Absolute Discretion - the right to be unreasonable?

10 November 2016

Many modern trusts are fully discretionary.

The trustees might be empowered to apply the trust assets  “... for such one or more of the beneficiaries, in such shares, at such ages, and on such trusts as my trustees shall, in their absolute and uncontrolled discretion, decide."

Does 'absolute' mean just that: total, unfettered, without challenge by disappointed  beneficiaries, even if the trustees’ decision is blatantly unfair and unreasonable?

Trusteeship is a 'fiduciary' role; regardless of the unfettered discretion contained in the trust and any perverse wishes of the settlor/testator, the trustees must act in 'good faith'.

Decisions of the English Courts over the last couple of centuries are strangely silent on the meaning of good faith. The Courts have an inherent jurisdiction to oversee the actions of trustees, so trustee discretion can never be properly described as 'uncontrolled'. Nevertheless, Judges have shown  reluctance to impose their own views on the actions of trustees specifically entrusted and empowered to make the decision as to how a trust fund should be divided.

It’s clear that the trustees aren’t required to treat all potential beneficiaries equally;  they can decide that certain potential beneficiaries receive nothing at all from the trust fund. And  they can benefit one of their own number if they’re a named beneficiary. While  there’s been judicial discussion of the need to weigh up the conflicting needs and interests of the various beneficiaries, it's yet to be determined whether such duty of 'good faith' must necessarily produce a result that, in any given circumstance, and by any appropriate measure, would be considered 'reasonable'.

The Jersey Courts have grappled with the issue. In the case of Re C Trust (2012), the Court felt it had authority to set aside a decision that 'no reasonable trustee' would have made. And in California, the Probate Code requires trustee  discretion to be 'exercised reasonably'.

Splitting hairs, perhaps, but my own take  on  the current law is that a trustee's decision must be properly 'reasoned', even if the end result might not be what most would consider 'reasonable'.

The  wishes of  the person creating the trust ('settlor' if it’s a lifetime trust; 'testator' if it’s a will trust) will carry much weight in the trustees’ decision making process. But those wishes need to be balanced against the true needs and merits of individual beneficiaries, especially if the expressed wishes might, perhaps, be described as 'perverse' or contrary to public policy.

While testamentary freedom is an oft cited tenet of English Law, the Inheritance (Provision for Family and Dependents) Act 1975 gives a right to dependents to claim a share, or larger share, of an estate where the testator hasn’t made reasonable provision for them.

1975 Act aside, a  testator’s right to be unreasonable is preserved. But while a testator may be allowed to act in bad faith, a trustee is not. So testators relying on like-minded trustees to fulfil their unreasonable wishes after their death might see those wishes frustrated. In my view, it’s only a matter of time before the Courts formally pin their 'trustee must exercise discretion reasonably' colours to the mast.

Further information

If you have any questions on any of the issues discussed in this blog, please contact Jim Sawer or a member of our private client team.

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