Chapter 8 – Powers of the court
Variation and termination of private trusts
90.Section 58 of the Act makes provision for both extra-judicial and judicial approval of arrangements for variation or termination of trusts. It does not apply as respects a public trust and does not apply as respects a private purpose trust (subsection (4)(b)). So far as extra-judicial variation is concerned, subsections (1) and (2) implement recommendation 79. Subsection (1) describes the ways in which a trust can be varied or terminated. Paragraph (d) gives effect to recommendation 91 by making it clear that all or part of the trust property can be resettled into a new trust. Where a beneficiary lacks capacity to agree or is not yet in existence or is presently unascertainable, an appropriate approval on the beneficiary’s behalf is necessary: see section 59(4) and (5).
91.Section 59 of the Act applies both to judicial and to extra-judicial variation or termination of a trust, and sets out the circumstances in which the agreement of a beneficiary or approval on behalf of a beneficiary is required.
92.Section 59 implements recommendation 89 and continues the regime of the 1961 Act in terms of which, with very minor exceptions, all capable beneficiaries must agree to any variation or termination; the Court of Session's role is restricted to supplying approval on behalf of those from whom agreement cannot be obtained. Subsection (2) implements recommendation 79 and, together, subsections (2) and (3) implement recommendation 80; agreement to a variation or termination can be given by a beneficiary, or approval can be given by a potential beneficiary, provided that the beneficiary or potential beneficiary is 18 years old or over and is capable. A legal person, such as a company or a corporate charity, can also give its agreement or approval.
93.Section 59(4) implements recommendation 83. It confirms the existing position whereby a guardian or person authorised by an intervention order or other document under the Adults with Incapacity (Scotland) Act 2000 (or the law of a foreign jurisdiction) may provide approval on behalf of an adult beneficiary or potential beneficiary who is incapable of consenting. Such approval by an authorised person is an alternative to court approval (under section 59(5)(b)).
94.Section 59(5)(a) to (d) re-enact the existing provisions in section 1 of the 1961 Act. Retention of age 18 in paragraph (a) partially implements recommendation 82. Paragraph (b) implements recommendation 83. Paragraph (c) and subsection (7) re-enact section 1(1)(b) of the 1961 Act. (“Potential beneficiaries” are defined in section 81(1).) Paragraph (d) re-enacts section 1(1)(c) of the 1961 Act. Paragraph (e) is a new provision, which implements recommendation 88. It allows a variation or termination to proceed even though one or more beneficiaries who would otherwise have to agree cannot be traced; their agreement is replaced by court approval on their behalf.
95.Section 59(6) preserves the current legal position that only a trustee or beneficiary may apply to the Court of Session under this section. Section 59(7) preserves the current law by restricting the category of potential beneficiaries on whose behalf the court can approve the arrangement. Excluded are persons who are aged 18 or over and are capable and who also fall within paragraph (b) and are identifiable persons or individuals. Such persons must agree to the arrangement themselves. To fall within paragraph (7)(b) a potential beneficiary must be identifiable as being in the relevant class or of the relevant description if the date or event that is referred to in the trust had taken place at the date of hearing the application. One example of potential beneficiaries is the class of the heirs of an individual who has not yet died. The heirs cannot be ascertained until that individual dies with the result that they have no present interest but are merely potential beneficiaries. The court cannot approve on behalf of those who would qualify as heirs if the individual were taken to die at the date of hearing the application but they must consent themselves. If, however, there are unborn or underage heirs then court approval on their behalf is both competent and necessary.
96.Section 60 of the Act, in partial implementation of recommendation 79, sets out the general rule that the Court of Session is only to approve an arrangement on behalf of a beneficiary or potential beneficiary who cannot consent for themselves if it thinks that the arrangement would not prejudice that beneficiary. For instance, suppose a trust is set up to benefit James, his spouse, Patricia, and their young child, Fiona. Each is beneficially entitled to one third of the trust property. If James wanted to vary the trust purposes so that he takes a greater share of the trust property, given Fiona’s young age, she would be unable to provide her consent and court proceedings would need to be raised to seek the court’s approval on Fiona’s behalf. The court would have to be satisfied that the proposed new arrangement does not prejudice Fiona, for example, by reducing her share.
97.Section 60(2), which implements recommendation 86, provides an exception to that rule. It states that no court approval on behalf of an unborn or a potential beneficiary who cannot be ascertained will be required if the court is satisfied that there is no reasonable likelihood that the event which would make the person a beneficiary will occur, or that someone who, if born, would be a beneficiary (or potential beneficiary) will be born. The proposed arrangement could therefore go ahead even if it would remove such a potential interest. Thus if Tom sets up a trust for his children and he has two existing children who want to terminate the trust and be paid the capital then the court will need to approve the arrangement on behalf of Tom’s unborn children and must consider whether they would be prejudiced by the arrangement. If Tom is an 80 year old widower then the court may be satisfied that the possibility of him having further children is so remote that it can be ignored. Evidence in the shape of medical and other reports may have to be presented in order to satisfy the court in less extreme cases. An example of a potential beneficiary who cannot be ascertained who had only a theoretical possibility of becoming a beneficiary might be the potential spouse of an intermittently incapable 85 year old person. If a person was, against all expectation, born or ascertained after the arrangement was finalised, that person will have no claim against the trustees or the other beneficiaries for any loss sustained as a consequence of the variation.
98.Section 60(3) extends the current law by increasing the factors which the court may consider in evaluating prejudice when deciding whether to approve an arrangement on behalf of a beneficiary or potential beneficiary who cannot consent. It implements recommendation 87 and ensures that the court can take into account more than economic factors. For example, where Susan has created a trust in favour of her current children, who are underage, and there is a proposal to extend the trust to include an adopted child, the likelihood of this leading to increased harmony within the family can be taken into account by the court in deciding whether to approve the change on behalf of the underage children.
99.Section 61 of the Act, which gives effect to recommendation 85, enables an arrangement to proceed without the agreement of, or court approval on behalf of, a beneficiary or potential beneficiary under section 59, if the court is satisfied that the person in question has a negligible interest in the trust. It gives statutory effect to the decision of the Court of Session in Phillips and Others, Petitioners 1964 SC 141. In contrast to section 60, the effect of the arrangement proceeding without the agreement of, or approval on behalf of, persons with negligible interests is not to remove their entitlement under the trust. However subsection (2) protects the trustees from claims by such beneficiaries; instead, their right of action would lie against those who have benefited from the variation (most likely other beneficiaries under the trust).
100.Section 62 of the Act substantially re-enacts section 1(4) of the 1961 Act which provides that an alimentary liferent cannot be discharged by the beneficiary, making one minor change. Implementing recommendation 84, subsection (4) provides that court authorisation is not required in respect of the variation or termination of an alimentary purpose created by a woman in her own favour before 24th July 1984. She is therefore able to agree to it herself. By sections 5 and 10(2) of the Law Reform (Husband and Wife) (Scotland) Act 1984, it has been incompetent for women to create alimentary provisions in their own favour since that date. Use of alimentary liferents in Scots law were, in the past, regularly used to provide protection against a scenario where a wife’s property could be squandered by her husband.
101.Section 63 of the Act applies when the Court of Session is considering whether to agree to a trust variation or termination on behalf of a person under the age of 18 years. Subsection (2) provides that the Court of Session will have to have regard to the views of a 16 or 17 year old in deciding whether or not to approve a trust variation or termination on his or her behalf. Subsections (3) to (5) set out the court’s duty in relation to the views of persons under 16. Subsection (1)(b) extends this to authorisation of a variation or revocation of an alimentary purpose. Under subsection (1)(a)(ii), this section does not apply to a person who is incapable, though a guardian or other authorised person may agree to an arrangement on behalf of such a person (section 59(4)) or the Court of Session may approve it (section 59(5)(b)).
102.Section 64 of the Act implements recommendation 90. Its purpose is to make clear that the agreement of the truster to an arrangement for variation or termination of the trust is not required (though if the truster happens to be a beneficiary or potential beneficiary, then agreement, or court approval on the truster’s behalf, is needed in that capacity). But for this provision it might be argued that the truster is invariably a beneficiary or potential beneficiary because of the radical right to receive the trust property if all the other trust purposes fail.
Alteration of trust purposes
103.Section 65 of the Act creates a new court power by which the purposes of a trust may be varied in certain circumstances. It applies to trusts, within the meaning given by section 81(1), but does not apply to commercial trusts or public trusts (see subsections (1) and (2)).
104.In partial implementation of recommendations 95 and 98(2), the section permits trust purposes to be altered by the court where there has been a material change in circumstances. The court may only adjust the purposes to the extent it considers necessary to offset or counter the effect of the change in circumstances. The section also enables the truster to prevent the court’s power from being exercised for a period of up to 25 years (or, in the case of an inter vivos trust, the lifetime of the truster (if longer)) by making express provision in the trust deed to that effect. The broad aim is to provide a mechanism to counterbalance, where appropriate, the freedom which trusters are to have (under section 45 of the Act) to set up a trust of any duration.
105.The power is exercisable by the Court of Session, on application by any of a broad range of persons specified in subsection (9). The application may be opposed by any other person so specified (subsection (3)).
106.For an inter vivos trust, the court must be satisfied that there has been a material change in circumstances since the trust was set up, or that such a change is reasonably in prospect. However, subsection (4) provides that the trust deed may provide that no application may be made to the court (either or both) during the lifetime of the truster or up to 25 years from the date of the creation of the trust(18). By subsection (5), where a truster attempts to prevent alteration for a period longer than 25 years, this is to be read as preventing the alteration until the later of the death of the truster or 25 years from the creation of the trust.
107.In the case of a testamentary trust, the court must again be satisfied that there has been a material change in circumstances since the testamentary writing (i.e. the will or codicil) was executed, or that such a change must be reasonably in prospect. Further, the testator must have died (which is an express statement of what is already implicit, since the trust only comes into existence at that point and cannot therefore be altered before then) before an application may be made. Subsection (6) provides that the deed constituting the trust may prevent applications for alteration by the court for a period of up to 25 years from the date of death of the testator.
108.Subsection (7) provides a further special rule for certain testamentary trusts, namely, where there was a material change in circumstances between execution of the testamentary writing and death. If, in that situation, the testator was either incapable during the period between the change and death (i.e. was not regarded in law as being able to alter the will) or, during that period, was unaware of the change and its effect on the trust (or could not reasonably be supposed to have been so aware) then the court has discretion to determine that any exclusionary period (of up to 25 years) provided for in the trust deed is to run not from death of the testator but from the date of the change of circumstances or, if the court thinks fit, the commencement of the testator’s incapacity or unawareness.
109.For example, Sam made a will in year 0, with provision for a trust for family members which could not be altered for 20 years, but began to suffer from dementia to the extent that testamentary capacity was lost by the end of year 1. The result was that Sam was unable to change the will in the light of major family changes in year 3; Sam then died in year 10. From that point (but not before), the court may be petitioned for a determination that the 20 year period he specified during which the trust is unchallengeable should not begin to run in year 10 on death but either in year 3, from the date of the material change, or even in year 1, upon the loss of capacity. If, in the will, Sam had specified a period of say, 5 or 10 years, then the effect of subsection (7) is that the court power will be available either immediately following death or soon after death. But that subsection only applies where the testator could not reasonably have been expected to take steps of their own to alter their will in the light of material changes before their death.
110.Subsection (8) provides that where a truster attempts to prevent alteration of the trust purposes for a period longer than 25 years, that is to be read as preventing the alteration of the trust for 25 years from the date of death of the truster.
111.Subsection (10)(a) lists some of the factors to which the court is to have regard when deciding whether and, if so, to what extent, to exercise its power under subsection (1). They include: the intentions or probable intentions of the truster; whether the beneficiaries consent to the proposed alteration; and the fairness of that alteration. Paragraphs (b) and (c) set out some of the options which the court has in making the order: it may order that the trust be brought completely (or partially) to an end, with the beneficiaries taking their entitlements, or that the date on which trust property would otherwise vest is to be brought forward or delayed.
112.Subsection (11) states, in effect, that the court power under this section may not be ousted by the truster (except as specifically provided for in the section) and will apply regardless of any contrary provision in the deed.
113.Subsection (12) provides some examples of what is meant by “change in circumstances”. Changes in the nature or amount of the trust property are included, as are changes in the personal or financial circumstances of a member of the truster’s family or a beneficiary; equally, changes in the tax regime are expressly included, as that is likely to be a reason, in some cases, for trustees to apply to the court under this section. Some such changes cannot, by their nature, be predicted in advance but those which can be reasonably foreseen may be used as the basis for a court application (by paragraph (a) of subsections (3) and (6)). Subsection (13) sets out factors which indicate whether a trust is a commercial one and, hence, whether it will be excluded from the scope of this section by subsection (1). There are some examples of commercial trusts in subsection (14), such as life assurance policies, unit trusts, and trusts linked to a partnership agreement.
114.Subsection (15) implements recommendation 98(2) and provides that the section applies to any trust, including those created before the provision comes into force.
115.Subsection (15) also makes clear that this section is in addition to the specific power in section 67 by which the court may remove (with or without replacement) an office from the trust deed where the holder of that office is to be an ex officio trustee.
Powers in relation to ex officio trustees
116.Section 66 of the Act implements recommendation 10(1)(b) and (2). Where a truster has provided that the holder of a specified office should be a trustee by virtue of holding that office (for example, the minister from time to time of a particular parish) that trustee is termed an ex officio trustee. Such trustees feature in a number of trusts, especially public ones. The offices which ex officio trustees hold vary widely; examples include the principals and other office holders in the Scottish Universities, judges, sheriffs, and local holders of religious office, such as the minister of a parish. Whilst there are sound reasons for a truster to use ex officio trustees, it can give rise to various problems, whose solutions in the current law are not always either clear or satisfactory. Subsection (1) provides a default power for an ex officio trustee to apply to the court, nominating a person to act as trustee in the ex officio trustee’s place, upon which the court may grant an order whose effect is two-fold: it acts as an appointment of the person nominated (subsection (1)) and a removal of the ex officio trustee (subsection (2)). The appointed person is not in any way dependent upon, or under the direction of, the nominating trustee (subsection (5)). The new trustee is to be treated on an equal footing with the other trustees and may resign, or be removed, in the same way as any other trustee, in which case the nominating person resumes the role of trustee. The appointed person automatically ceases, however, to be a trustee when the nominating person ceases to hold the relevant office (subsections (3) and (4)): so, for example, Mary, who is ex officio trustee of the Sunny Park Trust in her capacity as parish minister, may nominate Tom to act as trustee in her stead; but if he is still a trustee at the point when she ceases to be the parish minister then his appointment automatically terminates at that point. The power is exercisable by the Court of Session and the appropriate sheriff court (under section 81(1) and (3)). This provision applies irrespective of when the trust was created (subsection (6)).
117.Section 67 of the Act implements recommendation 10(1)(a) and (2). Subsection (1) provides that the trustees of a trust with an ex officio trustee may apply to the court for the removal of the relevant office from the trust deed. Such an application may also be made by the holder of the office, or the body of which the holder is an officer, where the specified office remains in existence (subsection (2)). This section will be of particular use where the role of an office has disappeared, perhaps because of institutional re-organisation of the underlying body; but there will also be other occasions when it may be appropriate, e.g. where the office no longer has the function which made it attractive for inclusion when the truster created the trust.
118.If an application under subsection (1) seeks the replacement of such an office with another office, the holder of which is to act as an ex officio trustee, the court may make the substitution provided subsection (3)(a) or (b) is satisfied. Those are either that the new office is more appropriate for the trust than the one to be removed or that the one to be removed is no longer in existence. The power is exercisable by the Court of Session and the appropriate sheriff court (under section 81(1) and (3)). This provision applies irrespective of when the trust was created (subsection (4)).
Application in respect of defective exercise of fiduciary power etc.
119.Section 68 of the Act provides a statutory court power, exercisable by the Court of Session, to grant a remedy, if considered appropriate, where the exercise of a fiduciary power by a trustee is challenged as being defective, that is, the power is exercised in error such that the effect is different from what is intended. This implements recommendation 101.
120.Subsection (1) sets out the basic conditions for an application to be made, namely that a relevant person (as defined in subsection (7)(b)) either considers that a trustee has already taken a decision which amounts to a defective exercise of the trustee’s fiduciary power or reasonably apprehends that such a decision is about to be taken. Subsection (2) provides the power to apply to court (which, under section 81(1) means the Court of Session).
121.The grounds on which the court may grant a remedy derive from the common law and are set out in subsection (3), which implements recommendations 102 to 104 (with recommendation 103 relating to the inclusion of paragraph (c), and recommendation 104 to paragraph (g)). For example, the ground at subsection (3)(a) (where the trustees have considered the wrong question) applies where the trustees decide to act in a particular way in response to a question which arises under the trust (for example where the payment of a legacy is subject to the trustees being satisfied that a particular condition has been met). Subsections (4) and (5) are consequential on two of the paragraphs in subsection (3), and they implement, in part, recommendations 102 and 104 respectively. Paragraph (g) of subsection (3) allows a challenge on the ground that the trustee has made an error as to fact or law and subsection (5)(b) provides that the error need not be as to the effect or consequence of the decision, thus avoiding certain difficulties which can arise under the current law.
122.Subsection (6) makes clear that the section does not interfere with the existing power of the court to take into account the purpose (or, in the view of the court, the likely purpose) of making the application. This may be relevant where the application is made to avoid tax as part of a failed tax avoidance scheme or where the motivation for making the application is otherwise inappropriate for some reason.
123.Subsection (7)(a), in implementation of recommendation 105, specifies the available remedies: reduction (either partial or full), rectification, declarator and interdict. Subsection (7)(b) implements recommendation 106 and lists those who, by virtue of being a “relevant person”, may make an application under subsection (2). By subsection (8) the power applies in respect of all trusts, whenever created, but only as regards a decision taken, or reasonably apprehended as being about to be taken, after commencement of section 68.
124.Section 69 of the Act reaffirms the ability for applications to be made to the Court of Session for trustees, protectors or supervisors to obtain directions in respect to the exercise of their powers (as described in subsection (1)) and for executors to obtain directions in respect of the exercise of their powers (described in subsection (2)).
Expenses
125.Section 70 of the Act implements recommendation 77. As a general rule, trustees are not to be personally liable for litigation expenses involving the trust, whether as a pursuer or defender (subsection (1)). (This provision deals with civil liability only; if a trustee is found criminally liable and is required to make a contribution to prosecution costs, these are to be paid out of the trustee’s personal patrimony.) This general rule is subject to a number of exceptions.
126.Subsection (2) provides that a trustee may be personally liable (whether wholly or in part) for litigation to which the trust is a party in certain circumstances. These include where the litigation is unnecessary in the court’s view (paragraph (a) and where the trust property is (or is likely to be) insufficient to meet an award of expenses (paragraph (g)). The court’s discretion here is such that it may find some or all of the trustees personally liable according to the circumstances of the case.
127.Where a trustee is found personally liable under subsection (2)(a) to (f), the court has discretion to allow relief against the trust property where it considers it appropriate to do so, and to the extent to which it considers it appropriate (subsection (3)).
128.Where a trust is party to litigation which is in progress, by virtue of subsection (4) a party may apply to the court (which, under section 81(1) and (3), means the Court of Session or the appropriate sheriff court) for a determination about the personal liability for certain expenses of the trustees, including those that have not yet been incurred. This allows trustees and parties taking or defending proceedings involving a trust to have more certainty about the likely implications of the action. An example might be a situation in which trustees are pursuing an investment advisor whose actions, they allege, have depleted the trust property down to a negligible level. In such a case, where it is highly likely that any expenses will exceed the value of the trust property, the trustees may raise an action against the advisor in negligence or fraud and then immediately apply to the court for personal relief from past and future expenses. Equally, if a trust with no or limited funds is used simply as a vehicle for litigation, the court may determine that the trustees will be responsible for any expenses from their personal property.
129.This provision applies irrespective of when the trust was created (subsection (5)).
130.Section 71 of the Act implements recommendation 78 and re-enacts section 34 of the 1921 Act. It permits the court (which, under section 81(1) and (3), means either the Court of Session or the appropriate sheriff court) to determine all questions of expenses relating to applications under the Act and, where it considers it reasonable, to direct that certain expenses are to be met out of trust property.
Miscellaneous powers
131.Section 72 of the Act allows trustees, or anyone with an interest in the trust, to apply to the Court of Session for authorisation for the trustees to make payments from the trust property on the assumption that particular events in the past or future have, or have not occurred (or will, or will not occur). The effect of such an order, which is known as a “Benjamin order” in English and Welsh law, protects the trustees from liability if it turns out that the assumptions in question were not in fact correct. An example of a past event might be the question of whether a particular person predeceased the testator without leaving issue. If, after reasonable enquiries, the trustees cannot trace any issue, they may apply to the court for authority to distribute the deceased’s estate on that basis. In relation to uncertainties about future liability, one example in recent times has been over whether the reinsurance arranged in respect of a deceased’s liabilities as a Lloyd’s Name (that is, an insurance underwriter) will prove sufficient; doubts over such matters can delay the distribution of the estate for lengthy periods. The effect of an order under this section only relieves the trustees of personal liability (unless the grounds in subsection (3) are established), but it does not affect the rights of any person if it later turns out that the assumptions on which the order is granted were in fact incorrect.
132.Subsections (1) and (2) implement recommendation 73(1). They allow the court (which, under section 81(1) means the Court of Session) to grant authority for the trustees to proceed with the distribution of trust property. By subsection (3), which implements recommendation 73(2), the effect of a court order under subsection (1) is to remove personal liability from a trustee who acts in accordance with it; if, however, the trustee was involved in concealing relevant facts from the court or in fraudulent actings then there is no protection against personal liability.
133.Subsection (4) states that the position of the beneficiaries is not affected. Thus, if events turn out other than as expected when making the court order, the entitlements which actually turn out to arise will be enforceable. But if the trust property has already been distributed by that time, the entitlements will require to be enforced against those to whom distributions were made, rather than against the trustees for breach of trust.
134.Section 73 of the Act provides a mechanism by which a beneficiary (or, by subsection (4), any person deriving a right from a beneficiary) may apply to the court – i.e. the Court of Session or the appropriate sheriff court (under section 81(1) and (3)) – to obtain title to heritable property (such as a house) or incorporeal moveable property (such as shares) to which the beneficiary is absolutely entitled but which is in the name of a trustee who has died or become incapable (within the meaning of section 83) of acting. The court may grant warrant for completing title to the property (subsection (2)) and any warrant is effective as a conveyance or, for example, in the case of leases, an assignation of the property in favour of the beneficiary (subsection (3)). This provision applies irrespective of when the trust was created (subsection (5)).
135.Section 74 of the Act deals with the vesting of corporeal moveable property which remains vested in a trustee who has either died or become incapable (within the meaning of section 83). Where a beneficiary is absolutely entitled to corporeal moveable property which remains vested in a trustee who has died or become incapable of acting and for which delivery or possession would be required for re-vesting, the beneficiary may apply to the Court of Session for a warrant for the property to vest in the beneficiary. For example, title to equipment – like computers – vested in the deceased trustee might be required to be delivered to the beneficiary in order to allow them to continue to operate a business. Subsection (3) provides that the effect of the warrant is to vest the property in the beneficiary as at the date of the warrant as if the beneficiary had taken delivery or possession on that date. Subsection (4) provides the same right for any person deriving a right from a beneficiary. This provision applies irrespective of when the trust was created (subsection (5)).
136.Section 75 of the Act essentially restates section 17 of the 1921 Act. Subsection (1) permits trustees (as a body or any one or more of them) to apply to the Court of Session for an order by which the accountant of court will supervise their administration of the trust in relation to the investment of trust property or the distribution of property to creditors and beneficiaries. Such applications are relatively rare but they are occasionally made. Subsection (2) requires the accountant to examine and audit the trustees’ accounts annually; in addition, the accountant has power to seek court directions in respect of the exercise of the superintendence. This provision applies irrespective of when the trust was created (subsection (3)).
In the original provision in the Report on Trusts, the default was the other way around and the provision set out a maximum period during which the trust was to be immune from alteration with the truster’s only options being to reduce that period.
