Equity: Termination and Variation of Trusts

Termination and Variation of Trusts

Varying a Trust

Trustees and beneficiaries cannot unilaterally vary a trust‘s terms. However, there are several statutory jurisdictions to vary trusts. Some apply to niche situations, such as in divorce proceedings or where a person loses mental capacity. The broadest are:

Variation of Trusts Act 1958

The 1958 Act is appropriate for varying the nature of the beneficiary’s entitlements under the trust. The Act does not specify who can apply for a variation order.

  • Ideally, an adult beneficiary should make the application. They should join the trustees as defendants to the action: otherwise any order made will not be binding on the trustees – M v H [2016] EWHC 572. If any adult beneficiaries oppose the application, they should also be joined as defendants, as should the settlor if they are still alive.
  • However, a trustee can make an application if they believe a variation would: a) benefit the beneficiaries and b) the trust lacks any adult beneficiaries willing to make the application: Re Druce’s Settlement Trusts [1962] 1 WLR 363.

If all beneficiaries are capable adults and consent, the court will grant the order. The Act allows the court to give substitute consent for four categories of individual:

s.1(1)(a)

Individuals directly or indirectly interested in the trust, whether vested or contingent, who cannot consent due to disability or infancy: s.1(1)(a).

s.1(1)(b)

Persons with an expectation of a potential future interest . For example, where C is the beneficiary and D is C’s heir. D has a possible expectation of inheriting the beneficial interest, but no vested interest. They may never get a vested interest – D may later stop being heir: Re Moncrieff’s Settlement [1962] 1 WLR 1344.

s.1(1)(c)

Unborn individuals (conceived or otherwise). This is relevant, for example, where the trust includes ‘X’s children’ and X does not yet have any children.

s.1(1)(d)

Discretionary beneficiaries of a protective trust. This applies to trusts where one beneficiary has a life interest that determines under non-inevitable conditions (e.g. bankruptcy). If that condition comes about, the trust determines and the beneficial interest vests in the discretionary beneficiary.

Save for discretionary beneficiaries under s.1(1)(d), the court will deny permission unless the proposed variation benefits that individual. Even then, the court has discretion to refuse to approve the variation.

Relevant factors in exercising the discretion include: the variation’s practical, family, social, moral and economic consequences; the potential risks of detriment; the benefits accruing to each beneficiary; and the beneficiary’s bargaining power: Re Van Gruisen’s Will Trusts [1964] 1 All ER 843; Re Holt’s Settlement [1969] 1 Ch 100; Re Tinker’s Settlement [1960] 1 WLR 1011; Re Cohen’s Will Trusts [1959] 1 WLR 865. The settlor’s original intentions are relevant, but their weight depends on the circumstances: Re Remnant’s Settlement Trusts [1970] 1 Ch 560.

The court will refuse an order which essentially constitutes resettlement rather than variation: Re Ball’s Settlement [1968] 1 WLR 899.

The Trustee Act 1925

Sometimes, trustees find themselves lacking the powers to efficiently administer the trust. In such cases, an order under the Trustee Act 1925 is relevant.

  • s.53 allows the trust to be varied to create powers to maintain, educate or benefit an underaged beneficiary.
  • s.57 applies where in ‘management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release, or other disposition, or any purchase, investment, acquisition, expenditure or other transaction’ something is expedient but the trustee has no power under the trust instrument. For example, if the trustee wants to purchase property but does not have a power under the trust instrument to do so: e.g. Gelber v Sunderland Foundation [2018] All ER (D) 31. The court will grant an order which grants the relevant power.

The court also has a residual discretion to vary a trust to grant new powers under its inherent jurisdiction. However, it is exceptionally rare for the court to rely on this due to the existence of statutory provisions. Typically, there must be a situation of emergency or absolute necessity.

Terminating a Trust

Once a trust has been created, the settlor no longer has the power to revoke it. The beneficiaries and trustees can terminate the trust under certain circumstances.

The Rule in Saunders v Vautier

The beneficiaries of an express non-charitable trust can end the trust by unanimous agreement. They can only do this, however, if they are all adults and have legal competence to do so. This is known as the rule in Saunders v Vautier (1841) 4 Beav 115. If they exercise this right, they each become entitled to absolute ownership of a share of the trust property.

The rule in Saunders v Vautier applies to fixed trusts and discretionary trusts where all the beneficiaries are known: Re Smith [1928] Ch 15. It is unclear whether it applies to discretionary trusts where the class of beneficiaries is not closed.

Exhaustion of Assets

When the trust no longer has any assets, it terminates. There are two ways this is likely to happen:

  • A trustee can end a trust by distributing trust assets to the beneficiaries. Once all assets have been distributed, the trust has achieved its purpose and terminates. For example, take a trust ‘of £3000, equally for my three grandchildren’. Once each grandchild has been given £1000, the trust is exhausted. A trustee can only distribute assets pursuant to an express power in the trust, or an implied statutory power.
  • A beneficiary may become absolutely entitled to trust property as a remainderman. This is where the property is held on trust for B, to vest absolutely in C on B’s death or when some other condition is fulfilled. C is the remainderman. When B dies or the condition is fulfilled, C becomes absolutely entitled to the property and the trust ends.
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