It is generally accepted that New Zealand has more formally settled discretionary trusts per head of capita than anywhere else in the world. These trusts control assets worth billions of dollars. However, the majority of people who can benefit from these trusts either do not know about the trust, or about their rights in respect of the trusts.
The purpose of this commentary is to provide a simply written and easy to understand explanation of what it is to be a beneficiary of a discretionary trust and what rights a beneficiary has in respect of a discretionary trust.
To understand what it is to be a beneficiary, it is necessary to have an understanding of what a trust is.
There is no legal or singularly accepted definition of what a trust is.
However, it is widely accepted that in its simplest form a trust is property that is owned by a trustee for the benefit of a beneficiary or beneficiaries.
The trustee is the legal owner of the property subject to the trust. However, the trustee cannot benefit from the property (unless the trustee is also a beneficiary).
Most importantly, as well as owning the property, the trustee also owes certain obligations to the beneficiaries. The existence of these obligations are fundamental to a valid trust. It is from these obligations that the beneficiaries derive their rights.
While the trust’s assets are held for the sole benefit of the beneficiaries; which beneficiaries can benefit, and to what extent is determined at the trustee’s sole discretion.
Although the trustee is the owner of the trust property at law, the trustee can only act for the benefit of the beneficiaries.
Even though the trustee cannot benefit from the trust the trustee is accountable to the beneficiaries for any loss.
If you find this a bit heavy ready, don’t worry. You are not alone. Even the experts can’t agree as to exactly what a trust is!
The message you need to take from this chapter is that trusts, unlike companies, are not legal entities. It is for this reason any dealings with a trust are with the trustees not the beneficiaries.
It is also important to appreciate that the information provided here is in the context of a discretionary beneficiary who has no fixed rights, other than a right to be considered. Where a trust is a will trust, or a “fixed trust” that provides for beneficiaries to have pre-determined interests in property, for example income for life on $500,000 or my house at 2 Glebe Street; the beneficiary’s rights are related to that property interest and as such are stronger and easier to establish and enforce.
The same is the case where a beneficiary is the final beneficiary of a discretionary trust where a named beneficiary might be entitled to share equally in the trust’s remaining property at the end of the trust.
The subject matter being considered here is that of a discretionary beneficiary with nothing more than a right to be considered, which is also referred to as an expectancy.
Major trust concepts
A reference to a trust is a generic reference to both property owned by the trust and the complex relationships that comprise a trust.
There is no register of discretionary family trusts. A trust is only required to register with Inland Revenue if the trustee earns income. That means that a trust that only owns a family home does not need to register with Inland Revenue.
The settlor is the person who settles the trust. This person chooses the initial trustee or trustees, decided who will benefit from the trust and what the trust rules will be. These rules are recorded in a document called the deed of trust.
The Settlor can also elect a person, who can be the settlor or someone else, who can add and remove trustees and or beneficiaries.
The trustee is the legal owner of the trust property and the legal “face” of the property. Registers of property ownership such as the companies office, which records share ownership, and Land Information New Zealand, which records property ownership, are not permitted to show that the owner of property is a trustee. This means that trust ownership is private information.
A beneficiary is a person who can benefit from a trust either through receiving capital or income. If this person is a discretionary beneficiary the beneficiary can only benefit at the trustee’s discretion.
A final beneficiary is a person who benefits when a trust comes to an end. Trusts can only run for 80 years. For a trust to be valid it is essential that the final beneficiaries can be identified.
Who is responsible for letting you know you are a beneficiary?
Despite the fact that trustee holds the trust’s assets for the beneficiaries, the trustee of a discretionary trust has no obligation to tell you if you are a beneficiary of the trust.
This may seem somewhat absurd given that the trustee is accountable to you for how the trust is managed.
It is a matter that has been grappled with by the Courts and academics for some time and although the possibility of legislated rules requiring a trustee to notify you that you are a beneficiary is being considered, at present there is no obligation for anyone to do so.
Where a trust is a fixed trust so that each beneficiary has defined interests the matter is a little different and the Courts have held that such a beneficiary must be advised of the trust and the beneficiary’s interests once the beneficiary is an adult.
If you suspect that you are the beneficiary of a trust, you can ask the trustee to confirm this. The trustee would be obliged to answer correctly. That is, although the trustee need not tell you that you are a beneficiary, the trustee must acknowledge that you are if questioned.
A trustee who did not confirm that a person was a beneficiary when asked would be in breach of trust and could be liable to the beneficiary for any loss the beneficiary incurred because of the breach.
Of course, if you do not know to ask if you are a beneficiary, or who to ask even if you know you might be, you are none the wiser.
If you would like guidance on how to establish whether this might be the case and if so who the trustee is your family lawyer may be able to assist you to make appropriate enquiries.
Having confirmed the existence of a trust, a beneficiary is entitled to ask to benefit from the trust’s assets.
Whether or not the trustee elects to given anything to a beneficiary is at the trustee’s discretion. However, if a trustee simply declines a request out of hand, without giving it due thought, the beneficiary can actually apply to the Court to remove the trustee and appoint another trustee.
Regardless of whether requested to do so by a beneficiary, a trustee has an obligation to consider the interests of all of the beneificiaries. This does not equate to an obligation to given money to or otherwise benefit each beneficiary.
To summarise, a beneficiary has the right:
The right to seek assistance from the Court does not mean that assistance will be given as every case will be considered on its own merits. As a general proposition the narrower the class of beneficiaries (as is the case with most modern family trusts) the more likely the Court will be to assist
A beneficiary also has a right to trust information. This is important as establishing that you are a beneficiary is of limited use if you don’t know what the trust’s assets and liabilities might be. Where trustees will not provide information or agreement cannot be reached regarding what information must be provided or how either party can seek the assistance of the court. See Erceg v Erceg
A beneficiary is entitled to ask a trustee for information about a trust including:
If the trust the beneficiary is enquiring about has already come to an end or been resettled onto another trust the beneficiary is entitled to ask for any documents that relate to the winding up or resettlement of the trust.
A trust is wound up when it comes to an end. A resettlement occurs when the assets of a trust are transferred to another trust.
If the trustee won’t provide the information requested a beneficiary can apply to Court for directions that the trustee must provide the information requested.
The reason beneficiaries are entitled to receive information is to enable them to ensure that the trustees is acting in accordance with the terms of the trust deed. However, these rights will always be subject to the discretion of the court that must balance the rights of a beneficiary seeking information against the interests of all the beneficiaries, and in some circumstances, the wider family.
Beneficiaries are not generally entitled to see information relating to the trustee’s decision making processes as this information is the trustee’s information, not the trust’s information.
Information trustees do not have to give to beneficiaries includes:
However, where advice from a settlor takes the form or a memoranda or letter of wishes, the Court can, on application to it, assess whether that advice does in fact form part of the trust documents. This is determined on a case by case basis.
A beneficiary who has to file Court proceedings is not automatically entitled to have his or her costs paid.
As a general rule a beneficiary who makes a successful application is entitled to have his or her costs met, to a certain extent, from the trust. However, as having costs met from the trust means that the beneficiary’s costs are being met from property held by the beneficiary, this is not necessarily entirely satisfactory.
In some circumstances the Court will order that the trustee meets the beneficiary’s costs, in whole or in part, personally. Where this is the case the trustee cannot seek to be reimbursed from the trust. Costs will be awarded against a trustee personally where the trustee has not met the trustee’s obligations to account for the trustee’s actions or to provide trust information. The greater the failure on the part of the trustee, the greater the likelihood of a costs award against the trustee.
A beneficiary can apply to the Court to review a trustee’s decisions or anything a trustee has done or not done. This is a statutory right, which means that it is provided for by legislation: see the Trustee Act 1956, s 68.
If an application is made the Court has wide powers to review a trustee’s actions and require the trustee to justify decisions made or not made.
Whether a discretionary beneficiary can apply under s 68 is not entirely clear. However , Court decisions to date suggest this avenue is possible where the class of discretionary beneficiaries is relatively small.
Although not supported by case law yet, if the discretionary beneficiary is also a final beneficiary, a claim may be permissible under s 68.
The administration and management of discretionary trusts in New Zealand is still relatively “new” in a legal context and for that reason, the answers to some questions are yet to be confirmed by the Court.
In the absence of certainty regarding whether a discretionary beneficiary can seek help under the Trustee Act it is important to appreciate that the High Court also has an “inherent jurisdiction” to assist beneficiaries where the trustee has failed to do so.
If a trustee has disposed of trust property in breach of trust, a beneficiary can re-claim that property from the trustee. Where the property has been disposed of the beneficiary can trace the trust property and claim the beneficiary’s proportionate share against property purchased with the trust property.
Trust law is a complex area. If you have a question about a trust you can ask your trust adviser to assist.
If you do not have a relationship with a lawyer or adviser with trust experience you can seek assistance from Vicki Ammundsen, who is a trust partner at Ayres Legal. Vicki can be reached at firstname.lastname@example.org.
If you want to look at more trust resources the following publications may also assist: