Revocation and variation of trusts
Revocation and variation by the High Court
New legislation should:
(1) provide the court with discretionary powers to:
(a)approve any revocation, variation or resettlement of a trust or any change to the scope or nature of the powers of the trustees to manage or administer the trusts on behalf of the following:
(i) minors (currently section 64A(1)(a));
(ii) incapacitated persons (currently section 64A(1)(a));
(iii) persons who may become entitled at a future date or on the happening of a future event or once they become a member of a certain class (currently section 64A(1)(b));
(iv) unborn persons (currently section 64A(1)(c)); and
(v) beneficiaries under protective trusts (currently section 64A(1)(d));
(b)waive the requirement for the consent of any other person and approve any revocation, variation or resettlement of a trust or any change to the scope or nature of the powers of the trustees to manage or administer the trusts;
(2) set out the following factors for the court to have regard to when exercising its discretion under P39(1)(a) or (b) of the provision:
(a)the nature of any person's interest and the effect any proposed varying arrangement may have on that interest;
(b)the benefit or detriment to any person that may result from the court approving any proposed varying arrangement;
(c)the benefit or detriment to any person that may result from the court declining to approve any proposed varying arrangement; and
(d)the intentions of the settlor to the extent these can be ascertained;
(3)remove the current requirement that any varying arrangement must not be to the detriment of those beneficiaries on behalf of whom the court provides consent under P39(1)(a). The court should instead be required to consider the broader range of factors set out in P39(2) when deciding whether to approve a varying arrangement;
(4)provide that the court must not use its discretionary power under P39(1)(a) or (b) of the proposed provision to reduce or remove any vested interest or any other property rights held by a beneficiary.
Please give us your views on this proposal.
The High Court can under its inherent jurisdiction authorise variations of trusts on behalf of beneficiaries in some circumstances. The House of Lords ruled in Chapman v Chapman
that the courts can consent to variations on behalf of incapable beneficiaries in the following limited circumstances:
(a)changing the nature of an infant’s property;
(b)providing maintenance for an infant and, rarely, for an adult beneficiary;
(c)sanctioning unauthorised transactions for the purpose of salvage of the estate; and
(d)sanctioning a compromise on behalf of an infant.
9.15Section 64A, modelled on section 1 of the Variation of Trusts Act 1958 (UK), was enacted largely to address the limitations identified in Chapman. Under section 64A the court has a discretionary power to approve on behalf of a minor, and certain incapacitated or unascertained beneficiaries, any arrangement that varies or revokes a trust or enlarges the powers of the trustees in respect of property subject to a trust. The court may only approve an arrangement if it is not to the “detriment” of the beneficiary on whose behalf it is consenting.
Range of varying arrangements the courts should be able to approve
Two types of “arrangement” can be approved by the court under section 64A:
(a)those that vary or revoke all or any of the trusts; and
(b)those that enlarge the trustees’ powers to manage or administer the trust property.
9.17Although the term is not used, the New Zealand courts have interpreted section 64A as permitting resettlements. The courts have accepted that a revocation can encompass both the termination of existing trusts and substitution by new trusts.
9.18One issue that is not fully settled is whether a variation must leave the substratum or fundamental purpose of the trust intact. If a proposed variation changes the fundamental purpose of a trust, then it may be argued that conceptually it cannot be regarded as “varying” that trust. In contrast, an arrangement (even if it involves a resettlement) that gives effect to the purpose of the original trust by other means, leaves the substratum intact, so may be regarded as merely varying the original trust.
9.19The concept of substratum is an elusive one. There has been something of a shift away from it operating as a limit on the court’s jurisdiction. In Greenwood Tipping J disagreed with the proposition that a variation or revocation cannot be approved by the court if it conflicts with the primary or predominant intention of the settlor. His view was that the intention of the testator (or settlor) was relevant as one of the considerations in deciding whether approval shall be given but did not limit the court’s ability to approve arrangements that conflicted with the testator’s (or settlor’s) primary intention. He said the purpose of section 64A is to put the court in the shoes of a beneficiary who is, by reason of infancy or other incapacity, incapable of assenting to the variation or revocation proposed.
9.20On its face, the wording used in section 64A(1), “enlarging the powers of the trustees of managing or administering”, suggests that only arrangements that broaden a trustee’s existing powers and not those that remove existing powers can be approved. Whether “enlarging the powers” includes adding new powers is also open to interpretation.
9.21Other law reform bodies have proposed extending the scope in this way and allowing arrangements “enlarging, adding to or restricting the powers of the trustees of managing or administering any of the property subject to the trusts”.
Classes of persons on behalf of whom the court can give consent
Under section 64A the court can by order only approve an arrangement on behalf of:
(a)any person who does not have full legal capacity (such as a minor or a person who otherwise lacks legal capacity);
(b)any person who has a future interest in trust property or an entitlement which is conditional on some future event;
(c)any person not yet born or who is unknown; and
(d)any person who could benefit from a protective trust (under section 42) once the interest of the principal beneficiary has come to an end.
9.23The interpretation of paragraph (b) has caused some difficulty for the courts. It covers beneficiaries with a more remote interest than those with vested interests, but it can be difficult to determine exactly what types of beneficiaries fit within this category. The word “unknown” in paragraph (c), taken in context, has been read by the courts as an enlargement of “unborn persons” rather than a new category. Paragraph (c) therefore encompasses persons who if born would have an entitlement, where it was not known whether any such persons had been born or not. Paragraph (c) does not include absent beneficiaries who are known to be born, but whose whereabouts are unknown.
9.24Paragraph (d) relates specifically to discretionary beneficiaries under protective trusts, as defined in section 42 of the Trustee Act. There are some protective trusts in existence in New Zealand, although the mechanism is now seldom used. It is probably no longer necessary to distinguish beneficiaries under protective trusts from others for the purposes of the court giving consent.
The requirement for no detriment
9.25The court’s power to approve an arrangement under section 64A is discretionary. The only express guidance given when considering whether or not to do so is the requirement that the arrangement must not be to the “detriment” of those beneficiaries on behalf of whom the court provides consent. The court does not need to find a positive benefit to the beneficiary in question; it is sufficient that the arrangement does not leave him or her any worse off. In determining whether an arrangement is to the detriment of any person the court has regard to all benefits which may accrue to him or her directly or indirectly in consequence of the arrangement, including the welfare and honour of the family to which he or she belongs. Where there is a real possibility of detriment to a beneficiary for whom the court has been asked to approve a variation, the problem has sometimes been addressed by covenants to make good any losses that may occur.
9.26The High Court has a limited jurisdiction under section 64A to approve variations or revocations of trusts on behalf of minors and incapacitated or unascertained beneficiaries. It also has limited power to consent to variations on behalf of incapable beneficiaries under its inherent jurisdiction.
9.27The main problems with the current provision are:
- There is uncertainty over the range of varying arrangements the courts can approve on behalf of beneficiaries.
- The classes of beneficiaries for whom the court can approve varying arrangements are somewhat unclear and are very limited. It is questionable whether the provision adequately caters for the range of situations where the consent of beneficiaries cannot be reasonably obtained.
- The requirement that any varying arrangement must not be to the “detriment” of those beneficiaries on behalf of whom the court provides consent may be too restrictive.
- The court should have greater discretion to consider the consequences of any proposed variation for all affected beneficiaries.
Options for reform
In terms of the range of varying arrangements the courts should be able to approve on behalf of beneficiaries, the options considered were:
(a)giving the courts the power to approve any revocation, variation or resettlement of a trust or any change to the scope or nature of the powers of the trustees to manage or administer the trusts; or
(b)limiting the courts’ powers to approving arrangements that leave the “substratum” or purpose of the trust intact, and/or those that expand the ambit of the trustees’ powers to manage or administer the trust property. Under this option new powers would not be able to be added and existing powers could not be removed.
On the issue of the classes of beneficiaries for whom the court should be able to approve varying arrangements we considered the options of retaining the status quo or adding all or some of the following classes:
(a)persons who have an interest, but whom it is impracticable to contact;
(b)persons who have an interest but cannot be traced despite reasonable efforts to do so;
(c)persons with an interest in the trust property that is very remote or conditional;
(d)persons with an interest in the trust property that is of negligible value;
(e)any person who would not be detrimentally affected by the proposed revocation, variation, or resettlement, but who had refused or failed to consent to it.
9.30An alternative approach, suggested by law firm Taylor Grant Tesiram, is to give the court discretion to waive the requirement for consent of persons not currently in the classes covered by section 64A.
9.31We also considered whether the requirement that the court must not approve an arrangement on behalf of any person that is to that person’s detriment should be retained. The alternatives considered included requiring the court to consider a broader range of factors when deciding whether to approve a varying arrangement. The relevant factors might include: (i) the nature and significance of the various beneficiaries’ interests; (ii) any detriment that the various beneficiaries might suffer as a result of the varying arrangement being approved or not approved; and (iii) the intentions of the settlor. We also considered the option of allowing the court a completely unfettered discretion to determine whether or not to approve any varying arrangement.
Range of varying arrangements the courts should be able to approve
9.32We consider that the court should have jurisdiction to agree to any revocation, variation or resettlement of a trust or any change to the scope or nature of the powers of the trustees to manage or administer the trust.
9.33Our assessment is that this approach is the most consistent with the extended rule in Saunders v Vautier that allows legally capable adult beneficiaries, by agreement, to vary the terms of any trust or modify the powers conferred upon trustees. We also consider the concept of the “substratum” of a trust or its primary purpose is too elusive and problematic to provide a useful basis for limiting the court’s jurisdiction in respect of variations. Instead we favour the type of approach taken in Re Greenwood where the intention of the settlor and the primary purpose of the trust is considered to be one of a number of relevant considerations that the court weights when deciding whether approval should be given. This does not limit the court’s ability to approve varying arrangements that conflicted with the settlor’s primary intention or the trust’s substratum. We suggest that this approach balances respect for the settlor’s intentions and the possible need for adjustments to be made over time as the needs and interests of the beneficiaries change.
9.34Almost all submitters favoured a specific reference to resettlement in legislation, although one expressed some concern over the court being able to approve a resettlement when the liability for any resultant tax consequences would be borne by trustees. Responses from submitters on whether variations should be limited to those that were consistent with the substratum of the trust were more divided. A number considered that the substratum concept was vague and problematic and should be avoided. The focus of a trust changes over time as the needs and interests of the beneficiaries change. Limiting variations to some supposed original underlying intention or substratum may not be in the best interests of the beneficiaries. However, some submitters thought that the concept of the substratum remained an appropriate restriction on variations. They considered that the intention of the settlor should be respected and the principle that the settlor determines the scope of the trustee powers and the nature of the trusts should not be departed from lightly.
9.35We consider that the better interpretation of “enlarging the powers” of trustees would be that the court may approve any variations to trustees’ powers including those that add new powers or remove existing powers. This is consistent with the rationale that the court ought to be able to agree to any variation that an adult beneficiary might agree to under the extended rule in Saunders v Vautier.
Classes of person for whom the court should be able to approve variations
9.36The classes of person for whom the court can currently approve an arrangement under section 64A are quite limited. It is questionable whether the provision adequately caters for the range of situations where consent cannot reasonably be obtained.
9.37We considered a number of different possible extensions to the classes of persons for whom the court should be able to approve an arrangement. To prevent desirable variations being thwarted there would seem to be a need to provide for situations where one or more ascertainable beneficiary cannot be traced or contacted despite reasonable efforts. Reform might also provide for the court to give approval in situations where persons have only a remote or conditional interest in trust property, or have a notional interest of negligible value. Where there are numerous beneficiaries with a remote or negligible interest in a trust it is impractical and costly to require the personal consent of all of them. It is also unreasonable to allow people with interests that are remote, conditional, or negligible to have a power of veto over variations that are desired by beneficiaries with a more significant interest. Most submitters favoured expanding the classes of person in respect of whom the court could agree to a varying arrangement.
9.38There was concern and less unanimity on the position of the recalcitrant adult beneficiary who has either failed or refused to consent to a variation. The United States Uniform Code allows the court to approve a varying arrangement on behalf of a competent adult beneficiary who has declined to consent if he or she would suffer no detriment as a result of the variation. However, law reform bodies in other jurisdictions have not recommended going this far. They have expressed concern that overriding recalcitrant adult beneficiaries could be regarded as expropriation of their property.
9.39The point was made in a number of submissions that there are widely different circumstances in which a beneficiary refuses to consent to a variation that would not be detrimental to their interests. The NZLS said that it might be considered reasonable for the court to overrule a person’s refusal where they are one of 3,500 potential beneficiaries with a minor or remote interest. However, it would not be considered so reasonable to override their view if they were one of only a handful of beneficiaries with a more significant interest. We agree that a more nuanced approach is needed. Overriding the views of a beneficiary in the latter type of situation is also not consistent with the underlying principle in Saunders v Vautier that those with the right of enjoyment in the property should be able to dictate the manner of enjoyment.
The requirement for detriment
9.40Some concern was raised by submitters over the current requirement that the court could not approve any varying arrangement on behalf of a beneficiary if it was to the beneficiary’s detriment. When determining whether an arrangement is to the detriment of any person the court is able to consider all benefits, including non-financial ones like the welfare and honour of the person’s family. However, the court often has to work around the provision to balance what can be relatively technical detriments to one person against the significant consequences that could result for others in not varying the trust. Devices such as covenants to make good any losses are resorted to as a way of getting around the problem of detriment.
Discretion of the court to waive the requirement for consent
9.41In its submission Taylor Grant Tesiram made the important point that as a general rule a power of the court to give substituted consent on behalf of persons (such as the one currently in section 64A) should be restricted to persons who are, because of some disability or other impediment, unable to determine the matter and consent for themselves. It proposed instead an approach that gave the court a discretion to waive the requirement for consent in respect of other people (such as those who could not be traced or those with remote or negligible interests).
9.42We agree that conceptually this is a better approach. It provides a mechanism for dealing with situations where it is impractical to obtain consent or where there are numerous beneficiaries with remote interests and so on, but does not stretch the concept of substituted consent beyond its natural ambit. It is also now clear to us that the type of approach set out in the Third Issues Paper that lists additional classes of person for whom the court is able to approve an arrangement will not adequately address the various concerns that have been raised. It also does not adequately grapple with the reality of our modern trust landscape.
9.43Many recently established trusts in New Zealand are fully discretionary family trusts. Constructing additional rigid classes based on whether interests are remote, conditional or discretionary is therefore going to be problematic. If the classes are broadly constructed, and include contingent and discretionary beneficiaries, they are likely to capture almost all beneficiaries under modern discretionary trusts. However, if the classes are narrowly constructed they will not adequately cater for the full range of situations that may arise. The court would still need to have a residual discretion to address circumstances that might not have been anticipated.
9.44Our preferred approach takes account of all these points. As well as the current power to give substituted consent on behalf of persons who are, because of some disability or other impediment, incapable of determining the matter for themselves and giving their consent, the court should have a discretionary power to waive the requirement for consent in respect of any other interested person and approve any varying arrangement. When exercising its discretion under this provision the court should take into account the nature of the interests of everyone affected by the proposed arrangement, and the benefits or detriments to those affected if the court approved that arrangement or if the court declined to approve the arrangement. The court should also be required to consider the intentions of the settlor to the extent that these can be ascertained.
9.45The concern that overriding the views of recalcitrant adult beneficiaries would in some situations be regarded as expropriation of their property rights needs to be addressed. This could be done by including a proviso that the court may not use its discretionary powers under the proposed provision to reduce or remove any vested interest or other property rights. The provision could not be used to reduce or remove the interests of sui juris beneficiaries who have refused their consent. If it were to do so that would amount to expropriation of the person’s property.