Rupert Morris
Partner
Guernsey
A perennial tension in trust law concerns the extent to which trustees may accede to a settlor's wishes to maintain secrecy over the existence of a trust and its beneficial class. This article considers the position of trustees who under Guernsey law, at the settlor's request, are instructed not to notify adult discretionary beneficiaries, specifically the settlor's children and their issue, of their status under the trust. If we consider a not untypical scenario of a wide discretionary trust in favour of the settlor's family and certain charities, with the settlor having expressed a clear preference that only the charities should now benefit, and that the children should remain ignorant of their beneficial status – the central question is whether trustees are legally entitled to comply with such instructions, or whether their duties to the discretionary beneficiaries require disclosure.
The general duty of disclosure
Guernsey trust law, which often shares many similarities with English trusts law, imposes upon trustees a duty to inform beneficiaries of the existence of a settlement and the nature of their interest under it. In the case of adult beneficiaries who have attained their majority and become entitled in possession, this duty is well established: trustees must notify the beneficiary not only of the trust's existence but also of the beneficiary's interest, so that they may receive what is due to them. The duty extends to adult beneficiaries of new settlements who are interested in possession, ensuring they are informed of the nature of their entitlement.
The position regarding beneficiaries with future or contingent interests is less settled, but the prevailing view is that trustees have a duty to take reasonable steps to inform adult beneficiaries with vested, vested defeasible or contingent interests of the settlement's existence and the general nature of their interest, as soon as reasonably practicable after the interest arises. Importantly, this duty exists unless the trustees reasonably believe, by reason of the remoteness of the interest, that the beneficiary has no reasonable prospect of successfully asserting rights to information on demand, or there are other special circumstances justifying delay. Crucially, "special circumstances" do not include merely the wish of the settlor to keep the existence of the settlement discrete.
Application to discretionary beneficiaries
The learned authors of Lewin on Trusts consider that generally similar considerations apply to discretionary beneficiaries, that is, objects of discretionary trusts or fiduciary powers. Where a discretionary trust is presently operative, there is an additional rationale for disclosure: proper consideration of the exercise of discretion from time to time may require communication with discretionary beneficiaries who have a realistic prospect of benefiting, so that trustees can take account of their needs and requests.
However, there is no absolute requirement to disclose the settlement's existence to all objects in all circumstances. Rather, what trustees must do is identify those discretionary beneficiaries who are, in the circumstances, real potential candidates for benefit in the proper exercise of the discretion; disclosure may, and normally should, be limited to such persons. Circumstances may change, and if there is a material change, disclosure may become requisite at that time.
This nuanced approach is exemplified by the treatment of fiduciary powers over wide classes. In Re Manisty's Settlement Trusts, Templeman J contemplated a power in favour of a class comprising the settlor's issue, relations and employees, where relations and employees had not been considered for benefit. There was no breach of duty in failing to inform them. However, it would not follow that trustees could properly keep the settlement confidential from the children of the settlor who had been considered for potential benefit.
The settlor's children in the present scenario
Applying these principles to the above hypothetical scenario, the settlor's children and their issue are adult discretionary beneficiaries expressly named within the beneficial class. Although the settlor has now expressed a preference that only the charities should benefit, the children remain objects of the discretionary trust unless the trust instrument has been validly amended to exclude them. If, as often occurs, the trust instrument has not been so amended, the children remain "real potential candidates for benefit" under the discretion.
The trustees cannot properly accede to the settlor's request merely because he wishes the trust's existence to remain secret. The wish of the settlor to keep the settlement confidential is explicitly stated not to constitute a special circumstance justifying non-disclosure. Thus, trustees who fail to notify the children of the trust's existence, in deference to the settlor's preference, risk being in breach of their duties to the very people in whose interests they are required to administer the trust.
Moreover, the settlor's informal instruction to the trustees to exclude the children from future benefit is not, without more, binding upon the trustees. In a discretionary trust, trustees must exercise their discretion properly, which includes giving fair consideration to all members of the beneficial class. To exclude the children entirely, without the legal machinery of a valid exclusion or amendment and without informing them of their status as discretionary beneficiaries, is likely to be found an improper fettering of discretion.
The limits of non-disclosure clauses
Some trust instruments contain clauses purporting to relieve trustees of the obligation to disclose the trust's existence to beneficiaries who have not yet received an absolute and indefeasible interest. Such clauses do not render the trust as a whole invalid, but it remains unclear whether the clause itself is valid and enforceable. The learned view is that it is probably not permissible to exclude the accountability of trustees to beneficiaries who, being kept in ignorance of the settlement, are thereby prevented from asserting their rights to information and accounts. Indeed, the duty to inform beneficiaries of their rights has been described judicially as "fundamental". Ultimately this is based upon the trustee's duty to account to the beneficiaries for its administration of the trust – if those beneficiaries do not know of its existence who then can hold the trustee accountable for its actions?
In the present scenario, even if the trust instrument contains such a clause trustees would need to consider carefully whether it is enforceable, and whether reliance upon it in circumstances where identifiable adult beneficiaries with a realistic prospect of benefit are being deliberately kept ignorant would be defensible.
Remedies for breach
A failure to inform beneficiaries of their interest is unlikely to cause immediate loss to the trust fund, but beneficiaries may recover compensation for breach of an equitable duty owed to them personally. A prolonged failure to comply with the duty of disclosure may also afford grounds for removal of the trustees, particularly where several beneficiaries are affected.
Conclusion
Trustees who are asked by the settlor to keep the trust confidential from adult discretionary beneficiaries who are real potential candidates for benefit are placed in a difficult position. The law does not permit them simply to defer to the settlor's wishes on this point. The wish of the settlor to maintain secrecy is not, of itself, a special circumstance justifying non-disclosure, and trustees who accede to such a request risk breaching their duties. Although trustees may legitimately refrain from notifying discretionary beneficiaries whose interests are remote or who have no realistic prospect of benefit, adult children of the settlor who are expressly named in a presently operative discretionary trust are unlikely to fall into that category. Prudent trustees should seek legal advice, and may need to consider an application to the court for directions, particularly if the settlor's instructions conflict with their duties to the beneficial class.
