BY DAVID KNIBBS AND CAITLIN WATSON – OCT 07, 2022 8:35 AM AEDT
Snapshot
- Disputes between disgruntled beneficiaries and trustees often arise over access to documents and information. Solicitors acting as trustees should be mindful of their fiduciary duty to beneficiaries and their specific duties in administering a trust.
- A trustee has a specific duty to account to beneficiaries and they must allow inspection of the accounts of the trust, upon request.
- There are practical ways in which solicitors can avoid conflict with beneficiaries whilst acting as a trustee. These can assist to avoid the unnecessary expense and delay that may result if conflict escalates to legal action.
When a beneficiary is unhappy with the way that a trust is being managed, it is not unusual for a claim to be made against the trustee. Solicitors, whether they are acting as trustees or advising trustees, need to understand a trustee’s obligations and consider whether steps can be taken to minimise the risk of a claim by a beneficiary.
Duty to account
In exercising their powers, trustees have a fundamental fiduciary obligation to act in the best interests of the beneficiaries. Trustees owe a duty to account to the beneficiaries and must maintain accounts and records (Parker v Higgins [2012] NSWSC 1516 at [57]-[58]). A trustee is also obligated to allow beneficiaries access to the accounts of the trust, when requested (Avanes v Marshall and Others [2007] NSWSC 191 (‘Avanes‘)). Trustees should provide prompt responses to reasonable inquiries and requests for information by beneficiaries. However, the trustee is not required to respond to ‘voluminous or lengthy queries’ (Gray v Guardian Trust Australia Ltd [2003] NSWSC 704 at [39]). The definition of ‘trust documents’ and the scope of beneficiaries’ rights to access trust documents remains unsettled in Australia.
What constitutes a trust document and may it be accessed by beneficiaries?
A trust document is not defined in the legislation and is circularly defined in many of the authorities. Trust documents include:
- the trust deed;
- accounts of the trust;
- documents concerned with the financial management of the trust;
- information on the amount of the trust property; and
- information on trust investments.
There are two competing lines of authority which address the principles applicable to the right of access to trust documents by beneficiaries.
The first line of authority, which involves the traditional, broad ‘proprietary’ approach, follows the case of Re Londonderry’s Settlement [1965] Ch D 918 which was relied on in the decision of Deutsch v Trumble [2016] VSC 263. The decision establishes that beneficiaries have an equitable proprietary interest in trust property. Documents relating to the trust form part of the trust property and can be inspected by beneficiaries (O’Rourke v Darbishire [1920] AC 581, 626-7).
The more recent line of authority involves a narrower, ‘discretionary’ approach. It follows the case of Schmidt v Rosewood Trust [2003] 2 AC 709 (‘Schmidt’). Trust documents include those that ‘evidence or record the nature, condition and value of the trust assets’ (Schmidt; Avanes; Silkman, Dorise Enid v Shakespeare Haney Securities Limited (ACN 087 437 783) in its capacity as responsible entity of the Shakespeare Haney Premium Income Fund (ARSN 106 223 483) [2011] NSWSC 148). This line of authority distinguishes trust documents from trust accounts and shifts the burden of disclosure from the trustees to the beneficiaries, who must invoke the Court’s inherent jurisdiction in order to obtain access. The Court will intervene if it considers that a trustee has fallen short of any duty to disclose, depending on the circumstances. The Court has inherent jurisdiction to compel the proper administration of a trust.
Recent Federal Court and NSW Supreme Court decisions have rejected the proprietary approach in favour of the discretionary approach (Wright v Stevens [2018] NSWSC 548 at [252]-[286]; Jordan v Goldspring [2021] NSWSC 7 at [142]; Smorgon v ES Group Operations P/L as Trustee of the ES Group Operating Trust No 1 (2021) 64 VR 146 at [62]-[71], [145]; and Webster (Trustee) v Murray Goulburn Co-Operative Co Ltd (No 3) [2018] FCA 990 at [110]).
Within the broad and narrow authorities, documents that evince a trustee’s reasons for
decisions under a discretionary trustee power are excluded from access by beneficiaries (Re Londonderry’s Settlement and Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, 445). The trustee does not need to disclose confidential documents, such as a settlor’s confidential communication (Smorgon v ES Group Operations Pty Ltd as Trustee of The ES Group Operating Trust No 1 [2021] VSC 608).
Practical tips on avoiding conflicts with beneficiaries
Solicitors often accept appointments to act as trustees, for example, in trust estates and investment trusts. To enhance relations with beneficiaries and to avoid unnecessary conflict, solicitor trustees should consider:
- providing regular monthly or quarterly updates on the status of the trust with copies of the trust accounts, depending on the nature of the trust;
- formally engaging accountants where necessary to assist in the proper accounting of the trust;
- where there are multiple beneficiaries, joint communications to all beneficiaries can help avoid the impression of partiality;
- maintaining well organised and secure trust files for the duration of the trust;
- promptly responding to beneficiary requests for information on the status of the trust – consider providing the same information to all beneficiaries even if the request has come from only one beneficiary; and
- identify and mark documents that record reasons and motives for making discretionary decisions regarding the trust, even if not obliged to disclose them.
If it becomes apparent that a beneficiary is intent on invoking the Court’s inherent jurisdiction to access trust documents, an inspection of the trust documents may help alleviate the beneficiary’s concerns. Offering an express written undertaking to abide by the trustee’s legal obligations may also provide some comfort to the beneficiary.
This article originally appeared on lsj.com.au