Trusts – What documents is a beneficiary entitled to see?

Two of the cases to which I refer this week were decided by the Royal Court of Jersey.  In a recent article, I referred to two decisions from the Cayman Islands.

Readers may wonder why I would refer to cases from places like Jersey and the Caymans.

The answer is simple.  They are world leaders in their field. 

Although only 52,000 or so people live in the Cayman Islands (2006) it was the fifth largest banking centre in the world.  It was home last year to 279 Banks.  It was also the world’s leading off-shore hedge fund jurisdiction with more than 10,000 hedge fund registrations.

Jersey’s population is a little bigger.  It has about 92,000 people.  As of 2004, this tiny place was home to a financial services industry that represented 20% of the entire market capitalisation of the Standard and Poors 500 in the US!

In a nutshell, a huge number of the wealthiest individuals and businesses in the world have such confidence in the quality of the legal systems in these two territories that they are willing to base themselves there.  Their Judges, and the decisions that they give, are regarded as world class.

I turn to my first case.   It was Rabaiotti’s Settlements [2000] JLR 173, a decision of the Royal Court of Jersey which held that a discretionary beneficiary was entitled to be given copies of:

• The Trust Deed.
• All Deeds of Variation and Appointment.
• The last three years’ accounts.
• A printout of the Trust’s share portfolio and a valuation of its equities.
• A current valuation of any land that the Trust owned (although this did not require the Trustees to obtain a valuation if it had not been previously obtained.)
• The Trust’s tax returns for the last three years.
• A schedule of the distributions that were made to the applicant, his wife and any of his children in each of the last three years.

Although the decision to disclose such documents is the subject of a discretion, the Court said that

“One starts with a strong presumption that a beneficiary is entitled to see Trust documents of the nature described.  There would have to be good reason to refuse disclosure of such documents.”

The extent of disclosure was similar to what Potter J ordered a few years later in Foreman v Kingstone [2004] 1 NZLR 841.

The Rabaiotti case was followed by another decision from the Jersey Royal Court – Re The Avalon Trust [2006] JRC 105A where it was held that there was “good reason” for the Trustees to provide a beneficiary with the Trust Deed, supplemental Deeds of Appointment, Trust Accounts and details of distributions.

What about a Memorandum of Wishes?

This is more difficult.  In Rabaiotti the Court required a Letter of Wishes to be disclosed because the discretionary beneficiary had discovered some earlier Letters of Wishes amongst his late father’s papers and there was a concern that if the Court proceeded solely on the basis of those Letters of Wishes, it might proceed on a false assumption.

Similarly, in Re The Avalon Trust a beneficiary’s wife had an earlier draft of a Letter of Wishes and, in the words of the Court, “It seems to us … undesirable that the … Court should be invited to proceed on the basis of a document which is not the same as the final Letter of Wishes.  There is risk in such circumstances that the … Court will draw or make assumptions which are not in fact correct.”

The subject was given its fullest exposition in Breakspear v Ackland [2008] EWHC 220, a decision of Briggs J in the Chancery Division in England.  This Judgment contains an excellent survey of the leading cases throughout the Commonwealth on this topic.  This was his primary conclusion:

“In the absence of special terms, the confidentiality in which a Wish Letter is enfolded is something given to the Trustees for them to use, on a fiduciary basis, in accordance with their best judgment and … the sound administration of the Trust.  Once the settlor has completely constituted the Trust, and sent his Wish Letter, it seems to me that the preservation, judicious relaxation or abandonment of that confidence is a matter for the trustees, or in an appropriate case, for the Court.”

In short, it will be very difficult to require Trustees to disclose Wish Letters.

Writing in the Journal of International Trust and Corporate Planning, Justice David Hayton has said of this decision “How can a beneficiary question the ‘honesty, integrity and fairness’ with which the [trustees’] deliberation has been conducted” if he or she is to be deprived of access to Letters of Wishes?

He says that:

“Fair-minded trustees should see the force of this and be prepared to disclose a Letter of Wishes while pointing out that the Letter merely guides, but does not bind, the trustees.

“Less honourable trustees will be able to get away with acting unfairly or even dishonestly.”

One way to deal with this is to ask the Court to inspect Letters of Wishes.  This happened in the Avalon case.  The trustees had said that the disclosure of the Wish Letter would be divisive and would lead to family discord.  This innocuous statement was held to constitute the giving of reasons which in turn justified the Court in examining the Wish Letter.  Having read it, the Judge held that the Trustees had acted reasonably in declining to give copies of the Letter to the beneficiary.

I think it can be said that there is a trend to require greater disclosure of documents to beneficiaries.  This is a good thing.  The more light that is made to shine on Trust administration, the more likely it is that trustees will adopt good practices and be more accountable for the Trusts that they have committed to administer.