Obligation of a Beneficiary of a Discretionary Trust
The Obligation of a Beneficiary of a Discretionary Trust to make Disclosure of the Trust's financials in Family Law Matters
In a recent case decided in February 2016, the Full Court of the Family Court of Australia overturned a decision made by a Judge where that Judge found the husband had not provided any information as to his interest in a discretionary trust established by the husband’s father when in fact he should have done so. The judge had ruled that the financials of the trust were in the husband’s “possession and control” because he had the right to request a copy of those documents in his capacity as a beneficiary.
The Full Court of the Family Court disagreed and instead found that a beneficiary of a discretionary trust:
- has no interest in the corpus;
- only has the right to require due administration of the trust; and
- therefore was entitled to have access to the financial documents of the trustees only for the purposes of ascertaining whether there had been due administration and not for any other purpose.
The Court stated,
“The obligation to disclose in family law proceedings is governed by Chapter 13 of the Family Law Rules 2004 (Cth) (“the Rules”). Rule 13.01 of the Rules imposes a general duty to give “full and frank disclosure of all information relevant to the case, in a timely manner”, whilst r 13.07 narrows the scope of the duty to “each document that is or has been in the possession, or under the control of the party disclosing the document; and is relevant to an issue in the case”.
The meaning of “possession and control” has been considered extensively. For a document to be within the power of a party, the party must be in actual possession of it or must have an immediate indefeasible right at the time of discovery to demand possession from the person who has physical possession of it: see Lonrho Ltd v Shell Petroleum Co Ltd (No 1)  1 WLR 627. In Schweitzer & Schweitzer  FamCA 445, O’Reilly J held at  that “possession” as contemplated by r 13.07 “means not mere physical possession (custody) but “possession” within the accepted meaning being “the legal right to possession”: see in B v B, per Dunn J at 805; 807”. Further, her Honour stated at  that a beneficiary of a discretionary trust “has no interest in the corpus, but only the right to require due administration of the trusts, and...is entitled to access to the financial documents of the trustees only for the purpose of ascertaining that there is due administration.” In the present case, therefore, the husband has no access to the financial documents of the trustees beyond that required to ascertain there is due administration. It cannot be said that he has the requisite “control” of the trust deed that would warrant its disclosure.”
The Full Court of the Family Court therefore found that the husband was not in a position to provide the information requested from the wife and that it was open to the wife to issue a subpoena to the trustee of the discretionary trust to produce the documents.
In family law matters it is common for:
- Spouses, who are beneficiaries of trusts to be provided financial statements and tax returns by their advisors; and
- Those spouses to allow their advisors to produce the trust’s financial statements and tax returns to the other spouse if so requested.
In light of the above decision, clients (and their advisors) therefore need to be careful when readily handing over to solicitors or accountants acting for their spouses, financial statements and tax returns of discretionary trusts of which they are only beneficiaries. The principle espoused by the Full Court of the Family Court of Australia above should be carefully considered before this type of financial information is readily disclosed.