Trustees' duty to account to beneficiaries
It is a fundamental principle that trustees and Personal Representatives (PRs) have a duty to keep an account of the administration of the trust/estate and may be ordered to produce those accounts to beneficiaries. This obligation ensures accountability and minimises the chances of mismanagement or abuse of trustees' extensive authority. Sadly, that ostensibly simple legal principle belies a complex area.
The general position is that 'every beneficiary is entitled to see the trust accounts' (Armitage v Nurse  ch 241) and 'the fundamental duty of the trustees is to be accountable to all beneficiaries' (Foreman v Kingstone  1 NZLR 841 HC).
That duty is complicated in large part by the array of confidential information contained within estate and trust documents such as details of the deceased's wealth, what assets they held, who they chose to leave them to and why, as well as trustees' entitlement to keep their decision making process confidential.
The case of letters of wishes
The difficulties faced by trustees are particularly apparent where beneficiaries seek disclosure of a testator's letters of wishes.
The very nature of a letter of wishes is with a view to it being confidential and it is intended to guide how trustees consider exercising their discretion. The case of Re Londonderry's settlement  established the proposition that trustees are not obliged to disclose their decision making process which should remain confidential. Accordingly, and whilst there is no blanket rule on the matter, where an application is made for disclosure of a letter of wishes, trustees will not usually be forced to disclose such a document (Breakspear v Ackland ).
The overriding duty
The duty to keep beneficiaries' informed trumps the duty of confidentiality unless there are 'exceptional circumstances' to withhold that information from beneficiaries (Foreman v Kingstone).
As to what information beneficiaries are entitled to and what constitutes 'trust accounts', there is some danger of misunderstanding:
"When the books and cases talk about beneficiaries' "entitlement to accounts" … they are not generally referring to annual financial statements…Instead they are referring to the very notion of accounting itself. Trustees must be ready to account to their beneficiaries for what they have done with the trust assets. This may be done with formal financial statements, or with less formal documents, or indeed none at all." RNLI & Others v Headley & Another  EWHC 1948 ch
The limits to beneficiaries' rights to account
Beneficiaries' entitlement to trust accounts is by no means absolute. A beneficiary has no absolute right to trust documents, but rather a right to seek access to those documents (Schmidt v Rosewood Trust ). That right to information arises from the PRs' fiduciary duty to keep beneficiaries informed as regards to those beneficiaries' interest in the estate/trust. Ultimately, disclosure of information and documents by PRs/Trustees to beneficiaries is a discretionary exercise where trustees (and the court in the event of a disagreement) will not be looking at entitlement, but what is in the best interest of the trust as a whole.
The relevant factors – the case of Ecreg v Ecreg
The recent non-binding New Zealand case of Ecreg v Ecred , where a primary beneficiary of a trust was refused disclosure of trust documents by the Supreme Court because of the beneficiary's past 'reprehensible' behaviour, gave a helpful list of ten factors to take into account when deciding whether and what information to disclose to beneficiaries:
- The documents that are sought. A beneficiary will have a stronger case if their request is for disclosure of core documents, such as the Will or estate accounts, rather than more remote documents such as a letter of wishes.
- The context for the request and the objective of the beneficiary in making the request. If the administration of the estate could not be properly monitored without disclosure, the beneficiary's case will be compelling.If disclosure has been made to other beneficiaries, this will be a relevant but not decisive factor.
- The nature of the interests held by the beneficiary seeking access. This is divided into two considerations:
- The beneficiary's proximity. A 'close' beneficiary such as an immediate family member or named beneficiary will have a greater interest than a charity or class beneficiary.
- The likelihood of the beneficiary actually benefitting from the trust.
- Whether there are issues of personal or commercial confidentiality. Recognition should be given to the need to protect confidential matters, particularly if there is evidence of the settlor's expectations of confidentiality.
- Whether there is any practical difficulty in providing the information. If it would be difficult or expensive to generate or collate the information requested, that may be a factor against requiring its disclosure.
- Whether the documents sought disclose the trustee’s reasons for decisions made by the trustees. It would not normally be appropriate to require disclosure of the trustees’ reasons for a particular decision.
- The likely impact on the trustee and the other beneficiaries if disclosure is made. Would disclosure have an adverse impact of the beneficiaries as a whole that would outweigh the benefit of disclosure to the requesting beneficiary? If so, refusal may be justified.
- The likely impact on the settlor and third parties if disclosure is made. E.g. it might be very harmful to the settlor's reputation to release details of a gift to a mistress. Or a business might be adversely affected if sensitive confidential information is disclosed.
- Whether disclosure can be made while still protecting confidentiality. Redacting confidential information may be sufficient.
- Whether safeguards can be imposed on the use of the trust documentation. Examples include undertakings or inspection by professional advisers only.
A cautionary tale for both trustees and beneficiaries
In RNLI & Others v Headley & Another , several charities were remainder beneficiaries in two trusts set up by a testator in a Will. Despite persistent requests over several years, the PRs failed to provide accounts to the charities. Eventually, the charities issued proceedings for an account for information relating to both the capital and the income aspects of the trusts.
The Court found that there had been a 'long and egregious refusal to engage at all with the [beneficiaries]' by the trustees. The court found that this was unwarranted and constituted a breach of the trustees' duty. The court ordered accounts to be disclosed to the beneficiaries.
On the issue of costs, the Court ordered the surviving PR (one of the two had died) to personally pay the charities' costs in full, without the right to reclaim them from the estate as would usually be the case.
However, the Court rejected the charities' solicitors' questionable application for disclosure of income related information, which the judge found they were not entitled to because the charities were only entitled to the capital, not the income. It is expected that the court would have refused the Charities' costs insofar as they related to the application for income information had the trustees engaged in the dispute at all. This demonstrates the importance of beneficiaries limiting their requests for information to that which they reasonably require to assess their own interest in the trust/estate.
The discretion afforded to trustees and the Court provides flexibility. This flexibility is necessary to allow distinctions between different beneficiaries' interest in the trust/estate, the varying nature of the documents requested, and the reasons for the disclosure request and/or the documents being withheld. Unfortunately, that flexibility creates complexities in advising trustees whether they should refuse disclosure, and in advising beneficiaries on what they should be seeking disclosure of, if anything.
For further guidance, please contact Barny Croft, Senior Associate in Michelmores' leading Disputed Wills and Trusts Team.