Being a trustee of any type of trust (and there are many!) is a serious responsibility. Whilst the word “discretion” might suggest freedom to make decisions, trustees are bound by a framework of legal duties, designed to protect beneficiaries and ensure the trust is managed fairly and prudently.
What is a Discretionary Trust?
A discretionary trust usually gives trustees the power to decide which beneficiary receives funds, and how much. Also, trustees can decide when the beneficiary will receive it.
There is often a Letter of Wishes that accompanies a discretionary trust, which sets out how the trustees should use their discretion. However, as it is only a “wish”, the trustees are not under an obligation to follow it religiously, albeit they often do.
Key Duties of a Trustee
Trustees must act in accordance with the terms of the trust and general legal principles. A key duty is to act in the best interests of all of the beneficiaries. This means that you cannot favour one beneficiary over another unless the trust instrument explicitly says otherwise. Additionally, you should avoid any conflict of interest and should not personally gain from the trust, for example, purchasing trust property at an undervalue.
Further duties are to keep records of trustee meetings and to keep accounts. Trustees must also comply with all legal, regulatory and compliance duties, including registering the trust at the Trust Registration Service.
Making Decisions
As detailed above, whilst trustees can use a Letter of Wishes to guide them, it is only one factor when making decisions. They must also:
- consider all relevant information;
- not consider irrelevant information;
- act rationally; and
- consider all potential beneficiaries.
Whilst trustees are not obliged to disclose how they came to a decision, they should keep a note in the event the decision is challenged by a beneficiary.
Whether you are a trustee and need advice as to your duties and obligations, or a beneficiary who considers that the trustees are failing in their duties, please do not hesitate to contact one of our team members, who will be happy to assist you.