Trustees be warned - think before you exclude!
The power to exclude a beneficiary from a trust must be exercised with due care failing which an excluded beneficiary may be able to obtain relief from the court.
Where the power to exclude is vested in a trustee, its exercise is subject to the same standard of care as the exercise of other powers and it must not, for example, be exercised capriciously or unreasonably.
The Trustee (Amendment) Act, 2021 will introduce section 59A which codifies the common law right to challenge a trustee’s breach of fiduciary duty and will specifically deal with the exclusion of beneficiaries from trusts where such exclusion was flawed. Under section 59A, with the leave of the court, an excluded beneficiary can apply to set aside a trustee’s decision to exclude him from the trust provided that certain conditions are satisfied.
To obtain section 59A relief, an excluded beneficiary will need to satisfy the court that:
- In the exercise of the power to exclude, the trustee did not take into account relevant considerations or took into account irrelevant considerations
- But for the failure to take into account relevant considerations or his having taken into account irrelevant considerations, the trustee:
- Would not have exercised the power
- Would have exercised the power, but on a different occasion to that on which it was exercised
- Would have exercised the power, but in a different manner to that in which it was exercised
In the matter of the representation of the Grundy Trust, the Jersey court in applying a similar provision of the Trusts (Jersey) Law, held that, on an application by two excluded beneficiaries, it had the power to, and did, vary an exclusion from a trust where the trustee failed to take into account relevant considerations and took into account irrelevant considerations. The court found that had the trustee exercised his discretion with the due care that was expected, the trustee would not have exercised the power of exclusion at all or would not have exercised it in the way it did.
Section 59A is not yet in force but is expected to enter into force shortly. It will provide an additional avenue by which excluded beneficiaries can challenge trustees’ decisions to exclude them.