Rights Of A Discretionary Beneficiary And Liabilities Of The Trustee.

The rights of a beneficiary under a discretionary trust are more difficult to identify than those of a beneficiary with a fixed interest. A beneficiary of a fixed interest trust, whether life tenant or remainderman, has an equitable interest  in the assets held in trust. As equitable owner, he has personal rights, enforceable against the trustee as the legal owner, to ensure that the trusts imposed by the trust instrument are carried out.

NO PROPRIETARY INTEREST IN THE TRUST FUND

Dating back to the decision in the English case of Gartside v IRC [1968] AC 553, it has been widely recognised that a discretionary beneficiary has no such proprietary interest in the assets comprising the trust fund. Whether the trustee is required to distribute all trust income among the class of beneficiaries (an "exhaustive" trust) or has a power to accumulate (a "non-exhaustive" trust), no individual beneficiary has an entitlement to any quantifiable share; all he has is a "mere hope" that the trustee will exercise its discretionary power to make a distribution in his favour. This concept of a "mere hope" was echoed more recently in England in Armitage v Nurse [1998] Ch241 and in New Zealand in Hunt v Muollo [2003] 2 NZLR 322.

In Gartside it was argued, unsuccessfully, that taken together the class of discretionary beneficiaries was effectively the owner of the trust assets. It was held that no such right to ownership could exist unless it is held jointly or in common - in contrast to the separate and competing rights of the discretionary beneficiaries. However, it is worth noting that in the case of an exhaustive discretionary trust if all the potential beneficiaries of a discretionary trust are of full age and capacity, they may call for the trustee to transfer the assets to them and terminate the trust (Re Smith [1928] CH 915; Re Nelson [1928] Ch 920 a development of the principle set out in Saunders v Vautier (1841) 4 Beav 115).

FIDUCIARY RELATIONSHIP 

The absence of a proprietary interest does not remove all rights from the discretionary beneficiary, nor all duties from the trustee. A fiduciary relationship exists as between the two of them and the trustee will be obliged to perform the trusts honestly and in good faith for the benefit of the beneficiaries and ensure the proper exercise of its discretion. This duty was considered in Re Hay's Settlement Trusts [1981] 3 All ER 786 and held to be an active process involving the trustee periodically considering whether or not to exercise its power in an informed way, considering the range of possible beneficiaries and the appropriateness of each individual disposition (also discussed in Re Manisty's Settlement [1974] 1 Ch 17).

In Re Locker's Settlement [1977] 1 WLR 1323, the trustees of an exhaustive discretionary trust had power to pay income for charitable purposes or among a class of beneficiaries as it saw fit. The trustee had failed to pay out the income over a number of years. It was held that it was the duty of the trustee to pay over income within a reasonable time and that if the trustee failed in this duty, the court would enforce it either by appointing new trustees or arranging a scheme for distribution. In the case of a non-exhaustive trust, the duty will still be enforced, only the trustee may elect to accumulate the income rather than distribute. Provided the trustee exercises its discretion in a bona fide manner for the purposes it was given, the court will not interfere (see McPhail v Doulton [1971] AC 424).

LOCUS STANDI

It appears to be good law that a member of the class of beneficiaries of a discretionary trust will have standing to sue in order to have the trustee's duties performed. It will not matter that the beneficiary has not already been in receipt of a disposition from the trustee or, indeed, that he may not benefit ultimately from the performance of the duty he seeks to enforce.

The recent New Zealand Court of Appeal case of Johns v Johns [2004] 3 NZLR reinforced this view. It was held that a discretionary beneficiary would have standing to bring an action for breach of trust regardless of whether or not there had been a distribution made to him. Although he has no entitlement to trust assets, he has sufficient standing to compel the trustee to administer the trust properly.

RIGHT TO INFORMATION

It is worth noting the number of recently reported cases analysing the rights of a beneficiary to seek information or disclosure of trust documents from the trustee. In the English case of Murphy v Murphy [1995] 3 All ER 1, the judge allowed an application by a discretionary beneficiary for disclosure of the identity of the trustee. In Guernsey also, there is authority establishing the right for a beneficiary without a fixed interest to access to trust documents (see Alan Stuart-Hutcheson v Spread Trustee Company Ltd, 5 July 2002).

The Isle of Man case Schmidt v Rosewood [2003] 2 WLR 1442 considered the rights of discretionary beneficiaries to disclosure of information. The appellant sought and obtained disclosure of trust documents in relation to two trusts. It was held that the right to seek disclosure of trust documents was an aspect of the court's inherent jurisdiction to supervise the trust and if necessary to intervene in the administration. A beneficiary's right or claim to disclosure of trust documents or information did not depend on having a proprietary interest in the trust property. The object of a discretion, including a mere power, could be entitled to the discretionary protection of a court of equity by way of disclosure of trust documents subject to considerations of confidentiality.

TRUSTEE' S DUTY OF CARE

A trustee must exercise care and skill in administering the Trust and the standards required are high; a professional Trust Company has the highest duty of care to its beneficiaries in view of its professed expertise (Bartlett v Barclays Bank  Trust Company Ltd [1980] Ch 515). He must act in utmost good faith. He must act in accordance with the terms of the trust instrument, and he must not allow his discretion to be fettered. A letter of wishes, for example must not be used as a directive, but rather as an aid available to assist in situations where a choice between several possible and equally bona fide actions must be made. The trustee may or may not decide to act in accordance with the wishes of the Settlor in these cases.

A trustee has onerous investment obligations. When making investment decisions it must take as much care as a prudent man would take in making an investment for a person for whom he felt morally obliged to provide (Re Whitely [1886] 33 ChD 347)

The trustee must not deal with the trust property for personal gain and any personal financial reward obtained through knowledge obtained from the Trust will be held in favour of the Trust (Boardman v Phipps [1967] 2 AC 46). The trustee should not conduct any personal business with the Trust unless specifically authorised to do so. This includes purchases from and sales to the Trust (Tito v Waddell (No 2) [1977] Ch106). Such so called "self dealing" can, however, be expressly authorised under the terms of the trust instrument; but even in these cases the trustee will be expected to act fairly and not to the detriment of the beneficiaries.

LIABILITY OF THE TRUSTEE

A trustee is in a special fiduciary position where he is obliged to manage the trust fund bona fide in the best interests of the beneficiaries. Before accepting such an onerous responsibility the trustee is under a personal duty to acquaint himself with the powers and liabilities which will be assumed by accepting the office. He should be certain he wishes and is able to undertake such responsibilities and he should take legal advice periodically whenever prudent.

Failure to act properly can expose the trustee to a breach of trust claim on the part of the beneficiaries; this will be made if the beneficiaries feel that any act or omission by the trustee has wrongly prejudiced their interests. Examples would include the following:

the trustee has made an imprudent investment or failed to supervise the activities of the investment adviser properly, resulting in a loss of value of the trust fund (Knott v Cottee (1852) 16 Beav 77);

the trustee has invested in assets producing a high income yield, to the detriment of the capital beneficiaries;

the trustee has failed to acquaint itself fully with the circumstances of the beneficiaries, and therefore failed to make a payment to an impecunious beneficiary, or made a payment to a beneficiary in a manner which was not advantageous from a tax perspective;

a trustee has had undue regard to the wishes of the Settlor, without properly considering the interests of the other beneficiaries; and

the trustee has made an unlawful profit from his office (Att-Gen for Hong Kong v Reid [1994] 1 AC 324).

Liability for breach of trust lies primarily with the trustee individually and, in the event of breach, the principal remedy is to sue the trustee for loss. The principle governing the extent of liability were stated in Target Holdings Limited v Redfern [1996] 1 AC 421, ie "to make good a loss in fact suffered by the beneficiaries which, using hindsight and common sense, can be seen to have been caused by the breach". Liability is personal to the individual trustee. Compensation is based on equitable principles based on the losses direct or indirect to the trust fund.

SUMMARY

In summary, the standard of the duty of care owed by a trustee to a beneficiary is high and, unless there are extenuating circumstances and subject to any rights of exculpation and indemnity under the general law and any such rights expressly conferred under the trust instrument, the trustee will be held to account for losses arising. Notwithstanding the lack of a proprietary interest in the trust fund, there is good authority establishing the right of a discretionary beneficiary to bring an action against the trustee for breach of trust and to compel proper administration of the trust.

> The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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