What is Absolute Entitlement?
There are a number of key phrases in trust law that, while frequently used, are seldom defined. Absolute entitlement is one such phrase. The concept of absolute entitlement is important as it affects the workings of a trust, and can determine the way in which funds are disbursed.
Furthermore, there is a reciprocal relationship between absolute entitlement and the nature of individual trusts; each is determined by the other, such that the existence of absolute entitlement may alter the nature of a trust but, conversely, the nature of a trust may also determine whether or not absolute entitlement applies.
EntitlementIn legal terms, ‘entitlement’ implies a guaranteed right of access. In trust law, entitlement is granted by way of the trust agreement; the terms of the trust determine who is entitled to derive benefit from the assets held in trust. An individual is deemed to hold an entitlement if they are guaranteed access to this benefit. For example, where a beneficiary is identified in a trust instrument they are deemed to be entitled; they have a right to demand benefit from the assets.
The concept of absolute entitlement is more complex and less broad, but rests on one key principle. Essentially, in order to be deemed ‘absolutely entitled’, an individual must have sole and exclusive right to instruct trustees with regard to the management of assets held in trust. Clearly, therefore, not all trust types allow for absolute entitlement; there is no beneficiary with absolute entitlement in a discretionary trust, for example, as no individual has the power to demand benefit from the assets. Rather, the trustees have the right to determine who benefits and what percentage of the assets they are entitled to.
Trustee EntitlementHowever, the entitlement of trustees to portions of the assets does not necessarily mean that absolute entitlement cannot exist on the part of a beneficiary. Where absolute entitlement would otherwise exist, but the trustees are entitled to some of the assets in order to recompense themselves for costs incurred through the management of the trust, these costs are disregarded.
Management costs are generally taken from the assets held in trust, but this does not necessarily mitigate the principle of absolute entitlement of the beneficiaries. Rather, it could be said that absolute entitlement is considered after any financial liabilities incurred by the trustees have been settled. Further elucidation of this principle is available in HMRC guidance CG37301.
Absolute entitlement may also be affected by the number of beneficiaries, whether potential or actual. If there is the potential for other individuals to benefit from the trust in the future, and these individuals will have a distinct and different interest in the assets to those of the existing beneficiaries, then absolute entitlement cannot be said to exist. On the other hand, the existence of more than one beneficiary does not necessarily mean that each of these beneficiaries is not absolutely entitled; if all of the existing beneficiaries hold a similar interest in the trust then they are all deemed to be jointly absolutely entitled.