Discretionary trusts: Can beneficiaries challenge trustee decisions? A cautionary tale for the Harcourt family

The role of a discretionary trustee carries significant responsibilities. Trustees must exercise their discretion properly, take into account relevant considerations, disregard irrelevant factors, and act in good faith for the benefit of the beneficiaries. While these principles are well established, applying them in practice can be far from straightforward, particularly where family dynamics, competing beneficiary interests, or complex factual circumstances are involved. The case discussed below provides a useful illustration of the difficulties trustees can face and the standards expected of them by the courts.

Our private wealth articles follow a fictional couple, Richard and Eleanor Harcourt, and their family. In 2014, Richard and Eleanor Harcourt gifted a parcel of farmland with development potential into the Harcourt Family Discretionary Settlement. The structure was intended for long‑term wealth preservation. Richard and Eleanor appointed their daughter Clara and their son James as trustees, with a wide class of beneficiaries including the settlors’ children, grandchildren and future descendants.

Richard and Eleanor prepared a non‑binding Letter of Wishes expressing a preference that, if the land were sold, the proceeds should be applied towards the grandchildren’s education, while acknowledging that all decisions remained for the trustees. As settlors, Richard and Eleanor retained no control over the asset once gifted to the Trust.

A dispute has now arisen. Clara and James propose to sell the land and use the proceeds to invest in their respective business ventures. Oliver, a beneficiary, opposes an immediate sale. He considers that the land’s proximity to a Local Plan allocation means its value is likely to increase significantly and questions both the commercial and tax rationale of selling now.

Trustees' duties

With a discretionary trust, no beneficiary has a fixed entitlement to trust assets. However, trustees must exercise their powers properly. Their duties include:

• act in the best interests of the beneficiaries as a whole;
• consider relevant matters and disregard irrelevant ones;
• avoid fettering their discretion; and
• manage conflicts of interest with particular care.

The present difficulty is sharpened because Clara and James are trustees, beneficiaries, and parents of beneficiaries who stand to benefit. This does not invalidate their role, but it engages the strict equitable principle that a trustee must not allow their personal interests to influence their decision.

Trustee decision making

It is common in family trust arrangements for trustees to make decisions which benefit members of the family. However, this does not diminish the obligation to consider the interests of the beneficiary class as a whole. Trustees should adopt a structured and well‑documented decision‑making process to demonstrate that their discretion has been exercised properly.

As a general principle, the court will not interfere with the exercise of a discretionary dispositive power where the trustees have acted honestly and in good faith.

In Re Hay’s Settlement Trusts [1982], the court outlined a helpful framework for trustee decision‑making. To minimise the risk of challenge, trustees should:

1. keep under periodic review whether their dispositive powers ought to be exercised;
2. consider the range of potential beneficiaries and the different forms of distribution available; and
3. assess the suitability of any proposed distribution on its own facts, taking a case‑by‑case approach.

Adherence to this approach will significantly strengthen the defensibility of a decision against challenge by a beneficiary such as Oliver. However, it remains essential that trustees take into account all relevant considerations in reaching their decision.

In Pitt v Holt [2013] UKSC 26, the Supreme Court confirmed that a trustee’s decision may be set aside where relevant considerations (including tax consequences) have been overlooked, or where irrelevant factors have been taken into account.

In practical terms, trustees must be clear about the decision they are required to make, identify the matters properly to be considered, and conscientiously apply their judgment to those matters. Where this process is followed, the resulting decision will amount to a valid exercise of discretion, and will not be overturned merely because someone else may have taken a different view.

How does the law apply to the Harcourt Family Discretionary Settlement?

Clara and James must be able to evidence that they have genuinely considered:

• the current market value of the land and credible projections of future uplift;
• development potential, including planning risk and timing;
• tax consequences (including capital gains tax and inheritance tax);
• liquidity needs across the beneficiary class (including education funding);
• the Letter of Wishes, (whilst not binding, it must be given appropriate weight).

The distinguishing feature is whether relevant factors have been properly weighed. A decision driven primarily by the trustees’ personal financial ambitions would be vulnerable to criticism as an improper exercise of discretion.

The conflict position is particularly sensitive. While Clara and James are not automatically disqualified from benefiting, they must show scrupulous good faith and independence. Failure to manage this conflict could render their decision susceptible to challenge.

Practical steps for Clara and James as trustees

Obtaining independent professional advice is critical. Clara and James should consider obtaining;

• an independent valuation (including development appraisal);
• planning advice;
• detailed tax modelling;
• financial projections of alternative strategies.

This both improves the quality of the decision and highlights compliance with their fiduciary duties.

Where doubt remains, trustees may seek the court’s approval of a “momentous” decision under the jurisdiction in Public Trustee v Cooper [2001] WTLR 901, commonly referred to as obtaining a “blessing”. The court does not substitute its own decision on the merits but will confirm whether the trustees’ proposed course falls within the range of reasonable decisions open to them. While such approval provides significant protection, some uncertainty has been raised following Denaxe Ltd v Cooper [2024] as to the extent to which a blessing is binding on beneficiaries who are unascertained or not before the court.

Oliver’s position

Oliver is a discretionary beneficiary and cannot compel a particular outcome. However, he may challenge the trustees if he can show:

• failure to consider relevant matters (e.g. credible development value);
• reliance on irrelevant or improper factors;
• conflict of interest affecting the decision; or
• absence of good faith.

The court’s role is supervisory, not managerial. If the process is inadequate, the decision may be set aside. In practice, disputes of this nature are often better resolved before litigation. Transparent engagement, supported by professional advice, may reveal a middle ground.

Summary

Discretionary trusts provide flexibility but place heavy responsibility on trustees. The experience of the Harcourt family illustrates how tensions arise when valuable, illiquid assets intersect with divergent family priorities. For Clara and James, the safest course lies in independent advice, transparent reasoning, and, if necessary, court approval. The robustness of their decision-making process, rather than the outcome itself, will determine whether their decision withstands scrutiny. Both trustees and beneficiaries should seek professional advice at an early stage when concerns arise, as addressing issues promptly can help avoid disputes, reduce costs and protect family relationships.