Keeping the Trustee Honest
It is fairly common for an individual or family to set up a trust to hold assets in the trust's name, instead of holding assets in their personal name. These trust assets are held legally by the trustee who has a fiduciary duty to manage the trust and its assets for the benefit of the trust’s beneficiaries.
Human nature being what it is, relationships can sometimes sour. Where the beneficiary/trustee relationship collapses, it is quite common that the trustee's conduct may come into question. Alternatively, suspicions as to the trustee's conduct may lead to a fracture in the relationship.
In either scenario, if you are a beneficiary and feel that the trustee is not complying with their fiduciary duty to manage the trust assets, what can you do? Where do you start?
Alternatively, if you are a trustee, what do you do if you are faced with allegations made by a beneficiary or beneficiaries that you are not complying with your fiduciary duty?
The Trust Deed
The trust deed is the starting point in any dispute between the trustee and a beneficiary, as the trust deed will contain the framework within which the trust is to operate and be administered.
A typical trust deed will include:
the object and purpose of the trust;
the trustee's powers of discretion (as well as any restrictions on those powers);
the mechanics for making distributions from the trust; and
a definition of the class or classes of beneficiaries.
Proceedings by a beneficiary against a trustee for breach of trust will normally involve an allegation that a trustee has breached its fiduciary duty and/or has acted outside its prescribed powers under the trust deed. Therefore, it is imperative that the trust deed be considered carefully to determine whether a trustee has in fact acted outside of its powers.
Rights of Beneficiaries to Documents
A dispute involving a trust and/or trustees of a trust will often include a battle over what documents that are in the trustee's custody a beneficiary is entitled to inspect.
Of course, if a beneficiary is considering bringing proceedings against the trustee for breach of fiduciary duty, documents involving the trust and particularly the conduct of the trustee will almost certainly form the evidentiary basis to support the proceedings.
Because the trustee owes a fiduciary duty to the trust beneficiaries, it would appear logical that a beneficiary ought to have the right to inspect all the documents relating to the trust that are in the trustee's custody. However, like many things in law, this proposition is not as simple as it might first appear.
Beneficiaries are generally entitled to inspect documents that are trust documents and are related to the financial management of the trust. This includes documents such as balance sheets and profit and loss statements. This entitlement may be subject to the need to balance any other competing interests - for instance, commercial confidentiality or the interests of the beneficiaries as a whole. Beneficiaries can also ask for a copy of the trust deed.
However, beneficiaries are not entitled to inspect certain documents prepared by the trustee in the administration of the trust that are not trust documents. For instance, courts have not generally required trustees to disclose documents that give evidence of, or reasons for, the exercise of any discretion within the powers of the trustee or communications between trustees as to the exercise of their discretion. Those types of documents are not "trust documents".
Whether a document is one which a beneficiary is entitled to inspect is determined on the facts, while the right to inspect trust documents may be governed by the trust deed.
Brown Wright Stein Lawyers assists many clients in trust-related disputes, acting for both beneficiaries as well as trustees. If you have a query about a dispute involving a trust, we would be glad to assist.
The material in this article was correct at the time of publication and has been prepared for information purposes only. It should not be taken to be specific advice or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained in this article.