In a discretionary trust, the trustees are given complete discretion concerning distributions of income or capital. The trustees may have the discretion to choose the timing of the distributions, as well as the recipients, amounts, and conditions of the distributions. The trustees may also have the discretion to exclude any one or more of the beneficiaries from distributions. Ultimately, while the beneficiaries of a discretionary trust are entitled to be considered for distributions, they are not guaranteed a distribution.
Trustees consider various information when exercising their discretion. Often, they rely on legal advice and opinions. To what extent are trustees required to disclose such information to the beneficiaries?
Generally, a trustee cannot claim solicitor-client privilege as against a beneficiary over any documents related to advice sought and obtained with respect to the administration of the trust. A trustee and a beneficiary have a joint interest in the administration of the trust, and legal advice sought by the trustee furthers the interests of the beneficiary.[1] This is known as the “joint interest” rule.
The joint interest rule is not absolute. In Londonderry’s Settlement, Re [1965] Ch. 918 (Eng. C.A.) (“Londonderry”), the trustees exercised their discretion to distribute capital among a class of beneficiaries. One of the beneficiaries objected to the amount the trustees proposed to distribute to her. She demanded production of the agenda and minutes of the trustees’ meetings, correspondence between the trustees, and correspondence between the trustees and the beneficiaries. The trustees declined to produce this information on the basis that it would serve no benefit and cause family friction among the beneficiaries.
At first instance, the trustees were ordered to disclose the information requested by the beneficiary. However, on appeal, it was held that the trustees were not obliged to disclose the reasons for exercising their discretion. In other words, the trustees did not have to disclose the agenda, minutes, or their communications between themselves and with the beneficiaries. The Court noted that trustees cannot properly carry out their confidential role if they may be subject to an investigation any time they exercise their discretion (though the case would have been different if the trustees had acted in bad faith).
In Ontario (Attorney-General) v Ballard Estate, 1994 CanLII 7513 (ON SC), Justice Lederman referred to Londonderry as a case “where it was more important to preserve the confidentiality of deliberations with respect to the trustees’ exercise of discretion in deciding which beneficiaries were to take.” However, Justice Lederman went on to say that the “matter is by no means static and the balancing of interests may well call for a different result depending on the circumstances.”[2]
A different result was reached in Whitell v Whitell, 2023 ONSC 3210, where the estate trustee tried to use Londonderry to resist disclosure of the estate lawyer’s file. The trustee argued that because the trust was discretionary, disclosing the file would intrude on his ability to “exercise his discretion in this confidential role.” The Court dismissed the trustee’s argument because the trustee had admitted on cross-examination that the trust was for the benefit and welfare of only one beneficiary. There were no other beneficiaries of the trust for the trustee to consider.[3]
Ultimately, whether a beneficiary is entitled to information relating to the trustee’s exercise of discretion depends on the facts and circumstances. Where it is important to preserve the confidentiality of the trustee’s deliberations – for example, where disclosure may cause family friction among the beneficiaries – the beneficiary may not be entitled to disclosure. However, where the beneficiary alleges a lack of good faith by the trustee or is otherwise in an adversarial relationship with the trustee, the beneficiary may be entitled to disclosure.
For more information about discretionary trusts, please read Joanna Lindenberg’s blog, “Discretionary Trusts.”
[1] Whitell v Whitell, 2020 ONSC 2310 (CanLII), at para. 19 (“Whitell”).
[2] Ontario (Attorney-General) v Ballard Estate, 1994 CanLII 7513 (ON SC), at para. 11.
