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What constitutes benefit?

Author: Jo Summers (jsummers@pwtadvice.co.uk) - 01/06/2007

In the case of Chapman vs Chapman [1954] the court found that it had no inherent jurisdiction to approve a variation of trusts for minor, unborn or unascertained beneficiaries just on the ground that the variation was for their benefit. The position was changed by the Variation of Trusts Act 1958 (the 1958 Act).

Section 1 (1) of the 1958 Act applies where property is held on trusts arising under a will, settlement or other disposition. It states that the court may approve any arrangement varying or revoking the trusts on behalf of minor, unborn or unascertained beneficiaries and discretionary beneficiaries of protective trusts. Section 1 requires that the court shall not approve an arrangement unless it would be for the benefit of the beneficiaries for whom the court is acting. The court therefore retains discretion to determine whether a variation is for the benefit of the beneficiaries. The court will also consider whether the proposed variation is a fair and proper one.

The court has, in the past, been required to consider what constitutes ‘benefit’ for the purposes of the Act. The recent case of S v T with the previous case of Re Weston’s Settlement [1969] to see whether the court’s views of benefit have changed over the years.

S v T: the facts
S was five years old. His unmarried father died intestate leaving S as the sole beneficiary of the statutory trust that arose on his father’s death. The statutory trust that arose due to ss46 and 47 of the Administration of Estates Act 1925. S’s interest in the statutory trust was contingent upon reaching the age of 18 or marrying before that age. Should S not meet either of these conditions then his father’s estate would pass to M, S’s paternal grandmother.

Mr and Mrs X has applied to adopt S and a question arose those proceedings as to whether s39 of the Adoption Act 1976 would have the effect of disinheriting S if an adoption order were made. Section 39(1) states that ‘an adopted child shall be treated in law... where the adopters are a married couple, as if he has been born as a child of the marriage’.

As a result, on the granting of an adoption order, S would be treated as if he had been born as a child of Mr and Mrs X and not as the child of his deceased father. S would no longer then be able to benefit from his deceased father’s estate, which would instead pass to the deceased’s mother.

It was held that the statutory trust arising on S’s father’s intestacy could be varied pursuant to s1(5) of the 1958 Act, as it was not settled by an Act of Parliament. An unopposed application was made to the court to vary the statutory trust under the Act. The proposed variation would do the following:

1)Give M a property held in the estate worth around £90,000, a sum that she was prepared to accept in order to relinquish her contingent interest under the statutory trust.

2)Involve M’s agreement not to pursue any claim she might have had under the Inheritance (Provision for Family and Dependants) Act 1975.

3)Pass the balance of the estate on trust absolutely for S. This would also have the effect of benefitting any children S might leave if he died intestate before the age of 18 (or having married before that age).

Having established that the statutory trust was one that could be varied under the Act, the court had to consider whether the proposed variation would be for S’s benefit.

The court noted that the problem was caused by s39 of the Adoption Act 1976, so that if the variation was not approved and S was adopted he would be disinherited. The court looked at the social implications of being adopted and found that if the adoption did not proceed then it would severely undermine S’s social welfare. The decision was that it was clearly for the benefit of S that an arrangement was achieved where an adoption order could be made but where S was not disinherited as a result. It was found that the proposed variation would benefit S financially and would also benefit his social welfare.

The court approved the variation to come into effect immediately before any adoption order was made, provided that the order was made within the next seven days.

Re Weston’s Settlement
In this 1969 case the settler had sought a variation of two settlements. All the parties to the proposed variation supported it, but the court’s approval was required on behalf of infant and unborn beneficiaries. The settler wanted to do the following:

• appoint two new trustees resident in Jersey in place of the existing English trustees; and

• insert a power in each settlement for the new trustees to transfer the trust property from the trusts of the English settlements after three months and subject it to trusts of identical Jersey settlements subject to Jersey law.

The court had to consider whether the variation would be for the benefit of the persons for whom it was acting.

Provided a scheme is legal, the court found that there was nothing improper or contrary to public policy in approving the variation of trusts for the purpose of avoiding or reducing tax liability. Lord Denning noted that there are a number of cases where the court approved variations that were proposed for that purpose (for a recent example, see Re N’s 1989 settlement [1999]). However, the court held that it should not just consider the financial benefit to the infants or unborn children, but also the educational or social benefit. In other words, would it be for the benefit of beneficiaries to emigrate just to save money? As Lord Denning put it: ‘The avoidance of tax may be lawful but it is not yet a virtue.’

The court considered whether the ties of patriotism were greater or less than the fiscal advantages of the proposed variation.

Lord Denning’s comments showed his views clearly:

• ‘there are many things more worthwhile than money’
• ‘one of these things is to be brought up in this our England, which is still the envy of less happier lands’; and
• ‘children are like trees: they grow stronger with firm roots’.

He found it was not for the benefit of the children to be uprooted from England simply to avoid tax. Moving the trusts to Jersey would only give the beneficiaries an even greater fortune than they would have had if the trusts were still in England and subject to taxation. Here, educational and social considerations outweighed tax-saving benefits.

The meaning of ‘benefit’
Both S v T and Re Weston show that while the court will be concerned with securing a financial benefit for the beneficiaries, this will not be the only type of benefit it will consider. Non-financial benefits are also relevant.

There are similar examples in other cases. Re Remnant’s Settlement Trusts [1970] related to a clause in a trust preventing the beneficiaries from marrying a Roman Catholic or a person practising Roman Catholicism. The adult beneficiaries applied to the court to vary the trust as they felt that the offending clause was likely to cause problems and tension in the family and would affect the beneficiaries’ choice of religion and marriage partners.

The court affirmed Lord Denning in Re Weston in holding that ‘benefit’ encompasses more than financial benefit.

In Re CL [1969] the court found that there need be no financial benefit at all for a variation to be for the ‘benefit’ of the beneficiary. This case related to a widow who was beneficiary of a protected life interest trust settled by her late husband. On the death of the widow the life interest would be added to a fund settled by the husband on their two adopted daughters. The widow had sadly lost mental capacity.

The proposed variation involved the widow giving up her protected life interest and her contingent interest in the remainder in favour of the adopted daughters, for no consideration. The court noted that the widow’s income was substantially in excess of her requirements. The variation was approved by the court on the basis that it was what the widow would have done voluntarily, if she had been of sound mind. It was held that it is not always necessary to have some form of financial benefit for the variation to be approved.

Conclusion for practitioners
The court’s function is to protect those who cannot protect themselves. The court must decide what is for their best benefit, whether that benefit is a financial, educational or social one. The S v T case shows that little has changed since Re Weston in the court’s determination of whether a variation is for the benefit of the beneficiaries for whom the court is acting.

The court will do its best to help a beneficiary financially, but as S v T and Re Weston the court considered the effects of moving children to another country just for tax benefits. The financial benefits must not be seen to be outweighing other non-financial benefits.

From Trusts and Estates Law & Tax Journal June 2007, Number 87

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Please Note:
These articles were based on the legislation in force at the date of publication. The laws may well have changed since. These articles should not be taken as being or replacing proper legal advice.

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