Rights Of A Discretionary Beneficiary And Liabilities Of The Trustee

The rights of a beneficiary under a discretionary trust are

more difficult to identify than those of a beneficiary with a

fixed interest. A beneficiary of a fixed interest trust,

whether life tenant or remainderman, has an equitable interest

in the assets held in trust. As equitable owner, he has

personal rights, enforceable against the trustee as the legal

owner, to ensure that the trusts imposed by the trust

instrument are carried out.

NO PROPRIETARY INTEREST IN THE TRUST

FUND

Dating back to the decision in the English case of

Gartside v IRC [1968] AC 553, it has been widely

recognised that a discretionary beneficiary has no such

proprietary interest in the assets comprising the trust fund.

Whether the trustee is required to distribute all trust income

among the class of beneficiaries (an "exhaustive"

trust) or has a power to accumulate (a

"non-exhaustive" trust), no individual beneficiary

has an entitlement to any quantifiable share; all he has is a

"mere hope" that the trustee will exercise its

discretionary power to make a distribution in his favour. This

concept of a "mere hope" was echoed more recently in

England in Armitage v Nurse [1998] Ch241 and in New

Zealand in Hunt v Muollo [2003] 2 NZLR 322.

In Gartside it was argued, unsuccessfully, that

taken together the class of discretionary beneficiaries was

effectively the owner of the trust assets. It was held that no

such right to ownership could exist unless it is held jointly

or in common - in contrast to the separate and competing rights

of the discretionary beneficiaries. However, it is worth noting

that in the case of an exhaustive discretionary trust if all

the potential beneficiaries of a discretionary trust are of

full age and capacity, they may call for the trustee to

transfer the assets to them and terminate the trust (Re

Smith [1928] CH 915; Re Nelson [1928] Ch 920 a

development of the principle set out in Saunders v

Vautier (1841) 4 Beav 115).

FIDUCIARY RELATIONSHIP

The absence of a proprietary interest does not remove all

rights from the discretionary beneficiary, nor all duties from

the trustee. A fiduciary relationship exists as between the two

of them and the trustee will be obliged to perform the trusts

honestly and in good faith for the benefit of the beneficiaries

and ensure the proper exercise of its discretion. This duty was

considered in Re Hay's Settlement Trusts [1981] 3

All ER 786 and held to be an active process involving the

trustee periodically considering whether or not to exercise its

power in an informed way, considering the range of possible

beneficiaries and the appropriateness of each individual

disposition (also discussed in Re Manisty's

Settlement [1974] 1 Ch 17).

In Re Locker's Settlement [1977] 1 WLR 1323,

the trustees of an exhaustive discretionary trust had power to

pay income for charitable purposes or among a class of

beneficiaries as it saw fit. The trustee had failed to pay out

the income over a number of years. It was held that it was the

duty of the trustee to pay over income within a reasonable time

and that if the trustee failed in this duty, the court would

enforce it either by appointing new...