Last month, we hosted a round-table discussion on the use of trusts and what happens when disputes arise.
Nadine Walton explored the options available to trustees looking to vary the terms of a trust governed by the law of England & Wales. Here she summarises the headline points covered on the day.
Why might there be a need to vary a trust?
Generally speaking, there may be two overarching reasons why it becomes necessary to vary a trust.
1. To achieve administrative efficiency.
The trustees may lack a specific power which they need to undertake a transaction, for example.
2. To change the interests of the beneficiaries.
This may be because there is a need to terminate the interest of a particular beneficiary, give a beneficiary access to capital 'early', or create new trusts over the assets.
What are the options?
The trustees must have authority to vary the trust, or they risk breaching their duties.
There are a number of 'sources' from which the trustees can obtain authority to vary. These can be summarised as follows:-
1. The trust deed;
3. The beneficiaries; and
4. The court.
Using the trust deed
By far the easiest source upon which a trustee can rely to vary a trust is the trust instrument itself.
This brings in to focus the need for the settlor to receive thorough advice at the point of creating the trust (or his/her will). The solicitor acting for the settlor should ensure that every power the trustees may need to rely upon in the future is incorporated into the trust document, having carefully considered with the settlor the purpose that the trust is to serve, the circumstances and likely needs of the beneficiaries, and the types of assets the trustees may hold.
If the trust deed is well drafted, it may never be necessary to rely on the other options noted below to ensure a variation can be undertaken. The importance of the initial advice and drafting for the settlor and his/her future trustees cannot therefore be understated. Initial effort in this area is likely to ensure the job of the trustees in managing the trust fund and meeting the needs of beneficiaries is made significantly easier, and less costly, during the lifetime of the trust.
If the trust deed does not grant a specific power to trustees, it may still be possible to rely on statutory powers to vary the trust. These statutory provisions can also help in cases where a settlor has not voluntarily created a trust, but it has arisen by operation of law. This may happen, for example, if the testator dies without a will, leaving minor children.
A key power that can often be useful is that known as the power of 'advancement'. In basic terms, this gives trustees the power to 'advance' trust funds to beneficiaries who have an interest in capital, before they are strictly due to receive this.
This power can assist in cases where there may be tax disadvantages of leaving the funds in trust until a beneficiary attains a certain age, and the individual in question has a clear and immediate need for financial assistance. However, there can be various limitations to using the power. Any individuals with a 'prior interest' in the trust fund must consent to the advancement. This can cause particular issues in cases of second (or subsequent) marriages, where the surviving spouse is left a 'life interest', with the assets passing to the children of an earlier marriage when the spouse's life interest comes to an end. It is not difficult to imagine that obtaining consent for distributions the children require in this instance may prove difficult, if the statutory advancement power is left unamended.
Consent of the beneficiaries
Where, taken together, all of the beneficiaries are of full age, have mental capacity, and are entitled to the trust fund, they can agree that the trust fund should be 'divided' in a particular way. This may extend to 'resettling' the trust on new terms. The trustees are bound to follow such a unanimous direction of the beneficiaries.
It is rare that this will present a viable option to vary the trust. It is most likely to be of use only in cases of fixed interest trusts where there are a small number of adult beneficiaries, who can see eye to eye.
Where discretionary trusts are concerned, the class of beneficiaries will likely include minors, and possibly unborn parties. In such cases, achieving agreement as to division of the trust assets is practically impossible.
In cases where none of the above options are viable ones, it is possible for trustees to apply the court to approve a variation to a trust.
The power the court holds to vary in specific circumstances can be found in a range of sources, including both statute and common law. Two of the most relevant statutory provisions to note here are as follows:-
(i) S.57 Trustee Act 1925. This permits a court to grant a particular administrative power to trustees to where it considers this is necessary to manage the trust fund.
(ii) S.1 Variation of Trusts Act 1958. This permits a court to approve a variation to the beneficial terms of a trust on behalf of party who cannot consent to it. The court will however obviously have regard to whether the change proposed will be of genuine benefit to that party.
There are a number of options which trustees can consider when contemplating a variation to a trust.
The most desirable option is to rely upon an express, bespoke power set out within the trust instrument itself. There may however be reasons this is simply not possible.
Regardless of the circumstances of the proposed variation, the trustees should take early advice on the best option to pursue, and ensure they understand the legal and taxation consequences of this.
Trustees are subject to extremely onerous duties. Any attempt to vary the terms of a trust without proper 'authority' could risk breaching these obligations.