Estate Planning

Varying or Terminating Trusts

By Hull & Hull LLP

Trusts can be varied or terminated prematurely in two ways: (1) through the operation of the rule in Saunders v. Vautier; and (2) under the powers of the court given by way of the Variation of Trusts Act.  There is also potentially a third method - by a trustee's exercise of his absolute discretionary power given by the trust document.  

This third method begs the question: is a trustee's discretion truly absolute? Debra L. Stephens, The Ontario Children's Lawyer, comprehensively reviews this topic, several relevant authorities and the law in other jurisdictions in her paper given at The Six-Minute Estates Lawyer 2009, entitled "Trusts: When is a Termination a Variation?".

Ms. Stephens gleans the following principles from the authorities: that payment of all of the capital of a trust to the beneficiaries is an improper exercise of discretion where it is not in keeping with the primary intention of the settler. However, it can be justifiable where it appears the circumstances of the beneficiaries are such that payment would further, rather than frustrate, the settlor's intentions.

Ms. Stephens also notes that the circumstances surrounding the exercise of discretion will have a large impact on its perceived propriety - each case will be examined on its unique facts i.e. the wording of the trust document, the needs of the beneficiaries and the value of the trust.

It is noteworthy that The Children's Lawyer (Ontario) takes the position that a trustee's 'termination' of a trust is, in essence, a 'variation' if there are contingent interests involved. As such, even if the discretion is absolute the trustee does not have the right to transfer the capital to beneficiaries without first giving notice to The Children's Lawyer and securing court approval. 

Obtaining the necessary consents and court approval is something I agree with in every circumstance of a trust variation or termination by way of a trustee's exercise of his/her discretion.  It is surely the best way a trustee can avoid exposure to future litigation on the matter.

Have a great day,

Natalia Angelini

Full post as published by Toronto Estate Law Blog on April 29, 2009 (boomark / email).