Safe from harm

The Variation of Trusts Act 1958 confers on the court the power to consent to an arrangement varying the trusts arising under a will or settlement on behalf of any person having an interest under those trusts but who, by reason of infancy or other incapacity, is incapable of consenting on his or her own behalf. The court may not, however, approve an arrangement unless the carrying out of that arrangement would be for the benefit of the person on whose behalf it is asked to consent.

Private life

A brief scan of the footnotes to the relevant chapter in Lewin on Trusts reveals that, while there were several reported cases on the Variation of Trusts Act 1958 in the 1960s, recently reported decisions are few and far between. The reasons for this may include the greater need in the years shortly after the Act came into force to examine the working of the new jurisdiction. It may also be the result of the recent tendency for such cases to be heard in private.

Whatever the reason, the decision of Mr Justice Norris in Wright v Gater [2011] EWCA Civ 802 provides useful guidance not only on certain points of procedure in relation to applications under the 1958 Act, but also on how the court should undertake its task of assessing whether or not the carrying out of the proposed arrangement would be for the benefit of the person on whose behalf it is asked to consent, particularly where the alleged benefit is not financial in nature.

The facts of the case were as follows. Edward Greenstreet died intestate on 28 October 2009. His estate, which was worth about £514,000, passed to his son, Kieran. No inheritance tax (IHT) was payable because the estate was entitled to claim a double nil-rate band.
Kieran died on 17 May 2010. He too was intestate. The inheritance tax payable in respect of Kieran’s estate (which included about £6,000 of his own savings in addition to the entitlement under his father’s unadministered estate) was about £89,000.

Kieran was survived by his son, Rory, and by his partner, Ellen. Rory was three years old. Under the intestacy rules, Kieran’s estate (including his inheritance from Edward) was held upon the statutory trusts for Rory contingently upon his attaining the age of 18 and, in default thereof, for Kieran’s uncles and aunts (referred to in the judgment as ?‘the ultimate beneficiaries’).

If Rory were to take Edward’s estate directly, rather than through Kieran’s estate, no IHT would be payable on the joint estates (provided that the variation occurred before the second anniversary of Edward’s death). Therefore, an application was brought by Rory’s mother and an uncle (in their capacity as administrators, for the use and benefit of Rory, of Kieran’s estate) to vary the trusts of Edward’s estate. However, Ellen took the view (and gave evidence to the effect) that it was not for the benefit of Rory (or, indeed, any child) to be in absolute control of substantial amounts of capital or income in his early twenties. Therefore, it was proposed that the estate would be held upon trust for Rory contingently upon his reaching the age of 30 (but subject to a power to apply income for his benefit until he reached that age and with the benefit of an enlarged power of advancement) and with a default trust in favour of the ultimate beneficiaries and Ellen (who, to the judge’s admiration, had made no claim against Kieran’s estate).

Value added

It was held by Norris J:

1. The court had to be satisfied that the proposed arrangement was for Rory’s benefit otherwise it would have no power or discretion to approve the arrangement on his behalf. Drawing on previous authority, the judge identified several principles to be applied when assessing whether or not the court is able to approve an arrangement.
First, the task should be approached with “a fair, cautious and enquiring mind”. Second, it is never enough that the proposal merely does no harm; to elicit the court’s approval it must confer a real benefit. Third, ‘benefit’ is generally financial in nature. In assessing the financial benefit of a proposal, the court will ask whether, if the person on whose behalf it is being asked to approve were competent and reasonable, the bargain is one into which he or she would enter (and, in this regard, the court will take such minor risks as an adult would be prepared to take).
But, fourth, ‘benefit’ need not be financial. In such cases, the assessment of benefit must be approached with caution to prevent the process from merely reflecting the perceptions and preferences of the judge. Finally, one way of assessing non-financial benefits would be to ask whether a prudent adult, motivated by intelligent self-interest and after sustained consideration, would be likely to accept the proposal.

2. The proposed arrangement would give rise to an immediate IHT saving of about £89,000 but that benefit fell to be weighed against the fact that Rory would suffer through the deferment of vesting. It was said in support of the proposals that this disadvantage would be cancelled out by the moral benefit to Rory of his not being in control of income or capital until the age of 30. The judge accepted that deferment of vesting is capable of constituting ‘benefit’ in an appropriate case but rejected the submission that the court should consider such deferment beyond the age of majority as ‘beneficial’ in principle.
The court would have to be persuaded that such deferment amounted to a benefit on the particular facts of any given case, e.g. because of the proven characteristics of the beneficiary, the size of the fund, the circumstances in life of the beneficiary or the family context. In Rory’s case, the only evidence was that of his mother, who had simply proffered the view that her three-year-old son should not have access to substantial capital or income at 18.

3. The judge could not approve the proposed arrangement. First, it came “dangerously close to... the line” between “variation” and “resettlement” because nothing remained of the original statutory trust. Second, there was nothing in Rory’s character or the setting of his life to suggest that there was a real risk of his being incapable of dealing with income or capital before the age of 30. Third, he considered it wrong to approve a long-term trust arrangement where “close family members controlled the purse strings” and that Rory had the right to have his future independence and autonomy as a young man respected.

Revised proposal

4. Nevertheless, the judge could (and did) approve a revised proposal, under which the trustees would include a solicitor (in addition to Rory’s mother and the uncle) and under which Rory would become entitled to income and ten per cent of the capital at 18 and to the remainder of the capital at 25. He was able to approve the revised proposal for four reasons. First, it constituted a variation rather than a resettlement. Second, given Ellen’s strong views about postponing Rory’s entitlement, if the statutory trusts remained unaltered then vesting might well be deferred to the extent permitted by the statutory power of advancement but if the court had a approved a variation then, provided no character flaws should emerge, “sensible trustees will regard the proper degree of postponement of his entitlement as settled”.

Third, after accumulation of income, the statutory trusts would entitle Rory to about £750,000 at the age of 18, which any reasonable person would regard as posing risks for Rory, being brought up in a family not accustomed to significant wealth and without his father. Fourth, the judge considered that a prudent adult would consider the revised proposal as being a proportionate response to the risk but as going no further than necessary.

The decision of Norris J provides a helpful reminder that there is no principle that the postponement of vesting of a large trust fund is necessarily beneficial. Any such postponement must be necessary and proportionate to the risks of early vesting as revealed by the facts of the specific case.

The judge also had some comments on procedural aspects. Notwithstanding the looming two-year deadline for implementing the proposal, it was not appropriate for the matter to be dealt with on the papers: save in a “truly exceptional” case, the approval of a variation ought to be considered at a hearing.
Furthermore, the proposal was promoted by Ellen (as one of Kieran’s personal representatives) but she also acted as Rory’s litigation friend. Although Ellen sought no personal gain, this dual role was inappropriate: she could not both advocate the proposal and subject it to independent scrutiny in Rory’s interest. This problem was compounded by the fact that a single barrister was instructed on behalf of both the claimants and the respondents. Counsel was therefore placed in the unenviable position of having to draft the arrangement for the claimants and of having to provide an opinion in support of it on behalf of Rory.

Another person ought to have been appointed as Rory’s litigation friend and the instruction of separate counsel was ?“a fundamental requirement”. Although this inevitably adds to the costs, it is clear that, even in a small and united family, separate representation is required to enable the proposed variation to be subjected to the necessary level of independent scrutiny. n

Joseph Goldsmith is a barrister at 5 Stone Buildings