Discretionary Trusts & Rights of Beneficiaries | Curtis Parkinson
Discretionary Trusts and The Rights of Beneficaries

Discretionary Trusts & Rights of Beneficiaries

Trusts can be used for many reasons. They can be structured to suit particular circumstances and beneficiaries. But what rights do beneficiaries have under the terms of a Discretionary Trust?

Discretionary Trusts

A Discretionary Trust gives greater power to the Trustees. They choose what they give to your beneficiaries and when. This flexibility is why they’re frequently used to provide for vulnerable relatives, children or grandchildren. They’re also valuable if you’re concerned that a beneficiary is easily influenced by others, negotiating a divorce settlement or is financially naïve.

A Discretionary Trust can allocate funds in your lifetime or set up in your Will, to come into effect when you die. It’s advisable to take professional advice when dealing with such arrangements. Trusts are rarely simple and can affect the amount of tax you pay. For example,  setting up a Discretionary Trust before you die may mean you’re liable for inheritance tax (IHT) if you die within seven years.

Beneficiary’s Rights Under a Discretionary Trust

Beneficiaries don’t have any legal entitlement to either income or capital under a Discretionary Trust. The Trustees have ‘proprietary interest’ or legal ownership. In reality, this means they have complete discretion as to whether or not to make payments of income or capital and to which beneficiaries.

That said, you can write a ‘letter of wishes’ setting out the purpose of the Trust and how the Trustees should deal with the trust fund, but this is not a legal binding document. Whilst the Trustees must act in the best interests of the beneficiaries; they have the right to use their discretion to bypass your wishes altogether.

Trustees Must Act Responsibly

Discretionary beneficiaries have a fundamental legal right to have the Trust administered in line with the terms of the trust document.

Furthermore, following the case of Schmidt v Rosewood Trust Ltd (Isle of Man) [2003] UKPC 26) it’s generally accepted by the courts, academics and practitioners alike, that all beneficiaries of discretionary trusts have the right:

  1. To request specific documents from the Trustees (see below);
  2. To be treated fairly and their best interests considered in all decisions made by the Trustees;
  3. To ask the courts for help;
  4. To ask the courts to remove a Trustee.

Trust Documents

Schmidt v Rosewood also clarified that:

  1. By law, Trustees are obliged to disclose documents if requested. These documents include Trustee contact details, trust accounts, trust assets and liabilities, trust deeds and appointments, trust distributions, and documents varying the Trust;
  2. Trustees should consider Letters of wishes, but they should remain confidential. Legal advice is privileged against third parties (but not beneficiaries) if paid for from the trust fund;
  3. Legal advice relating to Trustee disputes with beneficiaries is privileged; and
  4. The Court may order the disclosure of company documents where the Trustees have a controlling shareholding in a company.

Requesting Information from Trustees

Beneficiaries can approach the Trustees directly to ask for information or their reasoning behind making a decision. There is no need to involve the Court. However, using their discretion, the Trustees are entitled to refuse such a request. At this point, if the Trustees refuse, the beneficiaries can then apply to the Court to intervene.

In cases where disputes arise, the key to the whole process is whether the Trustees can demonstrate that in refusing the request, they have acted responsibly, understood the purpose of the beneficiaries’ inquiry and acted solely in the best interests of the beneficiaries.

Trustees who are unable to give a good reason for a refusal will run the risk of being personally liable for Court costs, should a dispute reach that point. Furthermore, beneficiaries can apply to the Court to have the trustee removed or replaced.

Our Advice

In the right circumstances, a Discretionary Trust can provide control, protection and flexibility. But be cautious. Despite the many benefits of setting up a Discretionary Trust, there are additional complexities, so our advice is to talk to a specialist.

Our Wills, Trusts and Probate team has many years’ experience of advising clients on the legal and practical implications of writing Wills and setting up trusts. So, if you’d like further information or advice, please contact us. We’re here to help.

Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.

Partnerships & Accreditations