Commentary on Sections Part 1 – Trusts Variation and termination of private trusts
90.Section 58 of the Act makes provision for both extra-judicial and judicial approval of arrangements for variation or termination of trusts. It does not apply as respects a public trust and does not apply as respects a private purpose trust (subsection (4)(b)). So far as extra-judicial variation is concerned, subsections (1) and (2) implement recommendation 79. Subsection (1) describes the ways in which a trust can be varied or terminated. Paragraph (d) gives effect to recommendation 91 by making it clear that all or part of the trust property can be resettled into a new trust. Where a beneficiary lacks capacity to agree or is not yet in existence or is presently unascertainable, an appropriate approval on the beneficiary’s behalf is necessary: see section 59(4) and (5).
91.Section 59 of the Act applies both to judicial and to extra-judicial variation or termination of a trust, and sets out the circumstances in which the agreement of a beneficiary or approval on behalf of a beneficiary is required.
92.Section 59 implements recommendation 89 and continues the regime of the 1961 Act in terms of which, with very minor exceptions, all capable beneficiaries must agree to any variation or termination; the Court of Session's role is restricted to supplying approval on behalf of those from whom agreement cannot be obtained. Subsection (2) implements recommendation 79 and, together, subsections (2) and (3) implement recommendation 80; agreement to a variation or termination can be given by a beneficiary, or approval can be given by a potential beneficiary, provided that the beneficiary or potential beneficiary is 18 years old or over and is capable. A legal person, such as a company or a corporate charity, can also give its agreement or approval.
93.Section 59(4) implements recommendation 83. It confirms the existing position whereby a guardian or person authorised by an intervention order or other document under the Adults with Incapacity (Scotland) Act 2000 (or the law of a foreign jurisdiction) may provide approval on behalf of an adult beneficiary or potential beneficiary who is incapable of consenting. Such approval by an authorised person is an alternative to court approval (under section 59(5)(b)).
94.Section 59(5)(a) to (d) re-enact the existing provisions in section 1 of the 1961 Act. Retention of age 18 in paragraph (a) partially implements recommendation 82. Paragraph (b) implements recommendation 83. Paragraph (c) and subsection (7) re-enact section 1(1)(b) of the 1961 Act. (“Potential beneficiaries” are defined in section 81(1).) Paragraph (d) re-enacts section 1(1)(c) of the 1961 Act. Paragraph (e) is a new provision, which implements recommendation 88. It allows a variation or termination to proceed even though one or more beneficiaries who would otherwise have to agree cannot be traced; their agreement is replaced by court approval on their behalf.
95.Section 59(6) preserves the current legal position that only a trustee or beneficiary may apply to the Court of Session under this section. Section 59(7) preserves the current law by restricting the category of potential beneficiaries on whose behalf the court can approve the arrangement. Excluded are persons who are aged 18 or over and are capable and who also fall within paragraph (b) and are identifiable persons or individuals. Such persons must agree to the arrangement themselves. To fall within paragraph (7)(b) a potential beneficiary must be identifiable as being in the relevant class or of the relevant description if the date or event that is referred to in the trust had taken place at the date of hearing the application. One example of potential beneficiaries is the class of the heirs of an individual who has not yet died. The heirs cannot be ascertained until that individual dies with the result that they have no present interest but are merely potential beneficiaries. The court cannot approve on behalf of those who would qualify as heirs if the individual were taken to die at the date of hearing the application but they must consent themselves. If, however, there are unborn or underage heirs then court approval on their behalf is both competent and necessary.
96.Section 60 of the Act, in partial implementation of recommendation 79, sets out the general rule that the Court of Session is only to approve an arrangement on behalf of a beneficiary or potential beneficiary who cannot consent for themselves if it thinks that the arrangement would not prejudice that beneficiary. For instance, suppose a trust is set up to benefit James, his spouse, Patricia, and their young child, Fiona. Each is beneficially entitled to one third of the trust property. If James wanted to vary the trust purposes so that he takes a greater share of the trust property, given Fiona’s young age, she would be unable to provide her consent and court proceedings would need to be raised to seek the court’s approval on Fiona’s behalf. The court would have to be satisfied that the proposed new arrangement does not prejudice Fiona, for example, by reducing her share.
97.Section 60(2), which implements recommendation 86, provides an exception to that rule. It states that no court approval on behalf of an unborn or a potential beneficiary who cannot be ascertained will be required if the court is satisfied that there is no reasonable likelihood that the event which would make the person a beneficiary will occur, or that someone who, if born, would be a beneficiary (or potential beneficiary) will be born. The proposed arrangement could therefore go ahead even if it would remove such a potential interest. Thus if Tom sets up a trust for his children and he has two existing children who want to terminate the trust and be paid the capital then the court will need to approve the arrangement on behalf of Tom’s unborn children and must consider whether they would be prejudiced by the arrangement. If Tom is an 80 year old widower then the court may be satisfied that the possibility of him having further children is so remote that it can be ignored. Evidence in the shape of medical and other reports may have to be presented in order to satisfy the court in less extreme cases. An example of a potential beneficiary who cannot be ascertained who had only a theoretical possibility of becoming a beneficiary might be the potential spouse of an intermittently incapable 85 year old person. If a person was, against all expectation, born or ascertained after the arrangement was finalised, that person will have no claim against the trustees or the other beneficiaries for any loss sustained as a consequence of the variation.
98.Section 60(3) extends the current law by increasing the factors which the court may consider in evaluating prejudice when deciding whether to approve an arrangement on behalf of a beneficiary or potential beneficiary who cannot consent. It implements recommendation 87 and ensures that the court can take into account more than economic factors. For example, where Susan has created a trust in favour of her current children, who are underage, and there is a proposal to extend the trust to include an adopted child, the likelihood of this leading to increased harmony within the family can be taken into account by the court in deciding whether to approve the change on behalf of the underage children.
99.Section 61 of the Act, which gives effect to recommendation 85, enables an arrangement to proceed without the agreement of, or court approval on behalf of, a beneficiary or potential beneficiary under section 59, if the court is satisfied that the person in question has a negligible interest in the trust. It gives statutory effect to the decision of the Court of Session in Phillips and Others, Petitioners 1964 SC 141. In contrast to section 60, the effect of the arrangement proceeding without the agreement of, or approval on behalf of, persons with negligible interests is not to remove their entitlement under the trust. However subsection (2) protects the trustees from claims by such beneficiaries; instead, their right of action would lie against those who have benefited from the variation (most likely other beneficiaries under the trust).
100.Section 62 of the Act substantially re-enacts section 1(4) of the 1961 Act which provides that an alimentary liferent cannot be discharged by the beneficiary, making one minor change. Implementing recommendation 84, subsection (4) provides that court authorisation is not required in respect of the variation or termination of an alimentary purpose created by a woman in her own favour before 24th July 1984. She is therefore able to agree to it herself. By sections 5 and 10(2) of the Law Reform (Husband and Wife) (Scotland) Act 1984, it has been incompetent for women to create alimentary provisions in their own favour since that date. Use of alimentary liferents in Scots law were, in the past, regularly used to provide protection against a scenario where a wife’s property could be squandered by her husband.
101.Section 63 of the Act applies when the Court of Session is considering whether to agree to a trust variation or termination on behalf of a person under the age of 18 years. Subsection (2) provides that the Court of Session will have to have regard to the views of a 16 or 17 year old in deciding whether or not to approve a trust variation or termination on his or her behalf. Subsections (3) to (5) set out the court’s duty in relation to the views of persons under 16. Subsection (1)(b) extends this to authorisation of a variation or revocation of an alimentary purpose. Under subsection (1)(a)(ii), this section does not apply to a person who is incapable, though a guardian or other authorised person may agree to an arrangement on behalf of such a person (section 59(4)) or the Court of Session may approve it (section 59(5)(b)).
102.Section 64 of the Act implements recommendation 90. Its purpose is to make clear that the agreement of the truster to an arrangement for variation or termination of the trust is not required (though if the truster happens to be a beneficiary or potential beneficiary, then agreement, or court approval on the truster’s behalf, is needed in that capacity). But for this provision it might be argued that the truster is invariably a beneficiary or potential beneficiary because of the radical right to receive the trust property if all the other trust purposes fail.