Ch8 Overriding the Trust Instrument Flashcards
The terms of the trust instrument can be overridden or varied in four ways:
- The trust can be terminated before its full implementation under the terms of the trust instrument (important- tax issue - 21 yr deemed disposition)
- The trust can be terminated before its full implementation under the rule of Saudders v Vautier
- Termination or variation w court approval under variation of trusts legislation
- A charitable purpose trust can be varied by a court ordered administrative or cy prés scheme
(i) give an example of how a trust can terminate when it has been fully implemented
??● Run its natural course - termination when trustee has carried out the terms of the trust leaving no further obligations on the trustee – e.g., life interest followed by remainder, life interest person dies and distribution has been made to remainder person
(ii) describe two ways in which a trust can be terminated before its full implementation under the terms of the trust instrument
Termination Under the Terms of the Trust Instrument
● The trust may be terminated under the terms of the trust instrument. For instance, the trust instrument might provide, for instance, that the beneficiaries of the trust can terminate the trust by majority vote. Many of the currently popular income trusts do this.
● Ex of ways to terminate:
○ in B.C. use of 80 year period from date of creation per s. 7 of the Perpetuity Act
■ shorter period often provided for because of the Income Tax Act
○ income trusts allowed termination by majority vote of beneficiaries
● Terms of the trust can be overriden before its full implementation through a power of revocation. This is where the settlor revokes the trust and the trust property is returned to the settlor
○ If the settlor wants to be able to revoke the trust, the right to do so must be expressly reserved in the trust instrument.
○ It is a rare power to reserve a right of revocation for tax reasons. The right of revocation results in the income of the property being taxed in the hands of the settlor.
Be able to:
(i) Describe a right of revocation.
(ii) Indicate how a right of revocation must be reserved to be effective.
(iii) Explain why it is used infrequently in Canada.
Revocation
● A power of revocation allows the settlor to revoke or bring an end to the trust and have trust property returned to the settlor
● Settlor could then retain property or subject it to new trusts
● Right to revoke is not automatic - it must be expressly reserved
● Rarely used because under ITA s75(2) income on trust property will be attributed to settlor who retains a right of revocation (ie settlor must pay tax on income of trust even tho settlor no longer gets income from it)
Be able to articulate the rule in Saunders v Vautier
Termination under Saunders v Vautier
● “one or more beneficiaries, all of full legal capacity, and who is, or are collectively, entitled to all the beneficial interest in the trust may apply to have the trust terminated and the assets transferred even though the trust instrument calls for final payment to be delayed”
○ Bens must be of legal capacity
○ Bens must collectively have ALL equitable interest in the trust property
○ Bens must unanimously agree to terminate trust
○ Similar articulation of rule as stated in english trusts treatise adopted by SCC in Buschau v Rogers
The rule has three key elements:
1) the beneficiaries must have full legal capacity. Adult and of sound mind in the sense of having an ability to appreciate the nature and effect of winding up the trust and the terms on which the trust is being wound up
● and is entitled to the beneficial interest in the property
● rule can also apply where there are several beneficiaries of sound mind with concurrent interests
● successive interests: may combine to require the trust to be terminated
● the rule can also apply where distribution of all or some part of the trust property is postponed to a future date.
● May apply where the trustees have been given discretion as to distribution of income or capital, where there is a class of beneficiaries and the trustee has been given discretion.
2) Together, the persons have to have the full beneficial interest in the trust property. If persons have contingent interests they too must agree to the winding of the trust.
3) All the beneficiaries agree to the winding up of the trust (and persons w contingent interests too)
→ rule can frustrate intent of settlor (ie spendthrift or accumulation to certain age), so important to spot potential applications of it and take steps to prevent its operation if that would frustrate objectives of the settlor/client. On the other hand it is an easier way than variation of trusts legislation to terminate a trust (simpler, less uncertain) which is useful if tax leg changes.
Saunders v Vautier
Vautier’s uncle left him with East India stock in trust. The dividends were to be retained and accumulated until V reached 25 then they were to go to V. V wanted it earlier and the court allowed it, finding there was no contingent interest.
The broader statement of the rule was accepted by the SCC which allows for more than one beneficiary where all the beneficiaries agree to the termination of the trust.
The rule serves a useful purpose where there are relatively few beneficiaries and the trust is not longer serving its interest because the fees for the trustees are outstripping the returns, or net fee returns significantly lower than bens could receive on their own, or investment of funds leaves portfolio risk while bens await distribution (ie why not distribute now). Sometimes changes in tax law may make a once sensibly tax-planned trust no longer sensible.
In theory, the rule can operate without an application to court but in practice an application is made. Either the beneficiaries and trustees could apply to the court for the terminating of the trust on the basis of the rule.
If beneficiaries dont apply trustees should so that court can watch out for contingent interests (ie question of whether all the beneficiaries have agreed). Dont want to be subject to action for breach of trust. Courst supervise application of rule and look out for contingent interests who havent consented.
(i) Spot potential applications of the rule in Saunders v. Vautier as well as situations in which the application of the rule in Saunders v. Vautier is not likely to be available.
Situations in which the Rule may apply
- Single Adult Beneficiary of Sound Mind
● clearly applies to single adult beneficiary – e.g., Saunders v. Vautier amount on trust to a certain age (e.g., 25th birthday)
● Can call for whole amt - Several Adult Beneficiaries of Sound Mind with Concurrent Interests
● can apply to several beneficiaries – e.g., fund invested for four minor children and direction to accumulate until youngest reaches age 25 – when youngest reaches age 19 (age of majority in B.C.) the four children can wind up the trust - Several Adult Beneficiaries of Sound Mind with Successive Interests
● entitlement in succession whether vested or contingent can combine to terminate the trust
● e.g., trust of fund for William for life, remainder to his children Xavier and Yolanda, but if William dies before Xavier and Yolanda reach age 25 direction to accumulate until they reach age 25, and if either of them then dies before reaching age 25 survivor takes, and if both die before 25 then to remainder to Zane – Xavier and Yolanda reach age 19 and everyone still alive then William, Xavier, Yolanda, and Zane can terminate the trust - Postponement to a Future Date
● e.g., testamentary trust with life interest to surviving spouse with remainder to be divided among children five years after death of surviving spouse – potential application of the rule if interpret as remainder interests of children as vested already (but question whether another interpretation is that remainder interests of children are contingent on surviving five years and possible reversion to estate) - Instalment Gifts
● e.g., amount per month to Adam for life and capital to Adam’s estate on his death – Adam can terminate trust if of legal capacity - Discretionary Trusts and Powers
● Discretion as to class of bens - all bens ascertained, full capacity, have collectively all interest even if right to receive pmt depends on discretion can apply if they all agree.
● Discretion of income/capital - e.g., trust of income for education and maintenance of sole beneficiary Candice and power to encroach on capital also for education and maintenance of Candice – education and maintenance determined at discretion of trustee – capital to go to Candice at age 30 or if she dies before age 30 then to her estate – Candice can terminate trust when she reaches age of majority and is otherwise of legal capacity
● e.g., trust for education and maintenance of Candice and David with power to encroach on capital for same purpose with capital to go to Candice and David at age 30 (or to their estates on death) – Candice and David can terminate the trust when they reach age of majority and are of sound mind - Life Interest with General Power of Appointment of the Remainder
● sole beneficiary with life interest only but with general power to appoint remainder in lifetime – then can apply to terminate the trust
● but if life interest with general power to appoint only by will – beneficiary of remainder interest is contingent on exercise of power by life interest beneficiary in her will (if not exercised remainder reverts to estate of settlor) – cases inconsistent here some allowing termination under Saunders v. Vautier and others not
Skill: (ii) Suggest ways in which the rule in Saunders v. Vautier can be avoided.
Avoiding the Application of Saunders v Vautier
● The settlor may want to prevent the beneficiaries from winding up the trust. Two elements allow for the application of the rule to be avoided 1. Contingent interest in a person who will refuse consent - ● e.g., postponement to a certain age then have interest contingent on person not reaching that age – contingent interest could be someone who the settlor knows would not, together with person whose interest is postponed, agree to terminate the trust ● The application of the rule might be avoided by providing for a contingent interest. One may select a contingent beneficiary who would not agree to the termination of the trust and who would not accept any payment form other beneficiaries inducing that contingent beneficiary to agree to the termination of the trust. 2. Interest or Contingent Interest in Minor or Unborn Person - to have a minor, or as yet unborn beneficiary, who do no have legal capacity to consent to winding up the trust under the rule ● instead one could make the person with the contingent interest a minor or unborn person so that the person with the contingent interest could not, together with the person with the postponed interest, agree to terminate the trust ● to better avoid the application of the rule one could create a contingent interest in favour of a minor or unborn person. The rule requires beneficiaries to be adult beneficiaries and thus this would prevent the rule from applying at least until the contingent beneficiary reaches adult hood. 3. Discretion to Distribute Among a Class with Some Members of the Class being Difficult to Ascertain - One can also try and have beneficiaries who will not consent to the termination of the trust or whose consent cannot be obtained because they are difficult to ascertain ● give trustees discretion to distribute among a defined class with members that will be difficult to ascertain or that includes minors or unborn persons or includes a person who would not consent to the winding up of the trust ● Another approach is to give the trustees a discretion to distribute among a class of persons that either includes persons who would be difficult to ascertain, therefore making it difficult to get all the persons with beneficial interests to agree on winding up the trusts, or by making discretion extend to bens, amts, and whether or not to give anything at all in which case amt not paid can be added to a gift over to an unborn/minor ben
Skill: (iii) Suggest ways in which the rule in Saunders v. Vautier can be made to apply.
In theory, the rule can operate without an application to court but in practice an application is made. Either the beneficiaries and trustees could apply to the court for the terminating of the trust on the basis of the rule. If beneficiaries dont apply trustees should so that court can watch out for contingent interests (ie question of whether all the beneficiaries have agreed - dont want to breach trust obligations if some other beneficiary appears and sues you etc)
Competing Views on the Application of Saunders v Vautier
Competing Views on the Application of Saunders v Vautier
● U.S. tends to put more weight on the intentions of the settlor – some U.S. jurisdictions require that the material purposes of the trust be served before a trust can be wound up
● Alberta (1973) and Manitoba (1983) reforms (attempt to go down US path - dont terminate trust till material purpose is served):
○ require approval of court for termination or variation of trust
○ Court would not exercise discretion jsut because wishes of testator would be overriden by rule…
■ Re Johnson changed bc didnt have flagrant disregard for ultimate wishes
■ Knox united church disallowed change because contrary to intent but overruled by CA who said too much emphasis on intent of testatrix which is overcome in every successful application to vary….
○ court not to approve an arrangement to terminate or vary a trust unless “in all the circumstances at the time of the application to the Court the arrangement appears otherwise to be of a justifiable character”
○ application of “justifiable character” test not clear, but it appears from cases, particularly in Manitoba, that the fact that the wishes of the settlor would be overridden by the application of the rule is not enough for the court to exercise its discretion not to apply the rule
(i) Be able to explain what variation of trust legislation (such as the British Columbia Trust and Settlement Variation Act) does and what the probable purpose was for the enactment of such legislation.
Nature and the Purpose of the Legislation
● Even where the rule does not apply the trust terms may still be varied under provincial legislation
● The legislation allows the courts to consent to a variation on behalf of beneficiaries who are not adults, otherwise do not have legal capacity, are unborn, or who have contingent interests and are unascertainable.
● Said to be motivated by tax legislation - trust reasonably drafted from a tax perspective may no longer make sense from a tax perspective when the tax leg changes. Prior to variation of trust leg it wouldn’t have been possible to change if saunders couldn’t be applied.
● Trusts and Settlements Variation Act → allows SC to approved proposed variation/revocation
○ S.1 SC may approve a proposed revocation or variation of a trust if it thinks fit on behalf of particular types of persons described in paragraphs (a) to (d) of the section
○ S.2: court must not give its consent on behalf of persons described in paragraphs (a) through (c) of s. 1 unless it “appears to benefit that persons”
○ S. 3: if a court is being asked to give consent on behalf of an unborn person, a minor, or person otherwise lacking capacity, notice in writing of the application must be given to the Guardian or Trustee
Skill Objective: Be able to assess whether a court will order a variation of a trust under the Trust and Settlement Variation Act with reference to relevant provisions of the statute and relevant case authority.
Persons on whose behalf the court can give Consent (s1)
● (a) Minors or Persons Lacking Legal Capacity:
○ give approval on behalf of persons who are minors or otherwise lack legal capacity and who have an interest in a trust whether vested or contingent (contingent interest is now, not at a future date)
● (b) Persons of Specific Description of Specific Class:
○ the court may consent for a a person who is of a specific description or class, who may become entitled at a future date or on the happening of a future behalf
○ Knocker v Youle - provision does not apply to persons having vested or contingent interests (since “interest” includes vested or contingent interests and since provision refers to “may become entitled” – persons with vested or contingent interests are already entitled). has been suggested that provision may apply to double contingencies
○ Bentall - court gave consent on behalf of 7 of 297 even though they were ascertained, had legal capacity and opposed the proposed variation of a defined benefit pension plan
○ Continental Lime - court gave consent to variation of pension trust opposed by one of 99 beneficiaries even though the one was ascertained, of legal capacity and opposed the variation
○ Buschau - followed Knocker v. Yule and declined to follow the Bentall Corp. and Continental Lime case
○ Law institute has recommended leg should clearly state court will be given discretion to consent on bhealf of ascertainable ben where “substantial majority” approves, where it would be detrimental to trust as whole not to, and where variation would not be detrimental to objecting ascertainable ben of full capscity
● (c) Unborn Persons:
○ court may given consent
● (d) Discretion that can only be Exercised on the Failure or Determination of an Existing Interest
○ paragraph d allows the court to give consent on behalf of a person who may obtain an interest in the trust by reasons of the exercise of a discretionary power given to someone where the discretionary power can only be exercised on the failure or determination of an existing interest that has yet to fail or bet determined.
● The court may not consent for s1 a,b or c unless it appears to be for the benefit of that person (s2). The courts will generally ask whether a “rational person presented with the variation providing such a benefit would consent to it”?
■ Courts look to nature of benefit and ask if rational person would consent. Benefit can be financial or not.
Consider:
Finnell: must be a benefit for every member, not just a group benefit
Kovish: dont have to show each ben would be better off, jsut that the bargain is a reasonable one an adult would be prepared to make
Smith: test is rlly jus twhether a rational adult would approve the proposed variation. Will also consider non financial benefits such as family harmony.
