If you know that your family has trusts and that is where your family’s wealth is, it’s easy to assume that some of that wealth will come to you out of those trusts at some point in the future.
You may even be enjoying it now, with the understanding that there is more to come.
But, unfortunately for beneficiaries, that understanding is not always right, writes Eleanor Davies, associate at offshore litigation firm Baker & Partners.
There are a number of ways that trust assets can lose value or trust structures fall apart, and beneficiaries can find themselves sorely disappointed.
What can beneficiaries do if they find themselves in such a position?
Regardless of what has happened, from trustee investment mismanagement to diversion of assets or mistakes that mean the trust structure is not what everyone assumed it to be, the first step is for beneficiaries to ensure they are in possession of all information available to them.
A beneficiary’s right to information is central to Jersey trusts law because it allows the trustee to be held to account in the exercise of its fiduciary duties.
A combination of Jersey case law and statute sets out what information it is that beneficiaries are entitled to.
The main categories of documents are well-settled, although the nuances continue to provide fruitful case law.
Broadly speaking, any form of document which forms the ‘accounts’ of the trust is available to beneficiaries.
This is not limited to financial accounts but includes any information relevant to the trust assets and what has happened to them.
It does not normally include documents relating to the trustee’s deliberations, communications with beneficiaries – other than the requesting beneficiaries – or letters of wishes.
Necessary and proportionate
Although the terms of the trust may limit beneficiaries’ information rights, this may be overruled by the Jersey court.
It has the power to order the trustee to disclose documents where it has refused to disclose them, or to disclose documents which would not ordinarily be disclosable.
In Trilogy Management v YT and others [2015] the court said that it will do so where disclosure is “necessary and proportionate” to enable the beneficiary to hold the trustee to account.
So, the first practical step beneficiaries can take is to request disclosure from the trustee. If that is impossible, or ill-received, the next step may be a court application.
Once the information is provided and shows what has happened, beneficiaries can seek advice on what action can be brought against the trustee and anyone else implicated.
This might include any, or several, of the following:
- An application to remove the current trustee and appoint a new trustee, or to appoint a co-trustee alongside an existing trustee;
- A claim in breach of trust against the trustee and anyone else who might have been involved, and/or potentially claims of dishonest assistance and/or knowing receipt – which are ancillary claims to a claim in breach of trust – against others involved in the breach;
- An application under one or more of the statutory mistake jurisdictions to unwind an appointment or an exercise of a power; and/or,
- A derivative claim, where a beneficiary brings a claim against a third party which would normally be brought by the trustee.
The last of these claims, which shares some similarities with the shareholder derivative action in company law, has received more attention recently following the Eastern Caribbean court of appeal’s judgment in Paraskevaides v Citco Trust Corporation and ors.
The court of appeal found that, at least in principle, a beneficiary of a trust may bring a direct claim against a third party to prevent unauthorised interference with trust property and, where there is no trustee in office and so no one else to protect the trust, a beneficiary may bring a derivative claim against a third party in respect of trust assets.
Beneficiaries may therefore be able to seek injunctive relief to protect trust assets where there is no trustee, or the trustee is unwilling to bring a claim.
Not all roads lead to court
Litigation does assume, however, that the situation is incapable of being remedied otherwise.
It is occasionally possible to remedy an innocent error by the trustee or another party without involving the court, and even court applications can be made in a way that minimises cost.
For example, if incorrect tax advice is the problem, the beneficiaries may be able to cooperate with the trustee to bring a mistake application at minimal cost to the trust fund.
Beneficiaries may want to take advice on whether there is a more consensual or even non-contentious solution, and proper legal advice is key to having the best possible chance of preserving what wealth remains.
This article was written for International Adviser by Eleanor Davies, associate at offshore litigation firm Baker & Partners.
