Discretionary trusts – your rights as a beneficiary

A trust is a legal arrangement by which a 'settlor', the person creating the trust, transfers assets to others, the 'trustees', with a direction that they hold those assets for the beneficiaries of the trust. The assets are normally cash, investments or property. The beneficiaries may be named individuals, or a 'class' of beneficiaries such as the children, grandchildren or spouse of the settlor.

In this article we highlight the types of trust, and the powers, duties and rights of discretionary trustees and beneficiaries. We also outline when a decision made by a trustee may be challenged.

Types of trust

There are several different types of trusts. Some common examples are:

Absolute trusts - where the beneficiaries and their entitlements are fixed by the trust deed or will.
Bare trusts - where the beneficiaries have the right to call for all of the capital and income of the trust at any time.
'Interest in possession' trusts - where one or more beneficiaries are entitled to the income from the trust for a period of time, but different beneficiaries are entitled to the capital at the end of that period.

In these types of trusts, the beneficiaries are entitled to the capital assets and/or the income generated by the assets of the trust in one way or another.
The other common type of trust is a discretionary trust. Under this type of trust no beneficiary has an automatic right to either income or capital from the trust – whether or not they receive any trust assets is at the discretion of the trustees.

Powers of the discretionary trustees

Any trust-specific powers of the trustees of a discretionary trust will normally be set out in the trust deed, or the will if it is a trust created by will, but in all discretionary trusts the trustees have full discretion about whether and how to make distributions of trust assets among the beneficiaries. This means that they do not need to treat all beneficiaries equally, nor are they required to distribute the trust assets at all during the trust period if they decide not to. Discretionary trustees can decide what gets distributed or paid out, to whom, and when, and they can even impose conditions on the gift.

Duties of the discretionary trustees

The key duties of a trustee of any type of trust are generally as follows:

Of care – trustees must take reasonable care when carrying out their role. This includes a duty to work with fellow trustees and to actively consider and select appropriate investments, taking professional advice if appropriate
To observe the terms of the trust
To act impartially between beneficiaries
To provide information – trustees must keep clear and updated accounts and tax returns for the trust and provide beneficiaries with core information about the trust on request (as expanded on further below)
To act unanimously with other trustees
To avoid conflicts of interest – trustees must ensure that their personal interests do not conflict with their role as trustee
Not to make an unauthorised profit for themselves – unless the trust deed permits trustees to charge for their services

Rights of discretionary beneficiaries

As set out above, beneficiaries of a discretionary trust do not have an automatic right to receive any income or capital from the trust. Similarly, they do not have an automatic right to information or documents relating to the trust, although discretionary beneficiaries are entitled to know of the existence of the trust and the nature of their interest in it.

However, case law has made it clear that where a discretionary beneficiary can satisfy that they have a real prospect of benefitting under the trust and there is an identifiable need for the trustees to account to them, the following documents should be disclosed to them on request:

Trust documents, such as deeds of appointment of new trustees and deeds of variation
Trust accounts
Legal advice obtained by the trust, provided that advice was paid for by the trust and it does not relate to any dispute between the trustees and the beneficiaries

If I'm not happy with a decision made by trustees what can I do about it?

Because the trustees have the power of discretion to distribute the income and/or capital of the trust as they see fit, a disappointed beneficiary cannot challenge a decision made by the trustees simply because they feel it's unfair. There is also no obligation on trustees to disclose information regarding ‘why’ they have made certain decisions. However, a decision made by a trustee may be challenged if:

The trustees breached their duties, as outlined above.
The trustees have failed to take into account matters relevant to the decision, or have taken into account matters which are irrelevant to the decision.
The trustees were acting under a mistake or misapprehension.
There has been a 'fraud on the power', i.e. an improper use of the trustees’ powers so that the decision made is outside the purpose for which the trust was created. This can include a decision creating a conflict of interest, or arising as a result of a bribe, or a payment to a non-beneficiary.
One or more trustees are acting under duress or undue influence.

An alternative remedy may be to seek the removal of the trustees. However - as set out in the recent case of Seymour v Ragley Trust Company & Ors – the threshold for removal of trustees is high.

In this case the Honourable William Francis Seymour, Earl of Yarmouth, brought a claim for the removal of two trust corporations as trustees of multiple discretionary trusts, of which the earl was a beneficiary. The trusts were family settlements relating to the Marquessate of Hertford Henry Jocelyn Seymour. The earl claimed that a breakdown in relations with his parents, Lord and Lady Hertford, had prevented the proper administration of the trusts, with the trustees taking the side of his parents in the disagreements.

However, the court found that there was no misconduct on behalf of the trustees, and that the breakdown in relations and/or perceived bias was insufficient to warrant the trustees’ removal.
This decision is in accordance with the long standing legal principle that the court will only interfere with a settlor’s chosen trustees, or indeed any other part of the structure or administration of a settlement, as a last resort.

The important takeaway here is that whilst discretionary decision making by trustees can be challenged, there must be a valid legal basis for doing so. For advice on your position as a trustee or beneficiary of a discretionary trust, please contact our disputed wills and trusts team.