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ABOUT THE AUTHOR: Michael Betley TEP is Managing Director of Trust Corporation
T he control and dissemination of information by trustees to both settlors and beneficiaries is an essential factor in the successful management of any trust relationship. To achieve this, the trustee must fully understand the intentions of the settlor at the time of creating a settlement, as well as appreciating the family dynamics and their specific needs as individuals. However, the increasing use of professional corporate trustees, rather than trusted family friends or long-standing advisors makes this more difficult as a result of the lack of ready and regular access to the family. But without this basic understanding, charting the right course could result in a hazardous journey during the lifetime of one’s trusteeship.
Precarious position
In the absence of this close and working knowledge of the parties to the trust, the trustees could put themselves in a precarious position in which they will not be able to justify their position to either the settlor or the beneficiaries, leaving them exposed to heavy criticism. The dangers of this situation were observed by Kirby P in Hartigan Nominees Pty v Rydge [1992] 29 NSWLR where he reflected that ‘Trustees are rarely the group of devout clergymen but large companies who act on the advice of lawyers’. This should be viewed as a warning that the professional trustee card has been marked and few courts will look favourably on trustees who do not discharge their responsibilities fully. So who is promising what at the time of creating a settlement? Has the settlor expressed himself sufficiently and as trustee could you be promising more than you are capable of delivering?
Guidance
The well-known case Re Londonderry’s Settlement [1964] 3 AllER set the benchmark in respect of establishing guidance on the extent to which beneficiaries can expect disclosure of trust documents. And while documents explaining the reasoning and decision-making process behind this guidance were not disclosable, Danckwerts LJ words in his judgement give us a good idea of what is expected:
‘Where trustees are given discretionary trusts which involve decisions on matters between beneficiaries, reviewing the merits and other rights to benefit under such a trust, the trustees are given a confidential role and they cannot properly exercise that confidential role if at any moment there is likely to be an investigation for the purpose of seeing whether they have exercised their discretion in the best possible manner.’
In this case Salmon LJ went on to state his views in relation to such disclosure:
‘Nothing would be more likely to embitter family feelings and a relationship between the trustees and members of the family than that the trustees should be obliged to state their reasons for the exercise of the powers entrusted to them. It might indeed well be difficult to persuade any persons to act as trustee where a duty to disclose their reasons, with all of the embarrassment, arguments and quarrels that might ensue...’
Londonderry also established what the duty of confidentiality was in relation to certain types of documents such as letters of wishes, where confidentiality was owed to various trust-related parties, such as the beneficiaries, settlor or indeed the trustees themselves. This duty of confidentiality was restated in Schmidt v Rosewood Trust Limited [2003] UKPC 26 in which the trustees were able to successfully argue that confidential information, such as letters of wishes or any other similar documents detailing the reasoning behind their decisions should not be disclosed. To do so would prejudice their duty of confidence to the settlor or indeed to other beneficiaries to whom they owed a similar duty.
Letters of wishes unless stated as ‘open’ would generally be regarded as documents that should remain confidential in the normal course of events. And in Hartigan Nominees, the settlor specifically indicated he did not want the beneficiaries to have access to the letter of wishes. Mahoney JA said:
‘I would for myself see the matter of confidentiality as being of particular significance in discretionary trusts of the present kind … special cases apart, it is proper that the settlor’s wishes and his privacy be respected.’
This position was subsequently qualified in Foreman v Kingstone 6 ITELR where the private memoranda addressed to the trustees were not protected by confidentiality as expressly required by the settlor, as in the judge’s view this duty was subservient to a higher duty owed by the trustees to the beneficiaries:
‘The fundamental duty of the trustees is to be accountable to all beneficiaries. That cannot be compromised by a settlor’s desire for confidentiality in relation to his and the trust’s personal and financial affairs unless there exist exceptional circumstances that outweigh the right of the beneficiaries to be informed.’
In this case the settlor had chosen his trustees very carefully to ensure in particular that his requests for confidentiality would be maintained. The resulting Obiter in this case make it clear that letters of wishes are trust documents that should be disclosed to the beneficiaries in the absence of a ‘substantial claim for confidentiality’.
With this in mind a settlor and trustee can be as prudent and careful as they wish, but ultimately the courts will want to ensure that the trustees are held accountable and, taken to the extreme, this could inevitably lead to the trustees having to disclose what are considered confidential papers. Alec Samuels in his criticism of Re Londonderry spoke in favour of disclosure when he stated that:
‘The fundamental premise … is totally unacceptable in a contemporary society. Trustees should be required to give reasons upon request … the world is full of people making secret reports and decisions upon other people, or feebly claiming that if they had to make full disclosure they would feel unable to speak and act with uninhibited freedom and candour … people should be made of sterner stuff.’
Conclusion
This leads to the conclusion that, whilst trustees owe a duty of confidentiality to the settlor and others in relation to sensitive or privately marked information, they similarly have a duty to account, but more importantly, a duty to act in good faith.
The recent case of Breakspeare v Ackland [2008] EWHC 220 (ch) also addressed the key question of confidentiality. Here the trustees believed that not only was the memoranda of wishes confidential, as required by the settlor, but if disclosed would lead to family discord. In undertaking their reasoning, whether to disclose or not, the case made it clear that the trustees must act in good faith and ultimately they should be able to demonstrate this.
So where does this leave the settlor, who fully expected the trustees to undertake their role in line with his wishes and guidance on a strictly confidential basis? Is it tenable for any trustee to suggest that the settlor’s private thoughts will remain strictly private?
What is clear is that the professional trustee, when establishing a relationship, needs to make a settlor aware of the rights beneficiaries have to obtain certain information. Bill Forman (Forman v Kingstone) took great lengths to choose his trustees to ensure that his intentions would not only be carried out, but that his guidance and wishes would be concealed from the beneficiaries, whose expectations of benefits from their trusts were not reflected in the trust deed and letter of wishes. Had Mr Forman been aware that his wishes would be disclosed, it is likely that he would have structured his arrangements somewhat differently. Whilst there are ways of constructing the terms of the trust to build in a settlor’s requirements, care should be taken not to deny the beneficiaries all their legitimate rights to information. It is clear that courts will not look favourably on a situation where beneficiaries are unable to secure or determine their interests and trustees will be held accountable to deliver this.
Many jurisdictions have statutory guidance to help both the settlor and the trust draughtsman in determining what can be achieved. In Guernsey the draughtsman of the Trusts (Guernsey) Law, 2007 (the 2007 Law) recognised that there will often be occasions when it will be appropriate to deny beneficiaries trust information. Accordingly the 2007 Law enables the terms of a trust to expressly exclude beneficiaries’ rights to information. In practice this is likely to be through the specific exclusion, in the trust instrument, of s26(1) of the 2007 Law, which identifies both the relevant parties and the type of information that the trustees should consider disclosing, to discharge its obligation to account. This does not, however, prevent a beneficiary exercising an overriding right to reply to the court for the information sought. But importantly it will be for the beneficiary to prove the need to gain the information, if denied by the trustees (s26(2)). This would also apply to letters of wishes, which the 2007 Law will treat, prima facie, as confidential and not for disclosure, without good reason (s38(2)).
When considering the right by a beneficiary to obtain trust documents being denied him, the beneficiary will need to clearly demonstrate a ‘necessary or expedient’ need, bearing in mind the circumstances of the case (s26(3)). A trustee faced with denying a related trust party with information should be conscious that he will have the ability to ‘consult’ (s32), with ‘professional persons in relation to the affairs of the trust’. Indeed, to ensure that, as trustee, you can clearly demonstrate, if put to proof, that you have acted in good faith, it will be a sensible precaution to consult with relevant parties and to keep a note of the trustee deliberations.
The professional trustee will always need to balance the settlor’s request for confidentiality with the need and appropriateness of providing the relevant beneficiaries with relevant information. It is, however, wrong to assume that a settlor’s stated intentions or expressed wishes will in all circumstances remain confidential. If the settlor, like Bill Forman, has very specific requirements with the need to preserve confidentiality then it is essential that the right provisions are built into the trust instrument at the outset. Unless trustees, and indeed the trust draughtsman, make it clear to the settlor of the limitations of the relevant jurisdictional law, and the trust deed itself, then it is highly likely that trustees are indeed making promises they cannot keep.