The rights of beneficiaries to trust documents have been a regular question before the Courts for many years. A new judgment from the Court of Appeal, Erceg v Erceg  NZCA 7, provides trustees with guidance when asked for copies of trust documents.
Court confirms no automatic entitlement to documents – disclosure is a discretionary decision
The Court of Appeal upheld the High Court's decision and confirmed the established line of authority that:
What a trustee should consider when deciding whether to disclose
The Court of Appeal said that in deciding whether or not to disclose trust documents to beneficiaries, trustees should consider:
- issues of personal or commercial confidentiality;
- the nature of the interests held by the beneficiary seeking disclosure;
- the competing interests (and the impact thereon) of the beneficiary seeking disclosure, other beneficiaries, the trustees, and any affected third parties;
- whether the documents can be withheld in full, or disclosed in a redacted form;
- whether safeguards (such as undertakings or inspection by professionals) should be imposed on the use of the disclosed trust documents;
- whether (in the case of family trusts) disclosure is likely to create or exacerbate disputes within the family, or affect the relationship between the trustee and the beneficiary seeking disclosure, to the detriment of the beneficiaries as a whole; and
- the nature and context of the application for disclosure (for example, where there are concerns about a breach of trust).
The weight of each of these factors, when balanced against each other, will be a matter for the trustees to determine. The Court of Appeal confirmed that:
In the Erceg case, the Court of Appeal noted that the trusts were set up on the basis that they would be administered in confidence, and that the settlor did not want the beneficiaries to have information regarding the trusts. This was held to have "considerable significance" for the final decision not to order disclosure in this case, particularly in light of the fact that the likelihood of a distribution to Mr Erceg when the trust was wound up was "remote" given that he was bankrupt.
First question – is this a request for trust documents?
The first question a trustee should determine is whether or not the documents requested are trust documents. A beneficiary is not entitled to documents which are not "trust documents", and belong to a settlor or trustee in a different capacity.
Exactly what constitutes a trust document is still not settled law, and wasn't a matter to be decided in this case. However, the Court of Appeal noted that trust documents do include "any document recording wishes or instructions conveyed by the settlor to the trustees – any so-called 'wish-list'."
What if the beneficiary is bankrupt?
The Court of Appeal decided that Mr Erceg had standing to ask for disclosure of trust documents, even though he was an undischarged bankrupt. Although any distribution by the trust intended for Mr Erceg may have been claimable by the Official Assignee, that did not alter his status as a beneficiary of the trust.
The Court of Appeal confirmed that "having beneficiary status is not itself property, even if some of the rights that come with that status are", and that since it was not property, the status had not vested in the Official Assignee.
This means that a bankrupt is entitled to request disclosure of trust documents.
Appointment of independent person
If an application for disclosure is made to the Court, the Court can order or refuse disclosure of documents on a discretionary basis. In Erceg, the application for disclosure was refused. The Court of Appeal went on to say that if it had been minded to allow disclosure it would have done this via an "independent person" who would provide a report back to the Court.
A trustee faced with a request for disclosure from a beneficiary may want to consider whether this approach could be used without requiring recourse to the courts. This may be appropriate where there are matters of commercial or family sensitivity and is likely to be both a useful cost saving measure, or a good defensive strategy to an application by a disgruntled beneficiary. It may also be a sensible position for a beneficiary to take if faced with repeated refusals by trustees for information.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.