There have been a number of recent cases where beneficiaries have gone to court to seek information about the activities of a trust of which they are a beneficiary. The cases have helped shed light on what and how much a beneficiary is entitled to know about the inner workings of a trust from which they stand to benefit from.
Erceg v Erceg is a recent high-profile (and somewhat tragic) case which discusses these issues.
The late Michael Erceg settled the Acorn Foundation Trust in 2004. The Trust owned a significant number of shares in Michael’s company, Independent Liquor NZ Limited. Michael died in November 2005 when a helicopter he was piloting crashed on its way to Queenstown. After his death, the Trust sold its shares in Independent Liquor for a “substantial sum” and then distributed the proceeds to beneficiaries of the Trust.
Millie Erceg is Michael’s mother and was a secondary beneficiary of the Trust. She did not receive a distribution. Millie made an application to the High Court in order to try and find out why she had been ‘left out’. She sought copies of:
- The trust deed;
- Financial statements;
- Agreements for sale of shares;
- Share valuation documentation; and
- Trustee resolutions.
Millie was successful, in part.
The Court stated as a guiding principle, that the trustees must provide such information to Millie that she will need so that she can be properly advised by her lawyer. Such advice would be about whether the trustees had acted in breach of their trustee duties. For that purpose Millie was entitled to a full copy of the trust deed and share valuation documentation. The Trust’s financial statements and resolutions were also provided, however, personal information was removed - this included the identities of individual beneficiaries to whom distributions were made. It is not clear from the Court’s decision whether the agreements for sale of shares were provided.
The reasoning of the Court in Erceg is helpful. The Judge also made some general comments about the nature of the rights of beneficiaries and provided some useful observations about whether a beneficiary could be successful seeking information in other circumstances.
The Judge said that beneficiaries of a discretionary trust (as in Erceg) have the right to have trust property properly managed and hold the trustees to account. It follows that the beneficiaries will need access to trust information so that they can enforce this right. The Court noted access to such information is not necessarily to all trust information. This was contrasted with earlier case law which said beneficiaries had a proprietary right to information and this ‘right’ could only be outweighed by exceptional circumstances.
The Court noted its inherent jurisdiction to supervise the administration of trusts. This means it may decide (where there is a dispute) not only what information must be provided to beneficiaries, but also how such information is given and used.
In Erceg, although Millie was given most of what she asked for, her access to the documents was tightly controlled – she could only view the documents with her legal advisors and she could not take copies for herself or provide the information to anybody else.
In so ruling, the Court highlighted that the Trust had tried to be helpful to Millie before: it had already offered to provide some of the documents requested previously, and Millie already had been given a copy of the trust deed (or portions of it).
The Court observed that Millie was only a secondary beneficiary, not a primary beneficiary. This meant her ability to demand information was perhaps slightly less than, say, a primary beneficiary who had received trust distributions before. In addition, there was evidence Millie had received financial assistance from another trust set up by Michael and Michael’s will.
Out of this factual milieu the Court made some key, practical observations:
- Much depends on the context of the application for release of information. In Erceg there was no question of a breach of trust by the trustees or any evidence of foul play. It appears the Trust was being run properly. Therefore, for what purpose is the information being sought?
- What category of documents are being sought? ‘Core’ trust documents like the trust deed and general information on assets and liabilities should be provided, however financial documents and trustee resolutions might be refused by the court. Then again, this material may all be provided but with personal and commercially sensitive information taken out.
- What is the effect of providing trust information to beneficiaries? Is it so that tabs can be kept on wayward trustees, or might it lead to problems for the trust and family members and create unnecessary litigation? There was evidence in Erceg that refusing Millie information would lead to further court proceedings and family disharmony. The Court however restricted information to Millie alone saying that other family members should not have access.
Erceg provides useful insight into what information a beneficiary might be able to obtain. However it also demonstrates that it is largely context-dependant. This means it can be difficult to give a ‘yes’ or ‘no’ answer to what information could be sourced.
In 2009 the Law Commission undertook a review of trust law and in September 2013 tabled in Parliament a proposal for a new Trusts Act to replace the current legislation. The Commission’s objective is to modernise trust law and make it “clear, consistent and practical”. A new Act is likely to be passed. Unlike the current law, it imposes a “mandatory duty” on trustees to account to the beneficiaries for the trust property. This will mean that trustees will have a clear obligation to respond to beneficiaries’ inquiries for information.
But the proposed new law also sets out a number of circumstances in which information can be withheld. The result inErceg is likely to be consistent with the new law – the beneficiary will not be entitled to all trust information and disclosure will continue to be context-dependent.
What can be taken from the Erceg case is that there is a balance of duties for the trustees to consider.
If you are a beneficiary of a trust and you are concerned about its management then contact the trustees and voice your concerns. If necessary a formal application can be made to the court.
As for trustees, Erceg might serve as a prompt to reconsider how they administer the trust and work with the beneficiaries. We suggest it is important to engage with beneficiaries. There may be good reason not to disclose certain trust information. Don’t be afraid to ask for information to be treated confidently. There might be a way to disclose the information which answers a beneficiary’s questions, but at the same time protects the interests of other beneficiaries.