Contents

Chapter 9
Revocation and variation of trusts

Revocation and variation by beneficiaries

Proposal
P38 New legislation should:
(a)state the common law rule (known as the rule in Saunders v Vautier) which provides that where they are in agreement, consenting, legally capable adult beneficiaries may act together to revoke a trust;
(b)clarify that where they are in agreement, and with the agreement of the trustees, legally capable adult beneficiaries may act together to confer new powers upon trustees or deviate from, or vary, the terms of the trust; and
(c)clarify that legally capable adult beneficiaries may consent to a resettlement of a trust, as well as a variation or revocation.
Please give us your views on this proposal.

Current law

9.3Where all the beneficiaries of a trust are adults with full legal competence and are in agreement, they can act together to require the trustees to terminate the trust and transfer the trust property to them to distribute as they see fit. This is the rule in Saunders v Vautier.221  The case law rule recognises that while the title and management of the trust property resides with the trustees, the right to beneficial ownership lies with the beneficiaries. It is for them to decide how they will enjoy the property.222
9.4The scope of the rule has been widened by the courts. In New Zealand the High Court has allowed beneficiaries to use the rule to confer new powers upon trustees or deviate from, or vary, the terms of the trust where the trustees are in agreement. In Re Philips New Zealand Ltd, Justice Baragwanath stated the position in the following terms:223

The rule in Saunders v Vautier … points the way: while all beneficiaries sui juris cannot direct trustees who bona fide oppose a particular course of action – Re Brockbank [1948] 1 Ch 206 – their power to put an end to the trust is the ultimate exercise of unanimous consent. Since they can together use their possession of the total bundle of proprietary rights to terminate the trust it is difficult to see why they cannot use the same rights to permit the trustees to modify it.

9.5This is also the position in the United Kingdom.224  This extension is consistent with the policy behind the rule in Saunders v Vautier. Those with the right of enjoyment in the property should be able to dictate the manner of enjoyment. It is likely that the rule would also be applied to allow beneficiaries to consent to a resettlement of a trust as this would be consistent with policy that those with the beneficial interest in property should be able to determine what happens to that property. The agreement of the trustees would be needed in any such situation where the original trusts were not simply being revoked.
9.6The application of the rule in Saunders v Vautier is not straightforward in relation to contingent and discretionary beneficiaries. The rule does not apply if a beneficiary’s interest is not indefeasible and absolute.225  A beneficiary cannot request the revocation of a trust where their interest is contingent unless all beneficiaries agree (including those who would benefit if the contingency were not met). Also, where trustees have the discretion to apply the whole or part of the trust fund to a beneficiary, the beneficiary cannot revoke the trust under the rule as he or she does not have a vested interest in the whole of the trust fund. However, where the trustees do not have discretion as to the amount of the trust fund to be given to the beneficiary, but only as to the method in which the fund shall be applied for the beneficiary, the beneficiary may revoke the trust. In the case of a fixed discretionary trust with several beneficiaries, where the trustees have a discretion regarding how much (if anything) each beneficiary receives, but the whole of the trust fund must be divided somehow for those beneficiaries, the rule can apply, if all the beneficiaries are legally capable adults and consent to the revocation or variation.226  This is because between them they have the right to beneficial ownership. However, in practice the rule often cannot be used to vary discretionary trusts because it is not always possible to identify all the beneficiaries or to obtain agreement from each of them.
9.7Finally, the rule in Saunders v Vautier may also be used to transfer to an adult, legally capable beneficiary of a fixed share of the trust property his or her share.227 The limitation on this is that the trust property must be of a form that allows the beneficiary’s share to be transferred to him or her. It is more difficult where the property includes land or shares in a private company. The beneficiary may have to wait until property can be sold so that it can be divided.228

Issues

9.8The Trustee Act does not address the circumstances under which beneficiaries should be able to revoke, vary or resettle a trust by agreement. Currently the rules that apply are a matter for case law as developed by the courts. While the case law rules are reasonably clear in most respects, they are not necessarily known or understood by lay people involved with trusts. Many people would be surprised to learn that the current law allows beneficiaries to vary or revoke a trust, in certain circumstances, without the involvement of the court.

Options for reform

9.9The options are:
(a)stating and clarifying the extended common law rule in Saunders v Vautier in legislation; or
(b)retaining the status quo and leave the matter to case law.

Discussion

9.10Stating the rule in legislation would make the law more accessible for non-lawyers. It would be clear on the face of the statute that consenting, legally capable beneficiaries can vary, revoke and resettle a trust without the oversight of the court. The agreement of the trustees should continue to be needed in situations where the trust is not simply being revoked.

9.11We suggested in the Third Issues Paper229  that codification of the extended Saunders v Vautier rule could be included in a revised version of section 64A of the Trustee Act. Under this approach, the provision would cater for court-approved variations, revocations and resettlements of trusts and also enshrine the principle that adult, capable beneficiaries acting together can also affect each of these actions, without court oversight. Codifying the case law rule in legislation in this way could help to place the court’s powers to vary trusts into context.

9.12Submitters were almost evenly divided on the issue of codifying the rules applying to revocation and variation by beneficiaries in legislation. A slight majority (including the New Zealand Law Society (NZLS)) favoured codifying the rule in legislation on the basis it would make the law more accessible for lay people and that it would also help place the court’s powers to approve variations into context. Those that rejected codification of the law in this area (including the Auckland District Law Society) expressed the view that the rule is already sufficiently clear and appropriately applied by the common law. They suggest that there is some risk that any legislative formation of the rule will not have the flexibility of the common law to address new circumstances. Setting the rule out in legislation may also give rise to unintended and undesirable effects.

9.13We consider that a clear statement of the law in this area would have significant educative value. The concerns expressed by those who favour leaving the matter to case law can be adequately addressed by careful drafting that summarises case law, and retains sufficient flexibility to address new circumstances. Overall our assessment is that there are sufficient benefits in stating case law rules that specify the circumstances under which competent adult beneficiaries can agree to revoke, vary, or resettle the terms a trust in legislation and clarifying where the agreement of trustees is needed.

221Saunders v Vautier (1841) Cr & Ph 240; 41 ER 482.
222DWM Waters, MR Gillen and LD Smith Waters’ Law of Trusts in Canada (3rd ed, Thomson Carswell, Toronto, 2005) at 1175.
223Re Philips New Zealand Ltd [1997] 1 NZLR 93 at 101. See also Neville v Wilson [1996] 3 All ER 171 (CA).
224IRC v Holmden [1968] AC 685 (HL) at 713, Goulden v James [1997] 2 All ER 239 (CA) at 247 and Wyndham v Egremont [2009] EWHC 2076.
225Burns v Steel [2006] 1 NZLR 559 at [36].
226Re Smith: Public Trustee v Aspinal (1928) Ch 915 at 918.
227Andrew S Butler “Trustees and Beneficiaries” in Andrew S Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) 105 at 147; Quinton v Proctor [1998] 4 VR 469.
228Stephenson v Barclays Bank Co Ltd [1975] 1 All ER 625 (Ch) at 637.
229Third Issues Paper, above n 220, at [4.23].