Trustees' duties and beneficiaries' rights under trusts
03 March 2022
03 March 2022
Barbara Gardener, Senior Consultant Tax and Trusts, Technical Connection Ltd, Technical Connection
One of the, perhaps unintended, consequences of the extension of the Trust Registration Service (TRS) to non-taxable trusts this year has been the growing awareness amongst trustees of existing trusts of what their obligations as trustees are.
It seems that it is not uncommon that individuals who have been appointed as trustees often do not even have a copy of the trust document, let alone appreciate what their duties under the law are.
Duty to keep trust records
It may come as a surprise (though it should not), that trustees actually have a legal duty to keep records of the trust beneficiaries. Indeed, all the persons connected with the trust, as for money laundering and TRS purposes "Beneficial owners" include not just the trust beneficiaries but also the settlor, the trustees, protector (if any) and anybody else who can exercise control over the trust. And regulation 44 of the Money Laundering Regulations 2017 headed "Trustee obligations" provides that:
44.—(1) The trustees of a relevant trust must maintain accurate and up-to-date records in writing of all the beneficial owners of the trust, and of any potential beneficiaries referred to...in a document from the settlor relating to the trust such as a letter of wishes...(containing the required information).
The corresponding requirement is that "the trustees of a relevant trust must on request provide information to any law enforcement authority" about the individuals mentioned above.
Needless to say, ideally, all trustees should be familiar with these provisions (for obvious reasons we have quoted only an extract).
In relation to trust beneficiaries, the information is required only about individuals actually named in the trust deed or any accompanying document such as a letter of wishes (who need to be entered on the TRS as named individuals, rather than a class, according to the latest update to the HMRC TRS Manual). It should be noted that HMRC's view in relation to a specific and distinct group of beneficiaries, such as under a trust created for grandchildren of the settlor, is that it is "reasonable to expect the trustees to be aware of the identity of each individual" and so such grandchildren should be recorded under the TRS as individual beneficiaries rather than as part of a class of beneficiaries. N.B. This is a change from the previously published HMRC guidance on this, although, TRS aside, it does seem perfectly reasonable that when trustees are given property to hold for the settlor’s grandchildren, they should know who those grandchildren are.
As for other "beneficial owners", such as the trustees, settlor and any protector, surely it should go without saying that the trustees should be in possession of their personal details. How else would they be able to administer the trust? For TRS purposes, the necessary details would include their dates of birth, nationality and country of residence. For practical purposes the trustees should have full contact details. In relation to the lead trustee, their full address, email and telephone number as well as National Insurance number will be needed.
The other side of the "information gathering" by the trustees is that if trustees need to gather information on beneficiaries, then those beneficiaries may well ask questions about what exactly they are entitled to under the trust.
What rights do beneficiaries have to information about the trust they benefit from or may benefit from in the future? Do beneficiaries have a right to be consulted? And do they always have to take the trustees’ word or do they have any rights to challenge trustees’ decisions if they feel they may be wrong or prejudicial to their situation? This month we look at the beneficiaries’ rights and next month we will consider the subject of ‘challenging trustee decisions’. Later on, we will consider the rights of estate beneficiaries against executors and administrators. The remainder of this article is based on English law.
The rights of a beneficiary to be given information about their interest under the trust
There is some information that a beneficiary is entitled to as of right, i.e. without having to ask for it, but this is rather limited. First, of course, is the right to be told that they are a beneficiary. Next, an adult beneficiary with an interest in possession has a right to be informed of the existence of the trust and their interest in it. This seems entirely logical, given that the beneficiary will be taxed on the trust income and/or their interest may be added to their estate for inheritance tax (IHT) purposes. Indeed, it is arguable that where the beneficiary entitled to income is a minor (under the age of 18) that the trustees may have a duty to inform the parents or guardians of the beneficiary.
As for the beneficiaries with more remote rights and discretionary beneficiaries, the position is less clear. While there is no general duty to inform such persons of their status, in practice, given that the trustees are under a duty to consider the situation of all the potential beneficiaries (when, for example, deciding on whether to make a distribution from the trust), the trustees may well have to inform the beneficiaries of their interest, just to avoid being in breach of their duties.
The position is even more complex when it comes to asking for further information about the trust.
The rights of a beneficiary to seek disclosure of trust documents
The question as to what rights trust beneficiaries have with regard to seeking information about the trust deed itself, as well as trust accounts and other documents, is one that has frequently been considered by the Courts. In English law, the traditional view has been that, first of all, there is a clear line between beneficiaries with a fixed interest (e.g. life tenant or remaindermen) and beneficiaries with only discretionary rights or objects of a mere power. The general view was that beneficiaries with a fixed interest were entitled to sight of certain trust documents because of their proprietary interest in them, whilst potential objects of discretionary powers were not.
There has also been some discussion as to what actually constitutes a trust document. The leading case on this point, Re Londonderry Settlement (1965) Ch 918, distinguished between trust documents relating to trust property and documents which relate to trustees´ exercise of their discretion. The view was that the trustees had to disclose the trust deed, subsequent appointments and trust accounts but did not need to disclose documents relating to the exercise of their discretion, such as agendas for trustees’ meetings, correspondence between the trustees or the trustees and the beneficiaries and minutes of trustees’ meetings.
A 2003 decision by the Judicial Committee of the Privy Council in Schmidt -v- Rosewood Trust Ltd (2003) WLR565 is now standard on the issue of the rights of beneficiaries to seek information from their trustees and the duties and powers of the trustees to make disclosure. Although this is a decision on Isle of Man law, it is based on English trust principles and mainly on English authorities and should be taken as being authoritative on English law.
In Schmidt –v- Rosewood Trust Ltd, the son of a deceased settlor of one of two trusts in the Isle of Man was seeking disclosure of trust documents from the trustees, Rosewood Trust Ltd. Rosewood opposed disclosure on the grounds that the petitioner was not a beneficiary under the settlements, his father had never been more than a mere object of a power and as such had no entitlement to trust documents or information. The order for disclosure was granted, but then set aside by the Manx High Court under the old principles where only the beneficiaries with proprietary rights in the trust fund would normally be entitled to seek documents. However, the Privy Council took a different view, rejecting the earlier "hard and fast" rules in favour of judicial discretion, considering that it was fundamental to the law of trusts that the Court had jurisdiction to supervise and, if appropriate, intervene in the administration of a trust, including a discretionary trust. The right to seek the Court's intervention did not depend on entitlement to a fixed and transmissible beneficial interest. The objects of a discretion, including a mere power, might also be entitled to protection from a Court of equity, although the circumstances in which this might happen and the nature of the protection would depend on the Court's discretion.
In conclusion, the present view, as far as discretionary beneficiaries are concerned is that disclosure is something that the Court has discretion to order in circumstances where the Court decides it is necessary for the protection of a beneficiary or an object of a power under a trust.
In a more recent case, Breakspear v Ackland  EWHC 220, the judge ordered disclosure of a letter of wishes. However, clearly each case will depend on its own facts.
In RNLI and others v Headley and McCole  EWHC 1948 (Ch), the charities who were remaindermen under a trust made several requests for information about the trust without success and so issued proceedings against the trustees. The charities argued, that 'Every beneficiary is entitled to see the trust accounts, whether his interest is in possession or not.' The judge noted that the charities’ remainder interest had not yet crystallised and therefore they had no basis to demand information about trust income that was payable to the life tenant.
However, he agreed that the charities did have a right to see accounts of capital, lists of investments and a breakdown of trustees' fees and expenditure in so far as the trustees have deducted these sums from trust capital.
Finding the trustees to be in breach of duty, the judge made an order requiring these accounts to be disclosed to the charities. He also ordered the surviving trustee to pay the claimant charities' costs, approximately £8,000, in full, without the right to claim them back from the trust estate.
The decision is therefore also a warning to trustees that they may end up being personally liable for failing to provide the requested information.
There was also a more recent case, Dawson-Damer & Ors v Taylor Wessing LLP  EWCA Civ 4, where some trust beneficiaries had sought to obtain information from the trustees, using the Data Protection Act 1998 (DPA). Following an unsuccessful request for certain documents from the trustee, the beneficiaries of certain offshore trusts made a subject access request (SAR), under the DPA. Under the DPA, a data subject has a right to be informed where personal data (of which he or she is the data subject) is being processed by a data controller. The professional trustee firm's attempt to rely on the professional privilege exemption for their failure to comply with the SAR failed, but it does appear that this is another potential route for accessing trust information.
The implications for trustees and beneficiaries
Here are some key points to bear in mind whether you are a trustee or a beneficiary:
- Beneficiaries with fixed rights under a trust have more rights to information than those under discretionary trusts.
- Certain beneficiaries must be provided with information as of right – e.g. a life tenant about the trust income they are entitled to. A life tenant under a qualifying interest in possession trust must be told about the value of the trust estate that falls into their estate for IHT purposes.
- Beneficiaries with fixed or contingent but defined rights (e.g. entitlement to capital at certain age or following the death of a life tenant) have a right to know that a trust exists and what their interests are.
- Generally speaking, the trust document and other documents appointing/retiring trustees or changing/adding assets are disclosable to a beneficiary. However, if the right of a particular individual depends solely on the trustees’ discretion, there may be no right to receive any information until the person in question becomes a “real potential” beneficiary.
- Generally, the trust accounts are also disclosable to a beneficiary, but access may be restricted depending on the nature of the beneficiary’s interest. A trustee is only obliged to provide the information needed by the particular beneficiary to appreciate their own rights against the trustee in respect of the administration of the trust; it is not necessary to go beyond this.
- Other documents, such as the settlor’s letter of wishes in relation to the trust, documents about the exercise of powers and discretions, and legal advice obtained by the trustees, generally need not be disclosed, although a Court may decide otherwise.
- If trustees receive a request for information from a beneficiary, they need to consider it carefully and only refuse a request if they are certain that this is in their power, bearing in mind that a beneficiary may apply to the Court and the trustees may find themselves personally liable for any costs. If in doubt the trustees may also apply to the Court for direction.
As can be seen from the above, trust beneficiaries have certain rights, but there is very little that the trustees actually are obliged to tell them. And while beneficiaries can ask for a wide variety of information and documents, the answer to whether they should receive it will depend on the facts and the Court’s discretion. Next month we will look at how a beneficiary may challenge trustee decisions.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.