingstone [5]. In this case the beneficiaries of three trusts, who were children from Mr Foreman’s first marriage, applied to the Court for information and trust documents. The trustees resisted disclosure. The Court identified that the following matters may be taken into account by a court in the exercise of its supervisory jurisdiction over trusts:

  • Whether there are issues of personal or commercial confidentiality;
  • The nature of the interest held by the beneficiaries seeking access;
  • The impact on the trustees, other beneficiaries, and third parties;
  • Whether some or all of the documents can be withheld in full or redacted form;
  • Whether safeguards can be imposed on the use of the trust documentation (for example, undertakings, professional inspection);
  • Whether, in the case of a family trust, disclosure may embitter family feelings and the relationship between the trustees and beneficiaries to the detriment of the beneficiaries as a whole.

If trustees decline a request from a beneficiary for information, the beneficiary may file an application in the High Court alleging that the trustees have breached their duty to account by not providing information. The Court has the power to consider such an application under is supervisory jurisdiction to administer trusts.

As a result, if trustees have difficulties making a decision about whether or not to disclose information, they might be better to seek directions from the High Court under the Trustee Act 1956.

In the case of a discretionary trust, beneficiaries are dependent on the exercise by the trustees of their powers under the trust instrument in their favour. They do not have proprietary rights in trust property but only a mere hope or expectation. As a result, discretionary beneficiaries do not have the power to demand money from trustees.

 

[1] NZLC IP26 at paras 2.10 and 2.11.
[2] Rauch v Maguire [2012] NZLR 845 (HC).
[3] Ibid at para [30].
[4] Schmidt v Rosewood Trust Ltd [2003] 3 All ER 76.
[5] Foreman v Kingstone [2004] 1 NZLR 841 (HC).