Trusts Essay UK Law

Question

2. ‘The Academic study of trusts is largely devoted to the need for certainty and clarity and the ‘right way’ of setting up a trust, whereas, in practice, such bodies as the courts and the Inland Revenue seem to be remarkably indulgent in the correction of mistakes. The strange thing is that nobody seems to suffer as a result of the gap between theory and practice.’

Discuss in relation to practices of ‘rectification’ and ‘variation’ of trusts other than variation under the Variation of Trusts Act 1958.

Response

(1) Introduction

Disputes concerning trusts stem from the lack of certainty as to their operation owing to deficiencies in the constituent object, subject and intention. It is proposed that a collaborative, rather than segregated, effort between academics and practitioners[1] focusing on certainty and clarity is likely to reduce the incidents of such disputes.Given the breadth of trusts law, this essay will lean towards, but not exclusively discuss, wills more so than other trust instruments.

This essay will explore variation as administered by the trustee and the beneficiary outside of the courtroom. We will then look to the Courts to correct the mistakes of trustees and beneficiaries, and in doing so briefly touch upon the Variation of Trusts Act 1958 for the purposes of establishing the legal context of court-assisted variation. As well as a look at the uncertainty surrounding family provision. Finally, it will conclude with the alternative means of amending a trust, rectification.

Before we delve into variation and rectification proper, it is vital to discuss the interaction between academics, the courts and the Inland Revenue as concerns the variation of trusts.

(3) Discursive Discussion

The “gaps” between theory and practice are not necessarily the principal source of dismay for litigants[2]. This is not to say that gaps do not exist; there is certainly a delay between the court’s diagnosis and the academic’s subsequent attempts at treatment owing to the often-protracted legal academic turnaround and filtration of judgments into everyday practices of lawyers. This may go towards explaining why amendments to the law of trusts have so often occur through retrospectively effective statute[3].

The Courts andInland Revenue fixate upon the correction of mistakes because that is their raison d’etre. As a matter of practicality, people are scarcely likely to front up to court or come to the much-maligned attention of Inland Revenue unless there is a problem. At which point, academics will pour over the resultant judgment or policy document and attempt to reverse engineer a blueprint for “optimal” trust drafting and operation that should be followed to prevent such disputes from recurring.In an ideal world, the solicitor instructed to plan the Estate of a client or sheath the assets of a company in a trust would have borrowed the same textbook from the Bar Council Library that was inspired by the above judgment and penned by the academic. In reality, the line between academic and practitioner is far more blurred; the two roles are not only complimentary but reflexive and do not exist in a vacuum. Suffice it to say, not only academics concern themselves with either theory or prevention.

(4) Variation by Trustee

A trust deed may expressly provide for its variation by the Trustee, which may be conducted without the knowledge or consent of the beneficiary or the need to approach the Courts. Whilst this may be an efficient method of adapting a trust to accommodate changes in circumstances, it exposes the trust to potential abuses by trustees, typically through the amending of the trust deed so as to excuse either past or future breaches.

Ideally variations are tempered by several simultaneous duties as towards the trust property, the beneficiary and the intention of the settlor. These duties may be summed up as an “irreducible core of obligations”[4] owed by the trustees and enforceable by the beneficiaries, much of which is grounded in the fiduciary nature of this duty that their actions be for the benefit of the beneficiaries. However, this duty is to be balanced against their duty to ‘the wishes of the settlor as expressed [in the trust instrument]’[5].Complimentary to this, the Trustee is bound to exercise their given powers ‘for the purpose for which…[they were]…granted.’[6]

Heydon & Leeming say that a corollary of this is that the trustee is to have regard only to matters of relevance[7] and to act impartially as between the beneficiaries when electing to exercise their powers.[8]

It was held in Armitage v Nursethat where negligence on the part of a Trustee in the performance of their duties has been alleged, they may only be excluded from liability in the presence of “clear and unambiguous words” to that effect.[9] That being said, it was stated in Harrison v Randall that liability of a trustee for deviation from the terms of a trust was a matter of necessity and whether it was for the benefit to the beneficiaries.[10]

In varying the trust, the trustee is to exercise the standard of care of the ‘ordinary prudent man of business’[11] when deciding to vary the terms. No doubt, where a mistake is made in the furtherance of this goal, the Courts or Inland Revenue will see to its correction.

(5) Variation by Beneficiary Consent

The beneficiaries of a trust are free to agree as to the variation of a trust’s terms, similar to the above, an application need not be made to court. The rule in Saunders v Vautier allows a trust to be varied to the extent that it is extinguished in the following circumstances of: (i) an absolute gift; (ii) payable in the future; and (iii) exclusively for the benefit of the beneficiary in question[12].Two aspects of the rule in Saunders v Vautier[13] should be explored:

(i) All beneficiaries must consent;

This rule can only apply to situations in which the transfer of the trust property to a beneficiary under the trust would not prejudice any other beneficiary under the trust.To do otherwise would simultaneously offend the intention of the settlor and breach the duty of the trustee to act impartially and fairly amongst trustees. For example, in the case of Re Horsenaill[14] the Courts would not acquiesce in the sale of an undivided parcel of land held upon trust to one of a group of beneficiaries in equal shares because to do so may compromise the sale of the remainder of the land thus damaging the interests of the other beneficiaries. One might argue that the situation would have been different had all of the beneficiaries agreed to the transaction.

(ii)  Attained the age of majority and legally/mentally capable of consenting to the transfer;

The significance of this limb is that it champions individual autonomy, which is the entire idea behind the law’s recognition of arrangements reached by mutual agreement. If a person is 18 years of age and they have an indefeasible title to an article of trust property, but may not take receipt until the age of 30; why is their unchallenged gift subject to the ordinary prudent man’s “care and diligence”[15] rather than their own?

b.Scope of beneficiary consent

The absolute entitlement to the trust property may allow a beneficiary to extinguish its operation, but it does not follow that they may puppeteer the administration of the trust itself (Re Brockobank)[16]. Variation of a trust by its beneficiaries in a Saunders v Vautier scenario is restricted to the conveyance of legal title. However,exceptions to this follow the subject matter of the trust property. A beneficiary entitled to receive shares in a company may govern the trustee’s exercise of the voting rights attached to those shares[17]. This is distinguished from Brockbank by the coincident common law rights accompany those shares and the acts periphery to the administration of the trust.

(6) Variation by Courts

The court’s power to vary trusts was initially unfettered, owing to what may have been an incorrectly perceived ‘original jurisdiction’. Following a proposal from the Law Reform Committee in the wake of Chapman v Chapman[18]which confined the Court’s powers of variation and rectification of ‘compromise’agreements tothose falling under the Settled Land Act 1925, Parliament passed the Variation of Trusts Act so as to enable all such ‘legally disenfranchised’[19] persons to apply to the Court for variation of a trust that would have originally fallen under the Court’s ‘compromise’ jurisdiction.

Consequently, unless your trust falls within the provisions of the Settled Land Act 1925 or the Variation of Trust Act 1958, any variation of a trust deed must necessarily fall outside of these categories and into the other mechanisms of variation or rectification discussed herein.

In addition to the above, the s57(1) of the Trustee Act 1925 grants Courts the ability to vary both the management and administration of a trust instrument where it is expedient to do so. This power is grounded by the fact that they may not interfere with beneficial interests under the trust[20].

b. Variation by Family Provision

The Inheritance (Provision for Family and Dependents) Act 1975[21] and its common law franchises[22] allows for the modification of existing provisions to beneficiaries under a will[23], and provides an avenue for eligible claimants to create entirely new provisions by way of court order[24]. Given that the modification of a provision to an existing beneficiary is usually open to consent amongst the other beneficiaries (if any), the Act is typically used by those not specified in the trust instrument, but still falling within the categories specified under s1(1)(a) to (e) in order to make claim for provision out of the Estate. In doing so, the Court is effectively creating a hitherto non-existent class of beneficiaries.

The Act could be said to both increase the powers of the courts to vary trusts anddepart from the express or implied intentions of the settlor.

This system appears to be founded upon an ‘inherent right’ of certain individuals, regardless of beneficiary status, to provision from an Estate. Furthermore, regardless of the perfunctory statement that this is the ‘last will and testament’ of the deceased, the Court’s and the claimant may have the final word.

(i) The Interaction between Provision and the Certainty

Interestingly, ss1(1)(a) to (e) of the Inheritance (Provision for Family and Dependents) Act 1975 outlines the pool of potential claimants; and by extension – the pool of potential beneficiaries[25]. Taking this further, ss3(1)(b) & (g) leave the door open for the court to determine the reasonableness of any provision that it may grant against those of any other potential claimants. This hints at an uncertainty of object.

Whilst traditionally, a trust will be set aside for want of certainty of object[26], (though this is to be qualified by Re Coxen[27]in which the court noted that minor issues in ascertaining the class of objects could be overcome and need not invalidate a trust automatically,[28] and such uncertainty is both a question of fact and a matter for evidence) this statutory pathway creates a conceptual exception to this. Relevantly, the equivalent NSWlegislation features s61(1):

…the Court may disregard the interests of any other person by or in respect of whom an application…may be made (other than a beneficiary of the…estate) but who has not made an application.[29]

This provision does not loom without qualification under ss61(2)(a) & (b) requiring that notice be served upon the concerned person (unless the court determines such notice to be impracticable or unreasonable). This acts to reduce the potential pool of beneficiaries, aid in expediting the administration of the estate and contribute some modicum of certainty for the claimants and trustee/executor.

(7) Rectification by Court

Rectification, as distinct from variation, is a remedy that may be obtained by application to Court for the retrospective correction of a mistake in the drafting of an instrument that records a trust. The reason being that in the absence of correction, the administration of the trust would prove either impossible or not bear any likeness to the intentions of the settlor and produce an undesired result.In this way it is a means by which much needed certainty may be injected into the operation of a trust instrument. However academics like Meagher, Gummow & Leeming remain cognizant of the lack of certainty as to when courts may apply it.[30]

a. Wrong words

Nonetheless, if there was any doubt, the Administration of Justice Act 1982 (UK) amended much of the legislation in the area with ss20 to 22. Specifically, s20(1) outlines the circumstances in which a Court will intervene and rectify a will, namely where it falls short of the testator’s intentions due to a clerical error or incongruence with his instructions.

Whilst this sounds fruitful, if we shake this branch, not much falls out. At what point does the clerical error trigger the assistance of the Court? When are the testator’s intentions no longer clear? How does the correction of clerical errors really differ from construction?

Some much needed, but still deficient, precision is added by s21(1)(a)-(c) which stipulates the categories of evidence that may be adduced in support of an application and is summed up as allowing evidence of “meaninglessness”[31], “ambiguous on the face of it”[32]; “ambiguous in the surrounding circumstances”[33].

Although simple principle in itself, it is readily apparent from the above that it is not always black and white as to when the Court should invoke the jurisdiction of rectification in place of simple construction.[34]

b. Correct words

On the other hand, rectification is also available where the correct words have been used but the settlor was mistaken as to their effect. In situations of this variety where rectification is used, one could argue that the distinction between variation and rectification becomes even more blurred.

For example, in Amp v Barker[35] it was held that rectification:

… may be available if the document contains the very wording that it was intended to contain, but it has in law or as a matter of true construction an effect or meaning different from that which was intended.[36]

It is evident from all examples of rectification that intention tethered to effect form the Rosetta Stone from which Courts will derive clarity.

Following from this, a settlor cannot be compelled to alter a grant and if the grantee seeks rectification, which is resisted by the grantor, ‘the deed must stand or fall in its actual condition without alteration’.[37]

How do we rectify a trust between a living settlor and beneficiary?In Lister v Hodgson[38], the court held that ‘whilst the settlor may have wished to originally include a particular term, the failure to include it in the final draft coupled with their present lack of a desire to include it when asked to do so now, will defeat any evidence adduced by the beneficiary to the contrary.[39] The reason being that a trust is commonly a unilateral creation of the settlor.The above ‘reluctant’ living settlor situation is to be contrasted with the reluctant dead settlor situation which Meagher et al posits is likely to yield a different outcome:

…although the grantee under a voluntary settlement could almost never obtain rectification of the settlement against a reluctant grantor, the same result does not necessarily flow if he brings his suit against the settlor’s legal personal representative…[40]

As concerns certainty, it is clear that the two situations are identical, except that the settlor has passed, thereby allowing the evidence of the beneficiary to stand unopposed save for the executor of the estate whose evidence is more likely than not to be less persuasive and bordering on hearsay (conceptually).

(8) Conclusion

This essay revealed the duality of academic and practitioner, in that more often than not, a practitioner is both and that the gap between theory and practice, as is clear from the discussions about variation and rectification, emanatefrom the nature of the general law itself rather than from its denizens. The capacity for trustees to vary a trust is understood as being tempered by the multitude of duties that they owe in the performance of their administration. Beneficiaries, perhaps the least capable of varying a trust’s terms except for in very limited circumstances may always apply to the Courts so as to reap the benefit of their amble abilities in this area. However, the presence of various avenues that may be pursued in this area may become the very source of uncertainty that litigants are attempting to remove by the very act of remedying the trust.

 

Reference List:

(1)   Cases (UK)

 

Amp (UK) Plc & Anor v Barker & Ors [2000] EWHC Ch 42

Armitage v Nurse [1997] All ER 705

Brown v Kennedy (1853) 55 ER 317

Butt v Kelson [1952] Ch 97                                  

Chapman v Chapman [1954] 1 All ER 798

Edge v Pensions Ombudsman [1999] 4 All ER 546

Emery (1982) 98 LQR 551

Harrison v Randall (1852) 68 ER 562

Knox v Mackinnon (1888) 13 App Cas 753

Lister v Hodgson (1867) LR 4 Eq 30

Re Brockobank [1948] 1 All ER 1558

Re Coxen [1948] 2 All ER 492

Re Downshire Settled Estates [1953] 1 Ch 218

Re Horsenail [1909] 1 Ch 631

Re Speight (1883) 22 Ch D 727

Saunders v Vautier (1841) 49 ER 282

Society of Lloyd’s v Robinson [1999] 1 WLR 756

Wharton v Masterman [1895-9] All ER 687

(2)   Statute (UK)

Variation of Trusts Act 1958 (UK)

Administration of Justice Act 1982 (UK)

Inheritance (Provision for Family and Dependents) Act 1975 (UK)

Trustee Act 1925 (UK)

(3)   Statute (International)

Succession Act 2006 (NSW)

Succession Act 1981 (QLD)

Inheritence (Family Provision) Act 1972 (SA)

(4)   Books & Articles

I J Harringham, “The Jurisdiction of Courts of Probate to Rectify Errors in Wills” (1972) 46 ALJ 221

Heydon & Leeming, “Jacobs’ Law of Trusts in Australia” (2010)

Meagher, Heydon & Leeming, “Equity: Doctrines & Remedies” (2010)