Head 22: Variation or termination of private trusts Flashcards
What does variation mean?
‘Variation’ means the varying of the terms of trust
What does termination mean?
‘Termination’ is when a trust comes to an end. The two are connected because a trust may be varied so as to terminate it.
What was the general rule at common law?
At common law if there was a beneficiary of full age and mentally capable who had a vested right, then they could require the trustees to make it over to them (unless the trust purposes require the trustees to maintain it e.g. in liferent the fiar can’t request that he receives the property now - he must wait until the liferenter dies) even if the trust deed postponed payment.
What did the common law branch of law start with?
**Miller’s Trs v Miller 1890
**Miller’s Trs v Miller 1890
⁃ In this axe a large estate vested in the second son of James Miller when he was 25 or married earlier with the trustees consent. He married at 22 with the trustees consent and sued the trustees for the property. The trustees refused to pay the money because payment was postponed to 25. This was thus a bare trust with the speciality that beneficiary could not demand that the trustees denude until a stated time.
⁃ The son went to court and the court held that the trustees must pay since he was the beneficiary of full age, he was mentally capable and the property had vested and was not required for any other trust purposes, therefore the trustees had to pay it to him.
- He was successful. There was no reason for the trustees to withhold, apart from the direction to do so.
⁃ [NB. Lord Young dissented on the basis that it was perfectly reasonable that young people should not get their hands on a vast amount of money but hopefully by the time they reach 25 they will have better sense.]
- So this case allows the partial or complete termination of a trust at the request of a single beneficiary, where that beneficiary is the only person with an interest. This case is only about termination.
- So if a beneficial interest is vested in a given person, and there is no reason for the trustees not to pay or transfer to that person, except for a direction int eh trust deed that they must not do so until that person has reached a specific age, that person can demand that the trustees pay, or transfer to him or her, notwithstanding that the trust deed forbids them to do so. If the beneficiary is the sole beneficiary then the trust is terminated.
*Yuill’s Trs v Thomson 1902
This full court decision confirmed the position in Miller’s Trs.
This means that children can demand payment of money left to them by will aged 16 if the property has vested.
How can you prevent children age 16 claiming payment left to them by will?
If you wish to prevent this then you must delay vesting (i.e. provide that the legacy is not to vest until e.g. 21 or 25). To do this you must think of alternative beneficiaries if the child fails to reach this age.
What is the current law?
⁃ The above is the starting point - but it has been extended by practice. It is extremely hard to find any authority for this extension - it just seems to have happened:
⁃ Now if all the beneficiaries (whether vested or not) are capable they can agree that the trust be terminated or its purposes (or the powers of the trustees) varied
⁃ The requirements are that all the beneficiaries must be:
⁃ 1) in existence
⁃ 2) of full capacity (age and mentally) (no one can consent for them)
[[- 3) There must be unanimous agreement (their wishes, if unanimous, override the terms of the trust deed and the views of the trustees)]]
What are the main bars to termination and variation?
⁃ The main bars to termination or variation or purposes are therefore:
⁃ 1) beneficiaries not yet in existence[ E.g. a family trust with the fee to the children and stating that should any of the children predecease me then their issue are to stand in their place. These ‘issue’ may not be in existence yet and thus no agreement can be made.]
⁃ 2) underage beneficiaries
⁃ 3) alimentary liferent[ This is a liferent given expressly for the recipient’s aliment and declared in the trust deed for the alimentary - this means it cannot be discharged once it’s been accepted.
[This is a way of preventing creditors being able to get at the money - because it can’t be discharged it is non-assignable thus it can’t be used in security of a loan and it can’t be sold.]]
Can trusters give themselves (or a third party) power to vary or revoke the trust?
Yes
What was the position of trusts after WW1?
After WWII taxation became punitive on trusts (and almost everyone - the top rate of tax was 85% or so). There was a huge pressure to allow pre-war trusts to be varied or terminated to make them more tax friendly or just get the money into the hands of the beneficiaries themselves. It took until 1961 for this to be done
What did the Trusts (S) Act 1961 change?
Under s 1 Trusts (S) Act 1961 the court can agree to a variation or termination on behalf of underage[ 18 not 16.] or unborn beneficiaries (and the alimentary liferenters???) if the court are satisfied that will not prejudice[ In this sense it means “economic prejudice”.] them.
⁃ Importantly, all the other beneficiaries (other than those listed above) must agree for a variation or termination to be possible.[ It is possible to make a trust virtually ‘bust proof’ by making it a discretionary trust with a large number of potential beneficiaries. To bust such a trust all of these people would have to be found and traced.]
⁃ The age limit here is 18 - this is an unusual exception to the normal 16 age of legal capacity rule - under s 1(3)(b) of the Age of Legal Capacity Act 1991.
⁃ In relation to alimentary liferent under s 1(4) the court can convert this into an ordinary liferent by discharging the alimentary liferent.
⁃ In deciding whether to do this the court looks at the other sources of income the person has and their needs and liabilities (so if the alimentary liferent is really the only source of income then it is unlikely to be discharged).
A rich man (aged 65) sets up an IV trust for himself, his 2 nephews and 1 niece. The trustees are to pay him income of trust fund during life. On his death the capital of trust is to be divided among his 2 nephews (both aged 36) and his niece (aged 30). If any predecease him their issue are to take their share[ Because of this destination-over there is no vesting until the date of the death of the liferenter.]. One of the nephews has two young children and the niece has one. The other nephew has no children and is severely mentally disabled.
1) If the nephew’s, niece and truster want to end the trust, who has to agree?
⁃ They have to consent to it because they are of full age and mentally capable. For the mentally disabled nephew (2) could consent on his behalf.
⁃ The real problem is that the issue are also beneficiaries of the trust even though they only come in if the nephews or niece predecease the truster. This means that they must go to court.
What can the court do?
⁃ So the truster, nephew (1) and niece must petition the CoS for authority to vary the trust and for the court to give consent on behalf of the unborn and incapable beneficiaries.
⁃ Firstly an actuary must value all their interests.
⁃ If the actuary finds that looking at the trusters age and health he has a 20% share of the trust fund, the nephews have 22% each, the niece has 25% and the nephew’s issue is 6% and the niece’s issue is 5% (and the chance of the incapax nephew having kids is regarded as zero so 0% interest).
⁃ If the termination is approved then the liferenter (truster) and the nephew and niece will be paid out.
⁃ Suppose the trust was £1m. The liferenter would receive £200k. The nephews will receive £220k each. The court can say that since nephew 2 is incapax they will hand the money over to his guardian or create a new trust for him with the money. The niece receives £125k.
⁃ In relation to the issue, what used to be done was that insurance policies would be bought that would pay out to the issue if the relevant person predeceased. But these policies are now unavailable. This means that what must be done is that money is retained for the issue. So for nephew 1’s issue the trustees would have to retain £60k and for the niece’s issue they would have to retain 5% which is £50k. The important point is that this money is paid out to the children when the truster dies irrespective of whether the nephew/niece has died. [Look this up if confused - it just means they will receive a certain amount on termination regardless of who predeceases.]
