Duty to inform potential beneficiaries of discretionary trust?

This seems a simple query, but one which I am struggling to find a definitive answer to. Do the trustees of a discretionary trust have an obligation to inform potential beneficiaries that the trustees have used their discretion to appoint assets to another beneficiary and the trust is being wound up?

Wife and family friend are named as trustees of the discretionary trust left under the late Husband’s will. Wife is named as potential beneficiary along with the adult children of the deceased (from first marriage). The trustees wish to appoint all assets to the wife and for the trust to be collapsed. Do the trustees have an obligation to inform the adult children that the trust is being dealt with in this way?

Katie Kenealy

I do not believe the trustees have any duty to advise the children of the proposed appointment.

If the children are unlikely to question the proposal, no issues should arise. However, if they are likely to object, the trustees must decide if it would be better to address the issue now, or perhaps end up with a potentially more entrenched dispute further down the line.

It’s really a question of managing the relationship between the widow and her step-children.

Paul Saunders

I don’t think that there is a rule requiring the trustees to inform other beneficiaries of a distribution, even one which exhausts the trust fund. But the trustees are under a duty to consider the interests of all beneficiaries before making a major distribution and arguably they may be in breach of trust if no communication of any kind has taken place. An apparently secure adult beneficiary may be concealing serious financial problems.

Tim Gibbons

Unable to comment on the legal position, but from a purely practical viewpoint, did the adult children know about this discretionary trust and/or ever receive any discretionary income distributions from it? If so, then it would be sensible to advise them.

Was there a letter of wishes? Are the adult children likely to take exception and object to this proposal or would they be fairly relaxed about it?

Maxine Higgins
Citroen Wells

A Will client recounted a family history such as this. On his first wife’s death he was sole Executor and Trustee of her Will which created a nil rate band Discretionary Trust. He had made a similar Will. On her death he closed down the Discretionary Trust and appointed all the money to himself, within the 2 years from her death. He also remarried within a year of her death. The adult children of his first marriage, and his own and only natural children, were the other potential beneficiaries. They threatened proceedings as they were advised they had a case for breach of trust and my client had had to settle in the sum of about £80,000.00. Both sides will have had legal fees on top.

The net effect was he had no further relationship with his 2 children and instructed me to cut them out of his Will, as in versions since the dispute, which was for an estate of a considerable size. There seems to me to have been no winners.

Nicola Briggs
Aticus Law

This sounds more a problem of unfortunately only appointing one trustee. It seems odd if the appointment was valid, as normally a minimum of two trustees are required to validly make an appointment.

There may have been other issues, such as whether there was any evidence of the trustee(s) not having taken all relevant circumstances into account before exercising their powers, or not exercising them in good faith.

Evidence as to steps taken to ascertain the circumstances of all the main beneficiaries before taking a decision is important. In the process of doing so, these persons will be aware of the trust I imagine, and have the right to ask the trustees for accounts
etc, so telling what is being done only makes sense.

If they are in doubt as to whether there may be a challenge, perhaps they should do it in two tranches.

Simon Northcott

Most nil-rate-band discretionary trust wills contain a provision that discretionary powers can only be exercised by a minimum of two trustees, and what the husband in Nicola’s case purported to do as sole trustee may have been technically invalid.

I would hope that the usual letter of wishes stating in terms that the surviving spouse should be regarded as principal beneficiary during his lifetime should have been sufficient to protect him against claims by the children that they should have a share of the trust capital.

Tim Gibbons

It appears to have been more an error in the drafting in the Will as my recollection is that there was only the one executor and trustee and no clause requiring two for the exercise of any powers, nor was there a letter of wishes. My client was represented at the time of the dispute, but whether negligence on the part of the firm that drafted the Will was considered I cannot say. However, with the benefit of experience, I will not be making that mistake.

Nicola Briggs
Aticus Law

Does seem like an error in drafting as it may have been an attempt to prevent sideways disinheritance.

As others have stated, there is no need to advise beneficiaries unless the trust instrument or statute requires them to do so. eg Trusts of Land and Appointment of Trustees Act 1996 section 11(1) provides for consultation with beneficiaries as follows:

“The trustees of land shall in the exercise of any function relating to land subject to the trust:
(a) so far as practicable, consult the beneficiaries of full age and beneficially entitled to an interest in possession in the land, and
(b) so far as consistent with the general interest of the trust, give effect to the wishes of those beneficiaries, or (in case of dispute) of the majority (according to the value of their combined interests).”

The requirements can be excluded by the trust instrument and it is standard to do so. Requirement (b) is particularly difficult where there is more than one beneficiary. STEP Special Provision 19 gives trustees an absolute discretion. (in a report by Leslie King).

Andre Davidson

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I think the apparent grounds for breach of trust in Nicola Briggs’ case may have lain, inter alia, in the rule against self-dealing.

The power of appointing new trustees can be a very significant one in NRB and other Discretionary Will Trusts and, strangely, there is not much evidence that it is commonly addressed.

Mark Walker
Anglolex Ltd.

With regard to Mark Walker’s posting, in 2017 Gill Steel’s LawSkills Limited published an article of mine on the very point he identifies: https://www.lawskills.co.uk/articles/2017/07/beneficiary-trustees-solution-strangulation/

The content remains relevant today

Paul Saunders

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In this case there are two Trustees, the family friend and surviving spouse as stated by Katie.
The issues here are not having a Memo of the settlor’s wishes and the Duty of Care we have as Trustees.
A well drafted Memo would state the settlor’s initial objectives with regard to his sole assets passing to the Trust and so whether he ( the deceased ) wished his natural children to benefit during the life or following the death of his second spouse. This would assist the Trustees greatly.
Whilst there may be no legal obligation, Trustees have a Duty of Care to all beneficiaries and this should be considered carefully especially where we have children as beneficiaries along with a Step Mother/Father as the blood children are often disinherited. Trustees have an obligation to consider all beneficiaries needs.
As Trustees we should remember that the use of Trusts are used for asset protection and to protect the vulnerable is more often the motivation for their use than that of tax planning. Those beneficiaries are all best served with the appointment of a professional and the risks of not doing so should be stressed to the Settlor or Testator.

Bob Massey,
Countrywide Tax and Trust Corporation

Having read Paul Saunders’ article, “Beneficiary Trustees: Solution or Strangulation?”, would the decision by the trustees to pay, say, school fees for a minor beneficiary fall foul of the wider self-dealing rule if a trustee is a parent of the minor and none of the exceptions (trustee is an original beneficiary; express provision in the trust deed allowing trustees to benefit etc) apply?

Anne Winterbottom
Dixon Wilson

Each situation will be fact dependent.

One important question will be if the distribution is: (i) to reimburse the trustee parent for the monies already paid, or (ii) to pay the provider/supplier.

Unless there is specific authority dis-applying it, in most instances the self-dealing rule will apply under (i), as the distribution will benefit the parent and not the child. The reimbursement of any person may be a breach of trust, whoever is being reimbursed, unless they are also a beneficiary of the trust.

Where a distribution is used to pay the provider/supplier direct, it will depend on whether the expenditure is reasonably that of the minor child rather than that of the parent. Having said that, whilst school fees are normally seen to be a parental responsibility, it has been held that they can be the subject of a valid distribution even where the beneficiaries are the settlor’s children and the settlor is specifically excluded from receiving any benefit.

There is a grey area – where the request is to distribute to the trustee parent to enable them to pay the provider/supplier. It may be that such a distribution might be upheld as not breaching the self-dealing rule. However, if payment can be made direct to the supplier, this should help dispel the need for any discussion of the validity of such an arrangement, provided that the service or item for which payment is made is not correctly the liability of the trustee parent.

Paul Saunders