Here’s the problem:
If, for whatever reason, it is thought a good idea to vary a trust, the options are relatively limited in most jurisdictions, or at least those which have based their law on the English tradition.
Absent a power in the trust itself, the choices are basically two:
- If the changes required are merely ones affecting the management and administration of the trust (only incidentally varying any beneficial interests) most of the trust jurisdictions have a user-friendly provision allowing the court to approve it without requiring the consent of every adult beneficiary and without the requirement of “benefit” for minors and unborns.
- But if the desired changes are to the beneficial interests themselves both those requirements must generally be satisfied.
What if some of the beneficiaries refuse to consent or are advised not to do so for tax reasons?
And how can you demonstrate the necessary element of benefit?
These questions have always been with us but have become pressing lately as a somewhat unexpected result of FATCA reporting requirements and certain tax issues affecting, particularly, US persons.
What if, for those reasons, it would be helpful to turn fixed trusts of income into discretionary interests?
In jurisdictions which follow the English model of the Variation of Trusts Act 1958 that may be very difficult to do:
How is it for the financial benefit of minors and unborns to sacrifice an entitlement in favour of a purely discretionary interest?
And if an adult beneficiary agrees to that change is he disposing of a valuable interest for tax purposes?
All this has led to an increased interest in Bermuda and its jurisdiction under section 47 of the Trustee Act 1975. At a glance, section 47 looks like section 57 of the Trustee Act 1925 in England and its equivalents elsewhere, which allow changes merely to management and administration. But section 47 lacks
those qualifying words and has been construed far more widely so that powers sought by trustees who have the effect of varying beneficial interests have been approved under that section. That makes section 47, with its absence of a requirement for adult consents and its test of expediency, look very attractive, even in cases where it would require a change of the proper law to get one to Bermuda.
The big question for debate is this:
If there is to be a rush to Bermuda and a consequent loss of business in other jurisdictions, should those jurisdictions try to do the same in order to retain the business?
We have some reservations about that. Bermuda retains its full variation jurisdiction in section 48 of the Trustee Act but its presence is intriguing given the liberality with which section 47 has been construed.
Why would one ever go to the lengths of pursuing a difficult full scale variation under section 48 if the same or similar can be achieved more easily under section 47?
We suggest that in those jurisdictions which are considering amendments to the variation legislation it will be essential to look at the variation provisions as a piece and to make some hard choices.
Do you really want to make it possible to deprive a beneficiary of a fixed interest, over his head, because others might find it expedient?
On the other hand, there may be undoubted advantages in being able to vary beneficial interests to meet the changing demands of tax and regulation.
Why should that be prevented by a beneficiary who refuses to consent?
These are tricky policy questions which are not easy to answer. They may be even more difficult in the light of various “decanting” statutes that have become prominent in the trust laws of some American states, which are perhaps an illustration of the maxim that the US and the English-law based jurisdictions sometimes get to the same point by moving in opposite directions.