When not to tell a beneficiary?

In a recently released judgment, In the matter of C Settlement [2017] JRC 035A, the Jersey Royal Court confirmed that, in principle, a trustee can withhold information from a beneficiary with capacity about his rights under a trust. However the trustee will need to have sufficient reasons justifying withholding this information. The decision also confirmed that such non-disclosure could be maintained even if the trustee applied to the court for a ‘Beddoe order’ – a process which would normally involve the court seeking representations from all of the trust’s beneficiaries.

We consider this decision further below.

Background facts

In the matter of C Settlement concerned an application by a trustee for a Beddoe order approving a settlement agreement. A former employee of an investment company which was wholly owned by the trust had brought a £2 million claim for wrongful dismissal. In order to settle this claim, the trustee proposed a settlement agreement which involved a payment of £350,000 to the employee.

The trustee sought representations (i.e. consents) from two of the three beneficiaries of the trust on the matter, both of whom endorsed the trustee’s decision to enter into the settlement agreement. However the trustee declined to seek representations from the third, ‘K’, then aged 19, on the basis that the trustee and K’s mother, one of the other beneficiaries under the trust, had agreed that “it would be a harmful and damaging burden for him to learn of the trust’s size“. K had been made aware of the existence of the trust and the claim but not any further details. The trust had net assets of around £75m and this information would necessarily be revealed to K if representations were sought from him.

Judgment

The court began by considering its role in approving a Beddoe application. It confirmed that the general approach was for it to decide:

  1. Whether the proposed action was within the trustee’s powers.
  2. Whether the trustee’s opinion in relation to that action had been formed in good faith and not been vitiated by any actual or potential conflict of interest.
  3. Whether the Court was satisfied that the proposed action by the trustee was reasonable.

Where the action being approved was the compromise of litigation, as in the current case, the Court had slightly wider discretion in deciding what was reasonable because the assessment of litigation risk lay within the Court’s area of expertise.

On the basis of a number of factors, including independent legal advice as to the probability of success obtained by the trustee and the clear emotional and financial cost of continued litigation,  the Court decided that the trustee’s approach was appropriate and the case for settling was ‘very strong indeed’.

The Court then proceeded to consider the absence of representations from K. K was a principal beneficiary under the trust and was of full age. He would therefore generally be entitled to have his views considered by the Court. However the Court also acknowledged that a trustee had a discretion not to inform a beneficiary of their entitlement or include them in a distribution where they could justify this on the basis of the beneficiary’s age, character or ‘some other special reason’.

In this instance, the Court held that it was reasonable for the trustee to decide to continue to withhold from K information about the trust for the following reasons:

  1. The course of action had been agreed by both the trustee and K’s mother.
  2. The knowledge of the trust could upset the balance in K’s life at a time when he was still maturing.
  3. Knowledge of the size of the trust might discourage K from completing tertiary education or obtaining reasonable employment and instead drive him towards a dissolute lifestyle of ‘party-going or riotous living’.

It therefore approved the settlement agreement proposed by the trustee.

Comment

This case makes clear that it is, in principle, legitimate for a trustee to withhold information from a beneficiary about their entitlement under a trust. However, it will be very much the exception and whether it is appropriate will in every instance depend on the particular facts of the case. Trustees seeking to withhold information should therefore ensure that they can adequately justify their decisions to do so.

They should also bear in mind the Court’s suggestion that whether information can be continued to be withheld when a trustee applies to the court for guidance on a course of action will depend on the reasonableness of the proposed course of action. The more uncertainty there is as to its reasonableness, the greater the influence a beneficiary’s view might have and consequently the greater case there is for consulting them.

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