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

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1 Variation and Termination of Express Trusts 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 ; [2000] SASC 296

4 Variation of Express Trusts In Re Langford (dec’d) Equity Trustees Ltd v Langford [2005] VSC 84 at [31] (decision varied on appeal but not on this point), Byrne J found that the sale of settled land to pay outstanding land tax was not an emergency, as it was possible that the beneficiaries could all agree to the sale, even though they had not all done so by the date of hearing.

5 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.

6 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

7 Trustee Act 1925 (NSW), s 81 (1) Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release, or disposition, or any purchase, investment, acquisition, expenditure, or transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the instrument, if any, creating the trust, or by law, the Court: (a) may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions, including adjustment of the respective rights of the beneficiaries, as the Court may think fit, and (b) may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income...

8 Management or administration The words ‘management or administration’ have been said to be of ‘wide import’ and ‘pick up everything that a trustee may need to do in practical or legal terms in respect of trust property’: Royal Melbourne Hospital v Equity Trustees Ltd (2007) 18 VR 469 at 500. The phrase concerns both ‘the manner in which trust property is managed, administered, handled, directed or controlled and the actual carrying out of those functions’: Arakella Pty Ltd v Paton (2004) 60 NSWLR 334 at 354

9 Expedient The word ‘expedient’ is given a flexible meaning, but should be read to mean expedient for the beneficiaries: Riddle v Riddle (1952) 85 CLR 202 at 214. The term means ‘advantageous’, ‘desirable’, ‘suitable to the circumstances of the case’ and includes ‘expediency created by sound practical business considerations’: Trust Company Fiduciary Services Ltd v Challenger Managed Investments Ltd [2008] NSWSC 1155 at [24]; Application of NSFT Pty Ltd [2010] NSWSC 380 at [17]. The court may refuse to order a variation if not all the beneficial interests have been represented on the question of expediency: Feeney v Feeney [2008] NSWSC 298.

10 Expedient Examples of expedient variations include Arakella Pty Ltd v Paton, where Hamilton J used the power to change the nature of the beneficiaries’ interest in a unit trust from units to shares, on the basis that it did not subvert the beneficial interests but accommodated them to the commercial needs of the trust. In Colonial Foundation Ltd v The Attorney-General [2007] VSC 344, the deletion of otiose clauses which had been rendered redundant was found to be expedient, as were changes to the trustee’s power to vary the trust deed and distribute capital and income, so that investment could be targeted to more capital growth.

11 The intention of the creator The intention of the creator of the trust is a relevant consideration in discovering what is expedient: Riddle v Riddle at 224. The exercise of the court’s discretion should be informed, but not governed by, the intention of the settlor or testator/trix: Royal Melbourne Hospital v Equity Trustees Ltd at 493–4; Alexander v Alexander [2011] EWHC 2721 (Ch) at [22].

12 Impact on beneficial interests In Re Ansett Australia Ltd (2006) 151 FCR 41, the court refused a variation which would have allowed a resolution to be put to a meeting which was adverse to the interests of the beneficiaries. But variations may be expedient if they adversely affect some of the beneficiaries as an incidental effect of management and administration. It has been said that ‘expediency’ requires that the variation be expedient for the trust ‘as a whole’: Re Craven’s Estate [1937] Ch 431 at 436; Re Sykes [1974] 1 NSWLR 597 at 600. In Riddle v Riddle, at 222, Williams J said that, ‘[t]he sole question is whether it is expedient in the interests of the trust property as a whole’. This might be one reason for not allowing a variation which negatively alters some of the beneficial interests.

13 Impact on beneficial interests Stein v Sybmore Holdings, Campbell J went so far as to say that s 81 of the Trustee Act 1925 (NSW) did not contain a requirement for the variation to be expedient for the trust ‘as a whole’. His Honour found that the section did allow for beneficial interests to be altered. Campbell J approved of a postponement of the vesting date of the beneficial interests under a trust, in circumstances where the delay might have caused potential beneficiaries to be added to a class (watering down other interests), or caused some classes of beneficiaries to miss out altogether. The change nevertheless was asked for by the beneficiaries (and granted), given the large tax liabilities they would have faced had the property vested when originally intended.

14 Royal Melbourne Hospital v Equity Trustees Ltd (2007) 18 VR 469 Victorian Court of Appeal had to consider whether to give trustees a power to sell portions of a large estate of settled land to create a managed fund so that mounting land taxes could be paid. If the land taxes were not paid the estate would be sold in portions by the state government to meet the debts. The grandchildren, who were entitled to the use of the land for life, were in favour of doing nothing as this left their rights least affected. But by doing nothing, eventually all the property would have to be sold to meet the tax debts and nothing would be left for residuary beneficiaries (a number of charities). The variation to create a managed fund would avoid this eventuality as larger amounts could be sold to create a fund which could then meet the debt. However, the immediate impact of such sales would be to accelerate the reduction of the grandchildren’s rights. It was argued that such a variation was not in the interests of the trust as a whole, because the grandchildren would be adversely affected earlier than what they would otherwise be.

15 Royal Melbourne Hospital v Equity Trustees Ltd (2007) 18 VR 469 Bell AJA, at 504, said: The submissions of the minority (but not the majority) grandchildren would deny the court any capacity to bring a sense of proportion to the exercise of the expedience power. No matter how clear the settlor’s intention to create several beneficial interests, how inimical the consequences of inaction for the trust property or the interests of one class of beneficiaries, how great the sphere of beneficial enjoyment preserved, how small the degree of beneficial enjoyment reduced, how fairly the scales are held between the various beneficial interests and how expedient the power is in all other respects, if conferring the power would disadvantage some or even a single beneficiary, that, it is submitted, is the end of it. Those submissions must be rejected. This ‘large and important’ [quoting Riddle v Riddle at 214] power is not exercised by the principle of the dog in the manger. The true position is that a power, otherwise expedient for the management or administration of the trust property and in the interests of the trust or beneficiaries as a whole, may be conferred even if its impact may be relatively positive for some beneficiaries and relatively negative for others. A power does not necessarily lose its character of being expedient for that purpose because it may impact differentially on the beneficiaries.

16 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

17 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.

18 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

19 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.

20 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.

21 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.

22 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

23 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.

24 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.

25 Fear of litigation 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.

26 Foreign ownership Menezes v Salmon [2009] NSWSC 2 concerned a trust of land where the beneficiary was a foreign national. This trust was not approved under s 21A of the Foreign Acquisitions and Takeovers Act 1975 (Cth), but Macready AsJ found that the imposition of a trust would not be inconsistent with the Act, as the Act did not make it illegal for a foreign national to own land in Australia. Penalties could be imposed for failing to notify the Treasurer of an intention to buy land. Because of this the court would not strike down the trust as that would effectively impose additional sanctions on the plaintiff. Other courts have found similarly: Huang v Fu [2011] NSWSC 316; Fan v Tang [2010] NSWSC 11; Ikeuchi v Liu [2001] QSC 54. In Sheikholeslami v Tolcher [2011] FCA 1050, Yates J said that the defence of unclean hands would only require the foreign national to notify the Treasurer of the beneficial interest.

27 Trusts to defeat insolvency Bankruptcy Act 1966 (Cth),s 120 voids any transfer of property for less than market value which occurs within five years of the commencement of the bankruptcy. Declarations of trust are clearly within the provisions of the section: Ambrose (Trustee) in the matter of Poumako (Bankrupt) v Poumako [2012] FCA 889. There are a number of exceptions, such as payments of tax, maintenance, and debt agreements: s 120(2). Transfers will not be void if they took place more than two years prior to the commencement of bankruptcy and the transferee can prove that at that time the transferor was solvent: s 120(3). However, if the transfer occurred less than two years prior to the commencement of bankruptcy, the provision is activated and it will not matter that the transferee had acted in good faith and paid valuable consideration, if that consideration was less than market value: Anscor Pty Ltd v Clout (2004) 135 FCR 469. If the transfer was to a related entity, the transfer has to have taken place more than four years prior to the commencement of bankruptcy. There is a rebuttable presumption that a person who had not kept books, records and accounts was insolvent: s 120(3A).

28 Section 121 1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if: (a) the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and (b) the transferor’s main purpose in making the transfer was: (i) to prevent the transferred property from becoming divisible among the transferor’s creditors; or (ii) to hinder or delay the process of making property available for division among the transferor’s creditors.

29 Trustees of the Property of Cummins (a bankrupt) v Cummins (2006) 227 CLR 278 Cummins, a barrister, who had become bankrupt after failing to pay income tax for nearly 45 years. In 1987 he had transferred his legal and beneficial interests in his matrimonial home to his wife, and he also transferred his shares in his chambers to a trustee, where the trust was set up to benefit his family. The barrister argued that his main purpose for doing this was to limit his exposure to professional negligence liability, as he claimed to fear the possibility that barristers would lose their immunity from negligence. The trustee in bankruptcy argued that the main purpose in transferring the assets was to avoid the Commonwealth Government’s considerable claims for unpaid income tax.

30 Trustees of the Property of Cummins (a bankrupt) v Cummins (2006) 227 CLR 278 Main purpose test: [Mr Cummins] was well aware in August 1987 that he had incurred very substantial liabilities to [the ATO], contingent only on [the ATO] issuing assessments in respect of past income years; [Mr Cummins] was well aware at that time that [the ATO] would issue assessments once [his] longstanding tax delinquency became known, an event that could occur at any time; [Mr Cummins] divested himself voluntarily of virtually all his substantial assets in August 1987; in any event, the assets retained by [Mr Cummins] were not sufficient to meet his taxation liabilities, if [the ATO] decided to issue assessments; and [Mr Cummins] saw the transfers as increasing the chances that his assets would be protected from any claims made by [the ATO].

31 Fraudulent conveyances Conveyancing Act 1919 (NSW) ss 37A (1) Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930, with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced. (2) This section does not affect the law of bankruptcy for the time being in force. (3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.

32 Fraudulent conveyances Marcolongo v Chen (2011) 242 CLR 546 French CJ, Gummow, Crennan and Bell JJ found that an ‘intent to defraud’ included attempts to delay, hinder and defeat creditors. The majority also found that it was sufficient of the section to prove an intent to hinder, delay or defeat creditors without also showing that the debtor wanted creditors to suffer loss or had a purpose of causing loss. Nor does the intent to defraud does need to be the sole or dominant intent. The expression ‘ an intent to defraud creditor’ should therefore be given a liberal interpretation: Cassegrain v Gerard Cassegrain & Co Pty Ltd [2012] NSWSC 403 at [255].

33 Agusta Pty Ltd v Provident Capital Ltd [2012] NSWCA 26 Agusta incurred fees to Provident, when it was acting as a trustee. Agusta had a right to be indemnified out of the trust assets for those fees. Later, Agusta was replaced as trustee by Riva and trust assets were transferred to Riva. Provident argued that the transfer of trust property to Riva was void because the transfer was intended to delay or hinder its rights to be paid. There was no direct evidence of any intention to defraud Provident. An intention could only be inferred from the nature of the transaction and the effect that it had on Provident’s rights to be paid. The Court of Appeal found that Provident could still seek payment from the assets even though they had passed to Riva. The transfer of trustee rights to Riva included Agusta’s right to be indemnified for the fees. Provident was the only creditor of the trust. There was, therefore, no equitable reason, preventing Provident from subrogating its rights with Riva’s right to be indemnified for those costs

34 Family Law The Family Court has the power to declare the rights and titles that parties to a marriage have to property and it has the power to make alterations to those rights: Family Law Act 1975 (Cth) ss 78, 79. Section 85A of the Family Law Act also allows the courts to make orders it thinks are just and equitable in relation to property dealt with by ante-nuptial and post-nuptial settlements which are made in relation to the marriage.

35 Section 106B In proceedings under this Act, the court may set aside or restrain the making of an instrument or disposition by or on behalf of, or by direction or in the interest of, a party, which is made or proposed to be made to defeat an existing or anticipated order in those proceedings or which, irrespective of intention, is likely to defeat any such order.

36 Kennon v Spry (2008) 238 CLR 366 Dr ICF Spry created a trust in 1968, and later recorded in writing in Dr Spry was the settlor and trustee. The trust was a discretionary trust where the beneficiaries were all the issue of Dr Spry’s father and their spouses. In 1983 Dr Spry removed himself as a beneficiary. When his marriage came into difficulties in 1998 he executed a document which removed himself and his wife as capital beneficiaries. Dr Spry and his wife separated in 2001.

37 Kennon v Spry (2008) 238 CLR 366 In 2002, he created four trusts for his daughters and he exercised his discretion as trustee to apply all the income and capital from the primary trust into the trusts for his daughters. He also transferred a number of shares into the daughters’ trusts. Later that year he appointed Kennon as joint trustee, with himself, of the four trusts for the daughters. Mrs Spry made an application to the Family Court seeking to set aside the 1998 document which had removed her as a beneficiary, and the later transactions which had benefited the daughters. At trial, Strickland J found in favour of Mrs Spry and set aside the transactions using s 106B. Strickland J ordered that Dr Spry pay the wife a sum of over $2 million. The Full Court dismissed an appeal and the matter then proceeded to the High Court.

38 Kennon v Spry (2008) 238 CLR 366 Did s 106B apply? French CJ, at CLR 395, found that: Because the 1998 instrument effectively disposed of Mrs Spry’s equitable right to be considered in the application of the Trust fund, and having regard to the trial judge’s conclusions about the purpose of the instrument, the order setting it aside was an appropriate exercise of the Family Court’s power under s 106B. Stephens v Stephens (Enforcement) ([2009) 42 Fam LR 423

39 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

40 Public policy In Andrews v Parker [1973] Qd R 93, an agreement that a woman would return property should she forsake her de facto relationship and go back to her husband was upheld as it had not brought about the immoral relationship. Similarly, in Seidler v Schallhofer [1982] 2 NSWLR 80, an agreement to continue a de facto relationship for a period (wherafter the relationship would be abandoned or lead to marriage) was not void because the state of ‘immorality’ of the relationship was already in existence when the agreement was struck.

41 Ashton v Pratt (No 2) [2012] NSWSC 3 Madison Ashton, who provided escort services to the late billionaire, Richard Pratt. Ashton alleged that she had contracted with Pratt to provide him with services as his mistress in exchange for him settling $5 million of trust for her two children, paying her $500,000 per annum, $36,000 per annum for rental accommodation and $30,000 per annum for travel expenses.

42 Ashton v Pratt (No 2) [2012] NSWSC 3 Brereton J, at [52], said: The arrangements between Ms Ashton and Mr Pratt involved none of the saving graces which enabled a different result to be reached in the cases to which I have referred [including Andrews v Parker and Seidler v Schallhofer]. Those arrangements were not made to facilitate continuation of an existing cohabitation, but to establish the ‘mistress relationship’. The evidence does not reveal a relationship, or consideration, beyond ‘meretricious sexual services’. In my view, on the current state of the authorities, the arrangements were contrary to public policy and illegal in the relevant sense. Had they otherwise constituted a contract, it would have been void as contrary to public policy

43 Marriage and family 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. 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

44 Ramsay v Trustees Executors & Agency Co Ltd (1948) 77 CLR 321 A gift of income to the testator’s son with an absolute gift to take effect at the end of the marriage with his present wife was upheld. The intention of the testator was not to separate the married couple but merely to prevent the wife from receiving any interest in the funds. The son still got the benefit of the income from the trust while married, which indicated that there was no intention to encourage divorce.

45 Penfold v Perpetual Trustee [2002] NSWSC 648 Will where the children would get no capital benefits until the death and burial or cremation of their mother (who had been divorced from the testator). The children argued that the requirement was void against public policy because it had a tendency to wish their mother dead and engender hatred for her being alive. It was argued that the condition was calculated to cause family disharmony. Windeyer J disagreed and found that the fact that the children’s interests were delayed was not an encouragement to hatred or murder. The intention of the testator was to ensure that his ex-wife would not benefit from his estate.

46 Ellaway v Lawson [2006] QSC 170 The testatrix left a gift in her will to her two daughters but required the interest of one daughter to be conditional on her divorcing her current husband or his death. Unlike Ramsay, there were no other gifts to this daughter. It was argued that the conditions were against public policy as they encouraged divorce and wished the husband dead. Douglas J rejected these arguments and upheld the condition. There did not appear to be an obligation imposed on the daughter to divorce. While troubled by the lack of any other gift, Douglas J thought that there were other means for ameliorating this problem (namely through a family maintenance application). Douglas J also opined that society’s changing attitude to divorce may suggest that the public policy issue is no longer as prominent as it had been in the past, although his Honour declined to decide on that issue

47 Kay v South Eastern Sydney Area Health Service [2003] NSWSC 292 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

48 Misrepresentation If the settlor has been induced to create a trust by misrepresentation, or has been pressured into creating a trust via undue influence, the trust will be voidable: Johnston v Johnston (1884) 52 LT 76; Williams v Bayley (1866) LR 1 HL 200.

49 Tjiong v Tjiong [2012] NSWCA 201 The case involved the estate of the late George Tjiong. Two of George’s children, Katrina and Lindsay, sought to set aside a discretionary trust which had been created by George’s brother and executor, Richard Tjiong, who was also trustee of the discretionary trust. At trial, Palmer J found that the daughters had been fraudulently deceived into giving their consent to the creation of the trust. They falsely were told that they would avoid a large tax liability and therefore be better off financially by settling a trust. Palmer J also found that Richard had also made payments in breach of trust and had fabricated a claim against the deceased estate. These findings were upheld on appeal.

50 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.

51 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:

52 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 sub­sequent is a restraint on alienation.

53 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

54 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

55 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

56 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

57 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.

58 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 inter­ est 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.

59 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.

60 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.

61 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.

62 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!!!!!

63 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)

64 DRAW IT ON A DIAGRAM!!!!

65 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

66 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

67 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

68 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

69 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

70 ‘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

71 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’

72 ‘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

73 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

74 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

75 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)

76 Nemesis Australia Pty Ltd v Commissioner of Taxation (2005) 150 FCR 152 There were a number of dispositions which could possibly have vested outside the perpetuity period. The court refused to invalidate the dispositions as it was possible that the interests could vest prior to the expiry of the period. Tamberlin J, at 586, found that the wait-and-see provisions applied so that the disposition must be treated as if it were not subject to the rule until such time as it becomes established that the vesting must occur outside the perpetuity period

77 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.

78 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.

79 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 condi­tion 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

80 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.

81 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.

82 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.

83 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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