Open access

It may come as a surprise to trustees to learn that not all legal advice they obtain is out of bounds to beneficiaries of the trust.

Typically, a beneficiary will ask for access to privileged legal advice obtained by a trustee in one of two contexts: first, when the beneficiary and the trustee are in dispute; or second, when the beneficiary is seeking to obtain information from the trustee although a dispute has not arisen.

In each of those circumstances, there is real risk that the legal advice sought is not privileged from production to the beneficiary. A number of recent decisions have confirmed that beneficiaries and trustees share a joint privilege in legal advice concerning the management or administration of the trust. The joint privilege arises by virtue of the formal legal relationship between the trustee and beneficiaries, who have a correlative duty and interest, respectively, in the proper administration of the trust. That relationship gives rise to a shared interest in legal advice concerning the management and administration of the trust.

This means beneficiaries will, in many cases, be given access to legal advice provided to a trustee (despite that advice being privileged as against the rest of the world). This can be an unwelcome surprise to many trustees, particularly when the legal advice was obtained to assist the trustee in making a decision that affects the rights or entitlements of the beneficiary who is seeking access to the legal advice.

When a dispute exists

If the beneficiary asking for the legal advice and the trustee are in dispute, a trustee needs to ask itself whether the dispute existed or was contemplated at the time the legal advice was created, such that it can be said that there was actual or contemplated litigation at that time. If the answer to that question is “yes”, the trustee will not normally need to produce the legal advice to the beneficiary. This is because the document will be subject to a valid claim of litigation privilege under s.119 of the Evidence Act 1995 (NSW) (or at common law) and the beneficiary will not have joint privilege in that advice.

On the other hand, if the answer to the question is “no”, the trustee will need to consider a number of other factors:

1. Was the advice given to the trustee in relation to the management or administration of the trust (broadly, the "affairs of the trust")? In the recent decision of Krok, the types of advice said to relate to the management or administration of the trust were:
   (a) advice from senior counsel to the trustee concerning requests made by a beneficiary for "information about the trusts";
   (b) advice to the trustee on “matters which might be said to have a bearing on the available fund or assets in respect of which a discretion might be exercised”; and
   (c)  "advice about the vesting of a trust and the taxation implications of that event".
2. Was the advice given to the trustee in its capacity as trustee of the trust? If the advice relates to the trustee’s personal legal obligations, not as trustee but in some other capacity, it will not be advice given to the trustee in its capacity as trustee of the trust. In determining whether advice is given for the benefit of the trustee personally, the focus is on the relationship between the parties at the time the communications were made.

If a trustee answers yes to both of those questions, then the trustee will need to produce the legal advice to the beneficiary. This is because the beneficiary will have joint privilege in that advice.

When a dispute does not exist

If the trustee and the beneficiary seeking the legal advice are not in dispute, the trustee will only need to ask itself: 

1. Was the advice given to the trustee in relation to the management or administration of the trust (broadly, the "affairs of the trust")?
2. Was the advice given to the trustee in its capacity as trustee of the trust?

The question of whether the dispute existed at the time the legal advice was created will not be relevant. Again, if the trustee answers yes to both of those questions, it will be difficult for the trustee to avoid providing a copy of that legal advice to the beneficiary.

The Courts have recognised that beneficiaries have a separate right to seek access to trust documents which is independent of any right arising in the litigious context (ie pursuant to a subpoena or discovery process). There is, however, a divergence of judicial opinion as to the basis of that right. Some judges have said that the entitlement arises as an incidence of the beneficiary’s proprietary interest in trust property. Others have said that access to trust documents may be granted on a discretionary basis pursuant to the Court’s inherent jurisdiction to supervise and intervene in the administration of trusts and the obligation arises due to the inherent obligation to keep beneficiaries informed.

Advice paid for by the trust - does that matter?

Often, advice relating to the management or administration of the trust will be paid for out of the trust assets, but that factor alone will not determine whether joint privilege subsists in the advice. Some judges have said that the fact that “the trustee felt at liberty to reimburse itself from the trust assets for the cost of the advice “lent support to a conclusion of joint privilege. Yet another judge has said that the question of whether a trustee has properly used trust funds to pay for legal advice is independent of the question of whether the trustee and beneficiaries share joint privilege in that advice.

Importantly, there are circumstances in which legal advice that does not relate to the management or administration of the trust may properly be paid for out of the assets of the trust. For example, the relevant advice in Gray was initially paid for by the trustee personally, but was subsequently the subject of an order that it be paid for out of the assets of the trust following unsuccessful litigation brought by the beneficiary. The later costs order did not give the beneficiary a joint privilege in the advice. An analogous situation may arise where a trustee obtains judicial advice pursuant to section 63 of the Trustee Act 1925 (NSW) that it is entitled to use the assets of the trust to defend proceedings brought against it by a beneficiary. That order would be highly unlikely to give the plaintiff beneficiary a joint interest in privileged communications relating to the proceedings.

Tips for Trustees

The "take away" for trustees is that legal advice should be sought with an eye to the possibility that beneficiaries may ultimately obtain access to that advice. What does this mean for trustees in practice? A few things:

1. When obtaining legal advice, a trustee should think about why they are obtaining the advice. Where possible, set out this purpose in writing at the time of seeking the advice.
2. If the legal advice is provided in relation to actual or contemplated litigation, the advice should say so expressly.
3. If the legal advice is provided to the trustee in a capacity other than as trustee of the fund, the advice should say so. In those circumstances, the trustee may wish to seek advice pursuant to a separate retainer that is not paid for out of the assets of the trust and/or from a different law firm than the one which provides regular advice in relation to the management or administration of the trust.
4. If a trustee is really in doubt about whether it can maintain privilege against certain legal advice, it should give careful consideration to making an application for judicial advice pursuant to section 63 of the Trustee Act 1925 (NSW). If the trustee obtains that judicial advice, and acts in accordance with it, it will be deemed to have acted in accordance with its duty as trustee in the subject matter of the application, and will be protected from any future claim by a beneficiary in that regard.

This article was first published in Superfunds, September 2012.