There are various reasons why it may be desirable to vary the terms of a trust, including succession, taxation and governance considerations. Where the class of beneficiaries includes minor beneficiaries (beneficiaries who are under 18) or unborn beneficiaries (beneficiaries who could, potentially, be born in the future) a variation of the terms of a trust must be approved by the court.
The Variation of Trusts Act 1958: An Overview
Adult beneficiaries who are of full capacity will have the ability to consent to a variation of the terms of a trust (or to its termination). However, in most landed settlements there will be classes of beneficiaries who cannot consent, such as minor beneficiaries, unborn beneficiaries or unascertained beneficiaries (such as future spouses). The Variation of Trusts Act 1958 (VTA) enables the court to provide consent on behalf of such beneficiaries. The court may only sanction a variation if this would be for the ‘benefit’ of the relevant beneficiaries. The term ‘benefit’ has a wide meaning here; it could even include, for example, postponing the vesting of a capital interest in a minor beneficiary, if this would otherwise have happened at too early an age.
When Might an Application under the VTA be Made?
Landed settlements will usually evolve gradually, with conversations about the direction of travel happening in different settings (such as trustee meetings, gatherings of the professional team and conversations with the ‘next generation’). An application under the VTA will often arise out of such conversations as a method of achieving long term goals and addressing potential challenges.
Some of the most commonly seen scenarios for applications under the VTA are:
Extending the lifetime of the trust
A number of settlements may now be nearing the end of their lives. Before 2009, UK trusts were limited to a fixed term of 80 years or a ‘life in being’ plus up to 21 years. The termination of a trust will inevitably have important ramifications for the beneficiaries and the preservation of the estate itself and is likely to result in significant tax charges (together with the need to revisit any arrangements in relation to heritage land and chattels if conditional exemption from IHT applies).
Following legislative changes in 2009, trusts may now last for 125 years and an existing trust can be extended for this full further period. This can often provide the impetus for an application under the VTA.
Extending the accumulation period
An application to extend the lifetime of the trust may also seek to extend the ‘accumulation period’. This is the period during which the trustees may accumulate trust income by adding it to capital, rather than paying it out to or for the benefit of beneficiaries. Before 2009, accumulation periods were generally limited to 21 years. From 2009, this limitation was removed, so trustees can in principle accumulate income for the entire lifetime of the trust.
This may be important where, for example, a landed settlement holds a large proportion of illiquid assets (such as land) as against a relatively small proportion of readily available assets, and the trustees wish to build up a reserve for meeting, say, IHT charges. It will also allow trustees a greater degree of flexibility – for example, income distributions to a particular beneficiary could be delayed if necessary for tax reasons.
The VTA may be used to achieve strategic objectives. A beneficiary or class of beneficiaries may become entitled to an absolute interest under the terms of a settlement, which may not be desirable for succession or governance reasons. The court can, under the VTA, postpone this entitlement (which may also be prudent for tax reasons).
An application under the VTA could also be used to grant a spouse of a life tenant a life interest (for IHT planning) or to rationalise the beneficial class. Rhoddy Voremberg’s article in this newsletter examines recent issues in relation to succession and gender. Future applications under the VTA may wish to address such issues as part of wider variation exercises.
Older, less flexible, trusts may include administrative powers which are not ideal for running a modern estate. For example, the investment and sale provisions are often more restrictive than modern trust instruments, or Settled Land Act 1925 provisions may apply which make the settlement more difficult to administer. Applications under the VTA will usually seek, alongside other changes, to modernise specific administrative powers to address these issues.
How is an Application Made?
Applications under the VTA are almost invariably made on an agreed, consensual, basis, which make them more predicable than other types of court application.
A formal application to court will need to be prepared. The role of claimant (the party who makes the claim) is often taken by an adult beneficiary. The other parties (who will, technically, be defendants) must include all the trustees and the other adult beneficiaries. The minor and unborn beneficiaries can be represented by the trustees.
A claim form is filed at court, with evidence in support of the application set out in a witness statement. The counsel for the unborns will need to explain why, in their view, the application is for the benefit of those beneficiaries. Provided the judge is satisfied with the proposal, the arrangement will then be approved, and the trust will have been varied.
It is worth touching on one further procedural point. The court had, traditionally, often been prepared to hear claims under the VTA in private. Recently, there has been a change of approach and the assumption, increasingly, is that hearings under the VTA will be heard in public.
Before the claim under the VTA is filed at court, the parties may now attend a ‘pre-issue’ hearing. This will deal with various procedural matters, including any request for privacy orders. While the direction of travel is away from blanket privacy orders, the court will frequently make orders to preserve an element of privacy, such as appropriate reporting restrictions. When taken together with other practical measures it will often be possible to ensure that information that needs to be kept confidential remains so.
If you require further information about anything covered in this briefing note, please contact our trusts and estates lawyers or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, January 2019