A trust is a legal relationship created (in lifetime, or on death) by a settlor when assets are placed under the control of a trustee for the benefit of a beneficiary, or for a specified purpose.
A trust has the following characteristics:
- The trust assets constitute a separate fund and are not a part of the trustee’s own estate.
- Legal title to the trust assets stands in the name of the trustee, or in the name of another person on behalf of the trustee.
- The trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed on him by law.
- The reservation by the settlor of certain rights and powers, and the fact that the trustee may himself be a beneficiary, are not necessarily inconsistent with the existence of a trust.
Trust disputes can relate to the administration or validity of a trust and arise for a number of reasons, such as:
- Applications for removal of trustees
- Applications for trust documents and/or accounts
- The trust is a ‘sham’
- Mismanagement of the trust/trust assets
- Disputes between trustees and/or beneficiaries
- Claims against the trust
Applications for removal of trustees
The roles, duties and powers of a Trustee are usually set out in the trust document (deed). There is also legislation and case law that sets out what their roles, duties and powers are.
When one or more beneficiaries are unhappy with the way in which a trust is being administered, they may seek the removal of a trustee. When agreement cannot be reached then there a number of grounds upon which the court may step in and remove a trustee.
There are some grounds which would automatically allow removal, such as the death of a trustee or an inability to act (e.g. due to medical reasons or living abroad). There are other grounds which will require the court to decide whether their actions mean they should be removed, such as:
- Disagreement between the beneficiaries and trustee(s)
- Failing to act in the best interest of the trust
- Being unfit to act (such as being declared bankrupt)
- Breaching their duties to the trust or the beneficiaries
- Mismanagement of trust assets
- Any other reason which calls the trustee’s suitability into question
Applications for trust documents and/or accounts
There is certain information a trustee is under a duty to provide to the benficiaries of a Trust. If no duty exists, it is up to the beneficiary to request this information. A trustee is under a duty to inform a beneficiary that the trust exists and the nature of their interest.
If a beneficiary requires further information, or wants copies of any trust documents or accounts, it is up to them to seek those from the trustees.
There is no automatic right for a beneficiary to be provided with a copy (or sight of) the trust document (deed).
A beneficiary’s rights to information are based on the fiduciary duty of the trustees to keep the beneficiaries informed and to provide accounts.
Beneficiaries are not entitled to disclosure as of right, but have a legitimate expectation of disclosure.
A beneficiary needs to prove that their prospect of benefiting under the trust is sufficient to warrant the disclosure of information they are requesting.
Trustees should note that beneficiaries do not have to prove that there is a “real suspicion “, but rather the Court will decide whether it is proper for them to interfere. Additionally, trustees are reminded that the Court may not view it positively if disclosures are only made begrudgingly and upon the imminent threat of legal action.
From the perspective of beneficiaries, they must ensure that document requests are framed properly and not overly wide or seeking information (as opposed to documents).
It is possible for a beneficiary of a trust to make an application for an inventory and account which requires the trustee to provide an account (list) of all assets in the trust as well as an account of their dealings with those assets and their actions.
A sham is in essence a pretence; it is a transaction which in legal reality is one thing but is dressed up to pretend to be something else.
A sham trust is therefore a trust that been set up where the settlor wants the benefits of a valid trust (such as protection from creditors, protection from marital claims, freedom from forced heirship, and so on) but does not want to give up the benefits of absolute ownership. The settlor therefore disguises their retained ownership in the form of a trust.
If the court considers a trust is a sham, it will be void and any property within the trust will be available to claimants against the settlor.