You may be a beneficiary under a trust you have set up or set up by your parents or by a wife, husband or partner – what does that entitle you to?
In short – not much, if you are a discretionary beneficiary.
Discretionary beneficiaries are the most common type of beneficiary for a typical family trust. They do not own or hold any property of the trust and they do not have an enforceable or legal right to benefit from the property or assets of the trust. It is common for the settlor and the trustees of a trust to retain a certain amount of control over how a trust manages it property and assets and it is the trustees who will decide which beneficiaries will benefit from this property. As a consequence discretionary beneficiaries can expect to have only a hope or expectation of benefiting from such property and assets. They do not have a right to this. As a consequence a discretionary beneficiary does not have a claim to property owned by the trust.
Beneficiaries however can and do have a right to ensure that the trustees of the trust carry out the terms of the trust and comply with the trustees’ core duties. The trustees must:
- perform their duties honestly, impartially and in good faith
- keep proper accounts
- not make any authorised personal profit from the trust, and
- not use the assets of the improperly or illegally.
Discretionary beneficiaries can take legal action to ensure that the trustees comply with these obligations. However they cannot, for instance, take legal action in the event that another beneficiary receives a distribution of property or receives some benefit from the trust and they do not. The trustees are entitled to favour one beneficiary over another so long as they comply with the terms of the trust and their obligations as trustees (see above).
Remember that these ‘rules’ apply to discretionary beneficiaries. There are other types of beneficiaries such as final or fixed beneficiaries and in those cases the situation is different again.