Trusts 15: Variation of Trust Cases

Terms in this set (14)

The court has no power to alter or rearrange the beneficial interests under a trust instrument even if every person interested who is sui juris assents and the change is shown to be for the benefit of infants and after-born beneficiaries.Per Lord Morton of Henryton: ". . . the court has only claimed jurisdiction to make such an alteration in maintenance cases . . . and has frequently denied that it has such a jurisdiction in any other case. In saying this I am not overlooking the 'salvage' cases, but they relate to administrative acts by trustees and not to alteration of beneficial interests."Per Lord Morton of Henryton, further: ". . . the court's jurisdiction to sanction a compromise in the true sense, when the beneficial interests are in dispute, is not a jurisdiction to alter these interests, for they are still unascertained. If, however, there is no doubt as to the beneficial interests, the court is exceeding its jurisdiction if it sanctions a scheme for their alteration, whether the scheme is called a 'compromise in the broader sense' or an 'arrangement' or is given any other name."A scheme of arrangement was submitted to the court for its sanction, whereby the provisions for unequal or selective maintenance during the lives of the settlors, and for the accumulation of any surplus income contained in two settlements, were to be struck out and the funds were to be transferred to the trustees of a new settlement which was to be entered into containing trusts similar to the trusts in the former settlements but omitting those provisions. The object of the scheme was to avoid claims for death duties. The Court of Appeal held that the court had no jurisdiction to sanction the scheme.

A judge of the Chancery Division has no inherent jurisdiction, in the execution of the trusts of a settlement, to sanction, on behalf of infant beneficiaries and unborn persons, a rearrangement of the trusts of that settlement for no other purpose than to secure an adventitious benefit (e.g., that estate duty payable in a certain event will, in consequence of the rearrangement, not be payable in respect of the trust funds). Decision of CoA affirmed.

Per Lord Simonds L.C., Lord Morton of Henryton and Lord Asquith of Bishopstone. The power of the court to sanction a compromise by an infant in a suit to which he is a party cannot be extended to cover cases in which there is no real dispute as to rights but in which it is sought by way of bargain between the beneficiaries to rearrange the beneficial interests under the trust instrument and to bind infants and unborn persons.

Per Lord Cohen. The jurisdiction of the court extends to compromises in the wider sense between tenants for life on the one hand and remaindermen on the other, but not to varying rights inter se of parties whom the testator has put on an equality.
Where property is held upon discretionary trusts during the lifetime of X and where these trusts are extended (by the beneficiaries and the court) so as to continue for a fixed period or until the death of X, whichever period shall be the longer, the alteration does not constitute the determination of an interest in possession within the Finance Act 1940 s.43(1) so as to give rise to an estate duty liability. After the death of the settlor in 1945 a trust fund was held during his widow's lifetime for the widow, their two children and their grandchildren. The appropriate accumulation period ceased in 1945. In 1960 the court in the exercise of its jurisdiction under the Variation of Trusts Act 1958 s.1 approved an arrangement whereby the discretionary trusts were extended for 21 years or the widow's lifetime, whichever should be the longer. In 1962 the widow died, and the Crown claimed estate duty on the ground that the extension of the trusts involved the determination of an interest in possession within the Finance Act 1894 s.43(1).

Held, that even if there was an interest in possession in the property, the extension in 1960 did not dispose of or determine it because no person other than the existing beneficiaries benefited thereby. Per Lords Reid and Wilberforce, the extension under the Variation of Trusts Act created a new trust of income; the arrangement took effect by virtue of the consent of each beneficiary, not of the court order, since the court merely gave consent on behalf of those beneficiaries who were unable to consent.

By a settlement made in 1927 the settlor conveyed a fund to trustees on trusts, giving them an unfettered discretion, by clause 2 (a), "during the lives of the settlor and" his wife, and the life of the survivor, to apply the income for the benefit of a class consisting of his wife, his children and their issue; and clause 2 (b) declared trusts as to income and capital, after the death of the survivor, for the benefit of the children and their issue. The settlor died in 1945. On January 12, 1960, when his widow was aged 84 and her first great-grandchild was expected, she applied to the court under the Variation of Trusts Act, 1958, for an order approving an arrangement agreed to by the trustees and all the adult members of the class of beneficiaries. Clause 2 of the arrangement provided that as from the operative date, January 12, 1960, the 1927 settlement "shall have effect subject to the variations ... hereinafter set forth." Clause 3 provided that "the discretionary trusts of income declared by clause 2 (a) of the [1927] settlement shall have effect during the life of [the widow] or the period of 21 years from the operative date whichever shall be the longer (hereinafter called 'the trust period')." The court approved the arrangement on behalf of the infant and unborn beneficiaries and ordered in the terms of the arrangement that as from the operative date the settlement should have effect as varied. The widow died on December 22, 1962. Estate duty was claimed on the trust fund, under section 2 (1) (b) of the Finance Act, 1894 , on the ground that the 1927 trusts were unaffected by the 1960 order and came to an end on the death of the widow; or, alternatively, under section 43 of the Finance Act, 1940, in that the effect of the 1960 order was to determine or dispose of an interest limited to cease on the death of the widow.

Held: Decision of the Court of Appeal affirmed. (1) that there was no passing of property under section 2 (1) (b) of the Finance Act, 1894, since the whole arrangement, including the discretionary trust set out therein, came into operation in 1960 and continued in operation until after the widow's death. The only change at her death was that one of the objects of the discretionary trust dropped out and that did not involve any liability to estate duty.

(2) That section 43 of the Finance Act, 1940, did not impose a liability to estate duty, since none of the beneficiaries affected by the arrangement lost anything thereby and the disposal was not in favour of any other person.

Per Lord Morris of Borth-y-Gest, Lord Hodson and Lord Guest: The discretionary trust continued, notwithstanding the variation, which did not end, but prolonged, it.

Per Lord Guest: Although there may be cases when an arrangement under the Variation of Trusts Act, 1958, revokes the trust in question, the arrangement here merely varied the original trust by inserting an extended terminal date for the exercise of the discretionary power.
1. Where the court makes an order under the Variation of Trusts Act 1958 s.1 approving an arrangement, it is the arrangement, consented to by the consenting adult beneficiaries and made binding on infants and unborn persons by the court's approval, not the order of the court itself, which varies the trusts. 2. An arrangement which, when approved, revokes all prior trusts and establishes new trusts which are in many respects similar to the prior trusts, is nevertheless a "variation" of trusts within s.1 of the 1958 Act. 3. The arrangement together with the court order constitute an "instrument" for the purposes of s.15(5) of the Perpetuities and Accumulations Act 1964 so that provisions deriving their validity from the 1964 Act may properly be included in the arrangement. 4. As regards unborn persons on whose behalf approval is sought the court should be prepared to take the sort of risk that an adult would be prepared to take.

The trusts of a settlement made in 1959 consisted of a life interest for W. and, subject thereto, trusts for her children attaining 21 years and if more than one in equal shares. W. wished to surrender her life interest in one-half of the income for the benefit of her children but to have the trusts of the settlement rearranged so that the children's interests should vest at the age of 30 years and that half the income of their respective shares should be accumulated at the trustees' discretion until the age of 25 or the earlier expiration of 21 years from the date of the court's order.

W. proposed that the settlement should be revoked and that new trusts should be declared in place thereof and she applied under the Variation of Trusts Act, 1958, for the court's approval of the arrangement.

The question for the court was whether trusts constituted before, but varied after, the commencement of the Perpetuities and Accumulations Act, 1964, could take advantage of changes in the rules against perpetuities and accumulations. On this, and another question which arose during the hearing as to whether an order under the Variation of Trusts Act, 1958, in exercise of the court's jurisdiction was ipso facto effective to vary the terms of the trusts so as to bind all the beneficiaries without the need for any other document:-

Held: (1) that in view of the long-established practice founded on In re Hambleden's Will Trusts (infra) and the object of the Act of 1958 in extending the court's powers, section 1 (1) could fairly be construed as giving efficacy to the exercise of those powers by the court; accordingly, when an order was made under section 1 (1) approving an arrangement, that arrangement was effective, without more, to vary or revoke the terms of a trust.

(2) That an arrangement, although cast in the form of a revocation of existing trusts and a declaration of new trusts, could still be within section 1 (1) of the Act if there was, in substance, a variation; and that, in the present case, the court was satisfied that the arrangement amounted to a variation.

(3) That since any variation of the trusts of a settlement owed its authority, not to the settlement but to the order of the court and the assent of the adult beneficiaries an arrangement made after the commencement of the Perpetuities and Accumulations Act, 1964 , constituted an "instrument" within the meaning of section 15 (5) of that Act and it was permissible therefore to insert in such an instrument provisions deriving their validity from the Act of 1964.

Held, further, on the merits of the arrangement, that although unborn issue might be so circumstanced as to derive no benefit, there were the normal prospects of events occurring which would either improve or not improve their position, and since on the hole the arrangement appeared to be for their benefit, the court would approve it.
On an application under the Variation of Trusts Act 1958, the court cannot approve a variation on behalf of living persons of full age who would have been interested in the trust property as members of a class to be ascertained in the future, if the class had instead been ascertained at the date of the issue of the summons. By a settlement property was settled on the usual trusts of a wife's fund under a marriage settlement on protective trusts for the settlor for life, then among her issue, with an ultimate trust in favour of the persons who would have been her statutory next-of-kin at her death if she had died intestate without ever having been married. At the date of a summons to approve a variation of the settlement under the Act the protected life tenant had three cousins who, if she had died unmarried at that date, would have been her statutory next-of-kin. Only one of them was joined as a party.

Held, the court could not, in view of the exception in s.1(1)(b) of the Variation of Trusts Act, 1958, approve the variation on behalf of the other two cousins; the court would, nonetheless, approve the variation on behalf of unascertained persons, leaving the trustees to obtain the consent of the two cousins if possible.

By a settlement dated May 15, 1935, the income of a trust fund was, in the events which happened, held on protective trusts for the daughter of the settler during her life. On her death the capital and income of the fund were to be held on trust for such of her issue as she should appoint and in default of and subject to any appointment in trust for her children who being male attained 21 years or being female attained that age or married, if more than one in equal shares. Clause 5 of the settlement provided that if the daughter had no child who attained a vested interest the trust fund should be subject to a general testamentary power of appointment vested in the daughter, and in default of and subject to any appointment in trust for the persons who would have become entitled under the Administration of Estates Act, 1925, at the daughter's death if she had died intestate without ever having been married, as tenants in common in the shares in which they would have taken under the Act. The settlers daughter, who at the date of the issue of the present summons was unmarried and had attained 61 years of age, had three first cousins, all of whom had attained 21 years of age. The daughter sought to vary the trusts of the settlement so that £500 should be held on protective trusts for her during her life and thereafter on trust for any husband who might survive her for life, and subject thereto on trust as to both capital and income for the persons who under the Act of 1925 would have become entitled at her death if she had died intestate without having been married, if more than one as tenants in common in the shares in which they would have taken under the Act, and subject thereto the capital and income of the trust fund should be held upon trust for her absolutely.

On an application by the daughter under section 1 of the Variation of Trusts Act, 1958,1 for the approval of that arrangement by the court on behalf of all unborn and unascertained persons who might become interested under the trusts of the settlement, only one of the three first cousins being made a party to the application:-

Held: (1) that the arrangement was one which it would be proper to approve on behalf of any persons who might become entitled under the trusts of the settlement who were not in existence.

But (2) that the court could not approve the arrangement on behalf of the two first cousins who were not parties to the summons, for although the persons who would take in default of appointment were the statutory next-of-kin of the applicant, and were a specified class of persons who might he come entitled to an interest under the trusts at a future date within section 1 (1) (b) of the Act of 1958, the exception in that paragraph required the hypothesis that the future date had fallen on the day on which the originating summons was issued, and, on the hypothesis that the applicant had died at that date, the first cousins would be ascertained and acquire their interest at that date, thus fitting the description in the exception in section 1 (1) ( b ).
By a settlement dated March 2, 1938, made between the applicant, Mrs. Joan Audrey Parkin, then Mrs. Joan Audrey Moncrieff, and the trustees, John Wyndham Stanton and Marjorie Somers-Smith Darby, the applicant assigned to the trustees her contingent reversionary interests under her parents's marriage settlement and under her maternal grandfather's will. The settlement provided that the trustees should hold the trust fund upon trust for the settlor, the applicant, for life, and after her death upon trust for her daughter, Ann Murray Moncrieff, or all or such one or more of her children in such shares and in such manner as she should by deed or deeds with or without power of revocation or by will or codicil appoint, and in default of appointment in trust for her child or children who being male should attain 21 years, or being female should attain that age or marry, if more than one in equal shares. The settlement further provided that if no child of the settlor attained a vested interest the trust fund should be held in trust for such persons or purposes as the settlor should by will or codicil appoint, and in default of appointment in trust for the person or persons who would have been entitled thereto if she had died domiciled in England and a widow and intestate.

The settlor had one child only who was the daughter referred to in the settlement and who died at the age of 14 years. The power of appointment in her favour was never exercised. On March 4, 1946, the settlor and her husband adopted a son, the first respondent, Alan James Parkin. At the date of the summons the settlor was past the age of child-bearing.

By the summons dated December 4, 1961, the settlor asked for the court's approval of the arrangement set out in the schedule to the summons on behalf of the infant respondents and all other persons who might thereafter become interested in the trust fund. The respondents to the summons were the adopted son, the trustees and four infant grandchildren of a maternal aunt of the settlor, who were contingently interested under the settlement as prospective statutory next-of-kin of the settlor if she survived her adopted son, the first respondent.

The arrangement provided that the trustees should set aside out of the trust fund and retain a sum of £1,000 for the benefit of the next-of-kin of the settlor, and subject thereto should hold the trust fund in trust for the settlor absolutely.

His Lordship then considered the scheme and approved it on behalf of the infant respondents and all other persons who might thereafter become entitled to an interest in the trust fund.
The court will not, under the Variation of Trusts Act 1958, revoke trusts and permit their transfer out of the jurisdiction where the sole advantage to be gained from such an operation is a fiscal one. Per curiam. There is nothing essentially improper in varying trust under the 1958 Act so as to effect a mitigation of prospective tax liability. Per Lord Denning M.R. (Danckwerts L.J. concurring). In considering the advantage likely to accrue to infants from variation the court will not confine itself to fiscal advantages. Per Harman L.J. (Danckwerts L.J. concurring). The court will not appoint trustees out of the jurisdiction in place of unimpeachable English trustees where the other jurisdiction has no experience of trusts. An application to appoint new trustees of two settlements and to vary the trusts thereof was made by the settlor. The court was asked to appoint (under the Trustee Act 1925 s.41) two persons resident in Jersey to be trustees in place of two English-resident trustees and was also asked to vary the trusts of the settlements under the Variation of Trusts Act 1958) by including therein a power for the trustees to transfer the trust funds to two equivalent Jersey settlements. The beneficiaries under the trusts, both of the English and of the proposed Jersey settlements, were the settlor's adult son A and his issue and the settlor's infant son B and his issue; A had one child but B had none. The evidence was that the settlor having bought a house in Jersey in 1966 spent several short periods in Jersey in 1967 before taking up continuous residence there in August 1967, with his wife and B. It was also in evidence that A obtained a lease of a flat in Jersey in May 1967 and took up continuous residence in Jersey with his family in August 1967. Both the settlor and his family and A and his family had previously resided in England throughout their lives, but they no longer owned any premises there. The object of the application was to save prospective capital gains tax and estate duty.

In 1964 the settlor made two settlements, a marriage settlement for the benefit of his elder son and any children he might have, and a voluntary settlement for the benefit of his younger son, an infant, and any children he might have. The trust funds consisted of shares in a public company of which the settlor had formerly been chairman. The trustees were all resident in England. After the introduction of the capital gains tax by the Finance Act, 1965, a very heavy tax liability would have been incurred on a disposition of the shares which could be avoided if the majority of the trustees and all the existing beneficiaries were neither resident nor ordinarily resident in the United Kingdom and if the general administration of the trusts was ordinarily carried on outside the United Kingdom. The settlor and the existing beneficiaries thereupon took steps to move from England to Jersey and by August, 1967, had acquired homes there.

By a summons dated November 7, 1967, under section 41 of the Trustee Act, 1925 , 1 and section 1 of the Variation of Trusts Act, 1958 , 2 the settlor sought (i) the appointment of two persons of good repute resident in Jersey as new trustees in place of the existing English trustees, and (ii) the approval of the court on behalf of infant and unborn beneficiaries to a variation of both settlements by inserting in each a power for the two new trustees, after the expiration of three months, to discharge the trust property from the trusts of the English settlements and subject it to trusts of identical Jersey settlements subject to Jersey law. All the parties to the summons supported the arrangements so that the affidavit evidence by the major beneficiary of his intention to make Jersey his permanent home was uncontradicted. Affidavit evidence by one of the proposed new trustees, an advocate in Jersey, was to the effect that though there was no Trustee Act in Jersey and the courts there had never made an order executing the trusts of a settlement, the opinion of the legal profession was that such settlements would take effect as expressed and would be enforced by the courts in Jersey. Stamp J. refused to sanction the proposed arrangement.

On an appeal by the settlor, supported by all the other parties before the court:-
Held, dismissing the appeal, that there was nothing improper nor contrary to public policy in approving the variation of trusts for the purpose of avoiding or reducing tax liability. But where that was the sole purpose for which the court's assistance was invoked (a) to appoint under the Act of 1925 new foreign trustees in place of unimpeachable English trustees and (b) to approve under the Act of 1958 a variation which involved the bodily transfer of English trusts outside the court's effective jurisdiction to a jurisdiction unversed in English trust law, the court could properly inquire into all the circumstances and consider (i) whether it would be for the benefit of the infant and unborn beneficiaries for whom the court was concerned to uproot them and the trusts from their native land for the sole purpose of giving them more money and (ii) whether the appointment of new trustees was convenient or necessary for reasons connected with the trusts themselves; and that since the beneficiaries' connection with Jersey was recent and tenuous and the appointment of the new trustees was mere machinery in the scheme to avoid tax, the court was entitled in the exercise of its statutory discretion, not to consider it "fit" to approve the proposed scheme nor "expedient" to appoint new trustees.

Per Lord Denning M.R. The avoidance of tax may be lawful, but it is not yet a virtue. The Court of Chancery should not give its approval to it if by so doing it would imperil the true welfare of children already born or to be born.
A forfeiture provision may be deleted from a trust on an application to approve a variation, provided that it is for the benefit of all the beneficiaries on whose behalf the court is concerned to approve the arrangement. R left property to his daughters D and M and to their children in remainder. The will contained forfeiture provisions that if at the death of either daughter a child of hers was a member of the Roman Catholic faith, attended a Roman Catholic Church, or was married to or living with a Roman Catholic, he should forfeit all rights under the will. M's husband was a Roman Catholic, two of her daughters attended a Roman Catholic church, and a third was baptised Roman Catholic. R died in 1968 and D and M sought the court's approval of a proposed arrangement under the Variation of Trusts Act 1958, whereby the forfeiture provisions might be deleted, and GBP 10,000 set aside out of the shares of D and M on accelerated trusts for their respective children.

Held, the court must be satisfied that the arrangement was for the benefit of every person on whose behalf the court was concerned to approve the arrangement, and that the arrangement was a fair and proper one. The arrangement was obviously for the financial benefit of M's children, and D's children would gain an accelerated interest of GBP 10,000. But, more important, such a forfeiture provision would operate as a deterrent on D's children in their selection of a spouse, and might well cause serious dissension between the two families. A forfeiture provision was by no means always intrinsically undesirable, but here its deletion would be for the benefit of D's children also.
In the absence of mala fides or some other circumstance which would show at least a grave misdirection of themselves by trustees, the court will not interfere with the trustees' discretion in the administration of a trust. Per curiam: The word "arrangement" in the Variation of Trusts Act 1958 s.1 , is used in the widest possible sense so as to cover any proposal which any person may put forward for varying or revoking the trusts. By his will, a testator devised farm property to his trustees on trust for sale on protective trusts for the benefit of the plaintiff for life, and after her death for such persons as she might by deed or will appoint, and in default of appointment on trust for the persons entitled on the distribution of her estate, with a proviso that the plaintiff should have the use and enjoyment of the capital if she needed it, and that the trustees might apply capital moneys arising on the sale of the farm for her benefit but that they were to consider the necessity for retaining sufficient capital to prevent her from ever being without adequate means. The testator also gave to the trustees a sum of GBP 4,000 on trust for the plaintiff on the same protective trusts, and with similar powers of appointment by the plaintiff and for the use of capital for her benefit, and authorised the trustees to use the legacy for the purpose of providing a residence for her. The plaintiff exercised both powers of appointment by deed irrevocably in her own favour. The plaintiff applied under s.1 of the Act for approval by the court of an arrangement varying the trusts whereby the trustees should stand possessed of the farm and the property, investments and cash representing the legacy on trust for the plaintiff absolutely. The trustees opposed the proposals.

Held, the court would not interfere with the trustees' discretion. (1) that the duty imposed by section 1 of the Act of 1958 was not confined to inquiring into the effect of a proposed scheme on those on whose behalf approval was sought, but required also consideration on behalf of any person or persons who might have an interest under the discretionary trusts, and whose presence prevented the sole beneficiary from putting an end to the settlement. The proposal had to be looked at as a whole to see whether it was proper to be sanctioned by the court, and the court had to have regard not only to the material benefit of the person who was unable to give his consent because he was not in a position to do so, but to the purpose of the trust. The views of the trustees were relevant though not conclusive.

(2) That, applying that test, and having regard particularly to the interest of any husband that the plaintiff might hereafter marry, the court should not approve the proposed variation.

(3) That the court should not interfere with the exercise of the trustees' discretionary powers in fulfilment of the duty imposed by the will.
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