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General

Not a good time

All good things must come to an end.  This is certainly true of trusts, whether good or not.  However, sometimes it just isn’t a good time for a trust’s assets to vest.  The reason for this are many and varied.  Often they involve tax.  For example if the trust’s assets comprise an immature forest and the trust must vest before the forest can be harvested the trustees will have a tax liability but no income to meet it.  See Dalziell v Dalziel.   Salvation can come in the form of a variation of trust (presuming the trust period is less than the maximum period permissible in accordance with the Perpetuities Act).  However, trustees cannot vary a trust as of right.  If there is a specific power of variation, well and good.  Alternatively, if all of the beneficiaries are of age and consent, again well and good.  However, in practice this is rarely the case as when we say all the beneficiaries are of age this requires all of the beneficiaries (actual and contingent eg future children or grandchildren).  Fortunately there is a third option, s 64A of the Trustee Act where (presuming all adult beneficiaries have consented) the court can approve a variation (including a variation to the vesting period) on behalf of the minor or contingent beneficiaries.

When deciding whether to consent or not  the court is able to look afresh at trusts where circumstances have arisen that may not have been foreseen or foreseeable by those establishing trusts.  For example, in Dalziell v Dalziel the Court took note of the fact that the taxing provisions now in force were not in force when the trust was settled.

The proper approach to dealing with applications under s 64A was usefully summarised by French J in McKnight v Craig at para [7] and [8] as follows:

“Relevant legal principles

[7] The role of the Court in an application under s 64 of the Trustee Act is to give consent to the arrangement on behalf of persons such as minors, unborn and unascertained beneficiaries who are unable to give consent themselves.

[8] The following principles may be distilled from the authorities: see Re Greenwood [1988] 1 NZLR 197, Re Byrne HC Wellington CIV-2003-485-000167,25 May 2004, Miller J and Ewington & Anor v Schulz & Ors HC Auckland CIV-2008-404-006596, 5 May 2009, Winkelmann J.

i) The power to approve a variation is discretionary.

ii) The Court may consider any proposal which varies or revokes any or all of the trusts or a proposal which enlarges the powers of the trustees in managing or administering the property subject to the trust.

iii) The discretion is exercised in the interests of the person on whose behalf the Court is asked to approve the variation and from their point of view. The Court should therefore ask itself whether the person would have given approval if that person were alive, of full capacity and properly advised.

iv) The Court can approve a scheme which conflicts with the intentions of the settlor but should not do so lightly.

v) The Court considers the trust provisions afresh if circumstances have arisen which were not foreseen or may not have been foreseeable at the time the trust was established.

vi) The Court cannot approve an arrangement to the detriment of any person on whose behalf the Court is giving consent.

vii) But the Court is to take a wide approach to benefits and detriments in arrangements and must consider the arrangements as a whole in a practical and business like way. Indirect and intangible benefits and detriments are relevant including the welfare and honour of the family.

viii) Difficulties may be met by amendments to the proposal or covenants by persons benefitting to make good losses to the disadvantage of other beneficiaries.

ix) An order approving a proposed variation may be conditional.”

In Argus v Barber the court approved variations including a variation to the distribution date that was sought due to concerns that the trust no longer met the definition of a complying trust due to minor changes in the definition of complying trusts introduced when the term qualifying trusts was replaced with complying trusts.  The variation did not address the definitional issue (this is being addressed separately and the trust’s accountant advises that a legislative change may be required to resolve the matter) but it did give the trustees time so that the matter might be resolved.

When considering whether or not to approve a variation, the court’s stand point is whether the variation is in the interests of the beneficiaries who cannot by reason of age, infirmity or contingency, provide their own consent.  The court does not consider external factors such as whether the variation might not be in the best interests of say Inland Revenue.

As trusts come of age, the need to vary them to meet new or unexpected circumstances will arise more often.  Accordingly, it is important to appreciate when trustees can vary a trust, and when assistance might be required.   Court applications are not undertaken lightly.  However, trustees who do not take an appropriately robust approach to varying deeds  (for example promulgating a variation that a majority of the beneficiaries agree to) of trust may later find themselves liable to beneficiaries who did not consent.

References:

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