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Variation and Termination of Express Trusts Associate Professor Cameron Stewart (with a few additions by Dr Lisa Ford, UNSW)

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Presentation on theme: "Variation and Termination of Express Trusts Associate Professor Cameron Stewart (with a few additions by Dr Lisa Ford, UNSW)"— Presentation transcript:

1 Variation and Termination of Express Trusts Associate Professor Cameron Stewart (with a few additions by Dr Lisa Ford, UNSW)

2 Variation of Express Trusts Powers to Vary Contained in Express Trusts A trust instrument can contain provisions which give the trustee the power to make certain amendments to the trust arrangement. For example, it is common for discretionary trusts to grant a power to the trustee to add beneficiaries to the class of objects: Ford & Lee at [15260]. In Kearns v Hill (1990) 21 NSWLR 107 the NSW Court of Appeal found that the power of variation contained in a trust instrument was to be given its natural an ordinary meaning even where it included a power to vary the identity of the beneficiaries of the trust.

3 Variation of Express Trusts Inherent Power to Vary Trusts Emergencies: Changes in the nature of investments for infants from personalty to realty, Lord Ashburton v Lady Ashburton (1801) 6 Ves 6; 31 ER 910; Re Jackson (1882) 21 Ch D 786; Investments in business transactions not authorised by a trust of settled land, Re Collins (1886) 32 Ch D 229; Havelock v Havelock (1881) 17 Ch D 807; Payment of maintenance out of income, even where there is a direction to accumulate income, Re New [1901] 2 Ch 534; Re Tollemache [1903] 1 Ch 955; and Compromises in favour of unborn children, Re Trenchard [1902] Ch 378; Salkeld v Salkeld (No 2) BC 200001626; [2000] SASC 296

4 Variation of Express Trusts Tickle v Tickle (1987) 10 NSWLR 581, Young J decided not to follow the restrictions placed on the courts power as set down by Chapman v Chapman. Instead, His Honour found at 586 that the inherent power might embrace circumstances where there was 'an element of salvage and a flavour of compromise and the combination of these factors may make it a proper case for the court to exercise jurisdiction to vary.' As such Young J thought it wise to add a fifth category where the power to vary should be exercised when circumstances have occurred which have tended to thwart the settlor's intention and where the parties have consented to a course which will effect an alternative scheme in line with the settlor's intention.

5 Variation of Express Trusts Statutory Power to Vary Trusts After the Second World War, the taxation of family trusts in Britain led to political pressure to allow variation of express trusts in ways that would lessen the impact of taxation Trustee Act 1925 (NSW), s 81

6 Termination or failure of express trusts Illegality: Any estate involved will be allowed to lie where it falls, meaning that equity will not upset the legal title of the property by imposing a trust: Holman v Johnson The court’s finding of illegality depends on whether the party has to rely on evidence of his or her own fraud to prove their title — equity will not assist them: Tinsley v Milligan

7 Termination or failure of express trusts However, if it is possible to prove title without the need to rely on evidence of illegality, the title can be upheld in equity. For exam­ple, in Tinsley v Milligan, a house had been purchased jointly by the parties but registered in the name of one party, so as to allow the other to continue to get social security. Given that one party had provided part of the proceeds an automatic presumption arose of a resulting trust: see Chapter 21. The result­ing trust was found to be valid because it arose without the necessity to bring evidence of the illegal purpose behind the transaction.

8 Termination or failure of express trusts In Australia the Tinsley v Milligan approach has been rejected and a more flexible test adopted that requires the court to examine the policy behind the law that has been breached

9 Termination or failure of express trusts Nelson v Nelson (1995) 184 CLR 538 A mother paid the purchase price of a house which was then registered in her son and daughter’s names. The purpose behind the transaction was to allow the mother to purchase another home at some future time, with the benefit of a subsidy under the Defence Service Homes Act 1918 (Cth). The subsidy was only available for one house. Sometime later the mother purchased another house with the use of the subsidy, making false declarations that she did not own any other property. The house in the children’s names was later sold. The daughter argued that she had a beneficial interest in the proceeds, whereas the mother and the son claimed a beneficial interest for the mother.

10 Nelson v Nelson Mother House Purchase $$ Registration Son & Daughter Who gets beneficial title in the proceeds? LAW: Legal Title holders? (son and daughter) EQUITY: Resulting trust presumed for benefit of ‘real’ purchaser (mother) EQUITY: Presumption of resulting trust is negated by presumption of advancement when purchase money provided by a parent and property put in name of a child So unlike Tinsley v Milligan, Mrs Nelson had to rely on her illegal behaviour to show that she did not provide the purchase price for the benefit of her children.

11 Termination or failure of express trusts Deane and Gummow JJ found that there should be no general policy of letting the loss fall where it lies. Instead equity should look at the specific circumstances of the case and the particular policy behind the law that had been breached. After analysing the Act, Deane and Gummow JJ found at CLR 570; ALR 158 that the policy was to help eligible persons purchase dwellings. It was not to prevent them from owning more than one house.

12 Termination or failure of express trusts As such, the policy did not require the court to automatically refuse equitable relief. Additionally, given the mother was seeking equitable relief, she was obliged to make good the amounts that she had defrauded from the government, before a resulting trust would be enforced

13 Termination or failure of express trusts McHugh J stated at CLR 613; ALR 193: … courts should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless: (a) the statute discloses an intention that those rights should be unenforceable in all circumstances; or (b) (i) the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct; (ii) the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; and (iii) the statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies.

14 Termination or failure of express trusts Toohey J, at CLR 5978; ALR 180 did not require the mother to pay back the subsidy as that was a matter for the government Dawson J took a different path and found that the false declaration was not sufficiently related to the circumstances giving rise to the resulting trust. The purchase of the home occurred a substantial period before the false declara tion was made. His Honour rejected at CLR 581; ALR 166 the distinction drawn in Tinsley v Milligan between cases where the illegality needs to be relied upon and those where it does not. Like Toohey J, Dawson J did not require the mother to repay the subsidy, given that the government had the power to recall it.

15 Termination or failure of express trusts Day v Couch [2000] NSWSC 230, the plaintiff was in a car accident and believed that he was liable for a large claim of damages. He transferred properties to his father for the purpose of making them unavaila­ble to any possible creditors. However, no claim was brought against him. After his father’s death he sought a declaration that he was the beneficial owner of the properties on resulting trust. There was no breach of any statute as the consequences of the illegal intent did not occur. As such Bryson J upheld the imposition of a resulting trust.

16 Public policy Immorality: A trust that promotes immorality will be invalid. Under this heading trusts in favour of future illegitimate children have been struck down: Re Ayles’ Trusts (1875) 1 Ch D 282, although it would seem highly unlikely that this would be the case in modern times Trusts that completely restrain a person from marrying, or which encourage a person to divorce, are also void: Re Johnson’s Will Trusts [1967] 1 All ER 553.

17 Public policy Trusts which have the effect of separating parent and child will also offend public policy: Re Boulter; Boulter v Boulter [1922] 1 Ch 75. A trust for one’s widow or widower which ceases on their remarriage is valid: Lloyd v Lloyd (1852) 2 Sim (NS) 255; 61 ER 338. Partial restraints on marriage, such as preventing marriage to a person of a particular religious denomination, race, ethnicity or class, have also been upheld: Seidler v Schallhofer

18 Public policy Kay v SESAHS I give the Children’s hospital at Randwick $10,000 for the treatment of White babies Racial Discrimination Act s 8(2) This Part does not apply to: (a) any provision of a deed, will or other instrument, whether made before or after the commencement of this Part, that confers charitable benefits, or enables charitable benefits to be conferred, on persons of a particular race, colour or national or ethnic origin; or (b) any act done in order to comply with such a provision

19 Restraints on alienation Once property has been given absolutely on trust, any restraint that is inconsistent or repugnant to that absolute gift will be invalid. For example, a restraint purporting to prevent the sale of the property after it has been given absolutely will be void: Public Trustee v Donoghue [1999] TASSC 147. Similarly in Brandon v Robinson (1811) 18 Ves 429; 34 ER 379, a trust which granted a life interest was given on the basis that the life interest was not transferable. This restraint was void because the life interest contained a power to alienate, which was offended by the condition subsequent.

20 Restraints on alienation A distinction must be drawn between an absolute gift that is sub­ject to a restraint, and a determinable interest that automatically ends on the happening of some event. The absolute gift, which is subject to a condition subsequent, in effect grants a complete interest, that is then divested on the satisfaction of the condition. As such, this type of condition subsequent is void as a restraint on alienation. If, however, the interest transferred in trust is determinable, the interest is considered to have ended naturally on the occurrence of the event:

21 Restraints on alienation For example, ‘to A on trust for B for life, but if B ceases to use the property as a hotel, then to C’ is considered to contain a restraint on alienation. The life interest is granted to B, but can be artificially cut short by the event of B no longer using the property as a hotel. Such a condition sub­ sequent is a restraint on alienation.

22 Restraints on alienation However, if the trust was worded ‘to A on trust for B for life until B ceases to use the property as a hotel’, B’s life interest is always limited in time to the event of the property no longer being used as a hotel. If and when the property is no longer used as a hotel B’s estate comes naturally to an end. This disposition is not considered to be an absolute gift with a limitation, as the interest contains the limitation within itself. As such there is no restraint on the interest granted

23 The rule against indestructible trusts A trust instrument that seeks to prevent the beneficiaries from eventually using and exhausting the capital of the trust funds will be void. Such a trust is objectionable because it prevents the trust property from being alienable: Re Cain [1950] VR 382 at 391. Such a trust also offends the rights of beneficiaries under the rule in Saunders v Vautier

24 The rule against perpetuities The purpose behind the rule is to place time limits on the creation of interests in property that prevent testa­tors from being able to forever control property from the grave via the use of infinite successive interests McCrimmon states at 130: –While strong arguments can be made for the abolition of the Rule, that fact remains that it is part of our law and legal practitioners and law students should have an understanding of its application

25 The modern rule against perpetuities An interest that is created to vest some time in the future, must vest within a life in being plus 21 years from the date the instrument becomes effective

26 The modern rule against perpetuities Note that the rule is not concerned with how long an interest will last. It is only concerned that the interest vest within the perpetuity period. A ‘vested interest’ is an interest in property that has taken effect in possession, or one that will take effect in possession through the natural determination of prior estates. To illustrate, consider a gift ‘to A on trust for B for life, and then to C’. This disposition contains three separate interests: the legal title of A as trustee, the equitable life estate in B and the remainder to C. All of these interests are considered to be vested. A’s interest has taken effect in possession.

27 The modern rule against perpetuities To contrast, consider a gift of property ‘to A on trust for B for life, then to C if C attains 21 years’. Unlike the previous example, C’s inter­est will not automatically come into possession on B’s death. C’s interest is subject to a contingency, and is referred to as a ‘contingent remainder.’ C’s interest will only vest if C attains the age of 21.

28 The modern rule against perpetuities The perpetuity period is equivalent to a life in being plus an additional 21 years. The phrase a ‘life in being’ is usually a reference to the life of someone mentioned expressly in the disposition. The life in being must be human and the person must be alive at the date of the creation of the interest: For example, in a gift to ‘B for life and then to any children of B who attain 18 years’ the life in being is taken to be B. The contingent interests of the unborn children must vest within 21 years after the death of B.

29 The modern rule against perpetuities More than one person can be employed in a disposition as ‘lives in being’. When a class is used the 21 years runs from the death of the last survivor in the class. Classes will only be valid if the class is not capable of increasing in number when the instrument takes effect. Moreover, the class must be capable of ascertainment at the date the instrument comes into effect.

30 The modern rule against perpetuities A popular example of this princi­ple is the ‘royal lives’ clause where the lives in being are defined to be the descendants of a particular member of the royal family. For example, in Clay v Karlson (1998) 19 WAR 287, the life in being was defined to be the last living survivor of King George V.

31 The modern rule against perpetuities If the life in being is an unborn child (en ventre sa mere — ‘in the belly of the mother’) the length of gestation is added to the perpetuity period. People are presumed to be able to reproduce no matter what age they are!!!!!

32 SOME STEPS 1. Is this a perpetuity problem? IE is there a contingent remainder 2. When is the interest created? (death? Inter vivos) 3. Who is the life in being? (living person or closed class of living persons) 4. Is there any possibility that it will vest outside the period of LIB + 21 years 5. Is there some mitigating rule or statute (will talk about later)


34 The modern rule against perpetuities: EXAMPLES An inter vivos gift ‘to A on trust for B for life, and then to any of B’s chil­dren that marry’. In this disposition the life in being is taken to be B. If B is alive at the time of the creation of the trust, the gift is to the children is void. B’s interest is vested but the children’s interest is contingent on them marrying. B may have children after the trust is created and those children might marry more than 21 years after B’s death

35 B is life in Being B’s children can marry more than 21 years after his death To A on trust B for life, then to any of B’s children that marry

36 The modern rule against perpetuities A gift of a gravel pit on trust to A to use until the pit is exhausted, and then to be sold and divided equally among the testator’s living issue. Assume that the pit is actually exhausted after six years. This gift will still be void because at the date the gift becomes effective it may take longer than a life in being and 21 years for the pit to be exhausted. This is known as an example of the magic gravel pit

37 gravel pit on trust to A to use until the pit is exhausted, and then to be sold and divided equally among the testator’s living issue A is life in being At the time the gift vests, no one knows if the gravel pit will ever be exhausted.. Doesn’t matter if it is in fact exhausted before perp pd POSSIBILITY = VOID

38 The modern rule against perpetuities A testamentary gift ‘to A, my wife, for life, then to A’s children for life, then for such of any children of my brother and sister who attain 21’. In this example, the wife is treated as the life in being. Assume that at the death of the testator his parents were both aged 66. Regardless of this fact, it is presumed under the modern rule that both parents were fertile and could produce more children. Therefore the gift over to the nephews and nieces is too remote as it was possible that the parents of the testator could have more children who might then breed and add to the class more than 21 years after the death of the wife. This is known as the example of the fertile octogenarian

39 ‘to A, my wife, for life, then to A’s children for life, then for such of any children of my brother and sister who attain 21’ (T’s parents are old but living at the time of death) A (wife) is LIB Brothers + Sisters of T can be born and have babies Babies of brothers and sisters can reach 21

40 Common Law Amelioration To soften the Rule against perpetuities, courts developed the Rule in Andrew v Partington (1791) 3 Bro CC 401; 29 ER 610. It is best explained through example. TAKE THE VOID GIFT: ‘A on trust for B for life and then such of B’s children that attain 25 years’

41 ‘A on trust for B for life and then such of B’s children that attain 25 years’, where B is alive at the time death/effect B is LIB B’s children can turn 25 >21 years after B’s death B can have children until the day he dies

42 RULE IN Andrews v Partington If one of B’s children turns 25 before the first interest vests, the class of B’s children is closed. Children born after that date don’t get anything. So the gift doesn’t offend the Rule

43 Statutory reform The primary reform has been the introduction of wait-and-see provisions: Perpetuities Act 1984 (NSW), s 8(1) The second major reform is in relation to the calculation of the perpetuity period. The period is set at 80 years automatically: Perpetuities Act 1984 (NSW), s 7

44 Statutory reform The third reform consists of an automatic reduction in age for beneficial interests that would fail because they are stipulated to take effect upon the beneficiaries reaching a specified age beyond 21 years plus a life in being. In some jurisdictions the age can be read down to an age that would not infringe the modern rule: Perpetuities Act 1984 (NSW), s 9(1)

45 Question Sue died leaving a farming property and a large bank account. Under her will, Sue appointed her brother Lex as executor and trustee of her estate. Sue was a prejudiced woman and disliked Catholics immensely. Clause 4 of her will stated: I give the farm to Lex on trust for Elizabeth for life, on the condition that Elizabeth is not married to a Catholic.

46 Question Clause 8 of her will states: I give $200,000 to Lex on trust for Anthony, then for any wife he may marry for life, then to Anthony’s children that attain 25 years. At the time of Sue’s death, Elizabeth had been married to Patrick (a Catholic) for five years. Sue had been aware of the marriage and did not approve. Anthony was aged 65 and had not yet married or had any children. He was, however, considering marriage to Bronwyn, his girlfriend who was aged 70. Analyse the validity of these trusts.

47 Solution Given the use of the phrase ‘on the condition that’ in cl 4, the gift of the life estate to Elizabeth has taken the form of a disposition with a condi­ tion subsequent. The condition subsequent concerning a marriage to a Catholic can be struck out as being against public policy because it requires Elizabeth to divorce. At first glance the gift appears to be a valid partial restraint of marriage as the condition restrains marriage to a person of a particular religious faith

48 Solution However, if a partial restraint is worded in such a way that it forces the beneficiary to divorce it will be struck down. It is clear that the testator’s intention is to force the beneficiary to divorce. As the condition is severable from the disposition, Elizabeth can take her interest free from it.

49 Solution Clause 8 needs to be examined to determine whether it offends the rule against perpetuities. For the purpose of calculating the perpetuity period, Anthony must be the life in being as the future wife and children are not ascertainable at the date the will comes into effect. The gift to the future wife is valid as it will vest within the life in being, because her interest will vest when she marries Anthony.

50 Solution However, the children’s interest offends the rule. First it is presumed that Anthony is fertile and that any wife he marries will also be fertile, regardless of their age. It is therefore possible that Anthony’s wife will bear him a child that will not reach 25 years of age within 21 years of his death. Therefore, that child’s interest could possibly vest outside the period.

51 Solution The gift would be saved by legislation, which automatically reduces the age restriction to bring it within the perpetuity period. This would have the effect of reducing the age restrictions to 21 years as opposed to 25 years. Finally, the wait- and-see provisions would allow the gift to survive initial uncertainty

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