Beware: Your Careful Trust Planning can be Varied by the Court: Winding up a Trust with Contingent Beneficiaries

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By Maria Starko and Zachary Murphy-Rogers

When setting up a trust, it can be difficult to imagine all the future scenarios and who may end up entitled to trust property. When these uncertainties exist, it is important to know the possibility of the trust being varied or terminated in the future. The British Columbia Supreme Court’s recent decision in Molnar v Molnar articulates the requirements for when a court may approve a trust variation (including the winding up of a trust) where there is a possibility of beneficiaries coming into existence in the future.

Background

The application involves a family trust (the “Trust”) settled by a father (the “Father”) for his son (the “Son”) and the Son’s descendants, before the Father passed away. The Trust was set up to benefit the Son and any of the Son’s children, living at or born or adopted by the Son between the date the Trust was settled and when it was to be distributed in 2035. At the time of judgment, the Son was 62 years old with only one 26-year-old child (the “Grandson”) who fell into this category. The Trust further provided that if both the Son and Grandson were to die before the distribution date, the Trust’s property would be divided among their children. The Son and Grandson both gave evidence that they did not intend to have any children prior to the Trust’s distribution date in 2035.

The Son applied to have the Trust wound up early and paid out, to benefit him and the Grandson. In addition, he sought a declaration that the Court approve the termination of the Trust on behalf of any persons unborn or adopted who could become entitled to an interest in the Trust, and that he be appointed trustee of the Trust. The application was ultimately decided in the Son’s favour.

The Law

The common law provides that if all beneficiaries to a trust have full legal capacity and unanimously consent, they can obtain a variation or termination of the trust. However, when trust terms leave the door open for potential beneficiaries not yet born or identified, as was the case here, these requirements cannot be met. The Trust and Settlement Variation Act of British Columbia provides a solution to this issue by giving the Court the power to consent on behalf of possible unborn or unidentified beneficiaries.

The Court in Molnar v Molnar laid out the legal test and principles used to determine whether to exercise its discretion to consent to the variation. In reviewing the evolution of case law in BC, the Court held that the applicable test is whether the variation provides a benefit to be obtained on behalf of those beneficiaries for whom the Court is consenting, such that a “prudent adult motivated by intelligent self-interest and sustained consideration of the expectancies and risks and the proposal made, would be likely to accept”. The Court explained that this requires balancing the remoteness of the possibility of any unborn or unidentified beneficiaries coming into existence if the trust is continued as is, against the benefit of approving the variation.

The Court’s analysis focused on the remote possibility of more beneficiaries becoming entitled under the Trust.. , despite the Grandson being only 26 years old. Under the terms of the Trust, even if the Grandson had a child the only possibility of that child becoming a beneficiary of the Trust was if both the Son and Grandson died before the distribution date.; the Court reasoned that this was an extremely remote possibility. The Court also considered that there would be a familial benefit to any possible unborn or unidentified beneficiaries in varying the Trust to support the financial security of their theoretical grandfather (the Son) in his retirement years. Ultimately, the Court found that this non-pecuniary benefit balanced with the extremely remote possibility of new beneficiaries arising made the proposed variation such that a prudent adult would likely accept. The Court approved winding up the Trust, consenting on behalf of the contingent beneficiaries, and appointing the Son as the new trustee.

Takeaway

This case demonstrates how the Court may exercise its discretion to vary a trust despite the original intentions of the settlor. Notably, the intentions of a settlor are not a relevant factor for approving a variation of a trust on behalf of potential beneficiaries, despite often being a fundamental consideration in other trust matters. It is crucial to keep this in mind when setting up a trust where the settlor wishes to provide for people who may not become beneficially interested until far into the future. Note: there are trust planning strategies that can be implemented so as to minimize the risk that your trust may be varied by a court in the future.

For further information or questions about trusts, please feel free to contact Zachary Murphy-Rogers or another member of the Clark Wilson Estates & Trusts group.