A Proposal for a Variation of Trusts Statute in Washington
| Publication year | 1985 |
I. Introduction
Beneficiaries sometimes wish to vary the terms of a trust that does not expressly authorize a variation. Commonly, the problem arises because the settlor did not anticipate the circumstances now facing the beneficiaries. Except in limited situations, the courts approve variations only reluctantly.(fn1)
In 1958 the English Parliament relieved some of the practical problems facing beneficiaries by enacting the Variation of Trusts Act.(fn2) The Act permits a court to authorize variations in the distributive provisions of a trust. Under this Act, a court may approve an arrangement on behalf of minor, disabled, unborn, or unascertained beneficiaries if it finds that the arrangement will benefit such persons.(fn3) Ontario has enacted similar legislation.(fn4)
In 1983 Missouri became the first state to enact legislation, patterned after the English Act, that permits courts to approve trust variations.(fn5) Under the Missouri statute, the court can approve variations that reallocate the relative shares of the beneficiaries either by reducing the shares of some beneficiaries and increasing those of others or by terminating the trust earlier than indicated by the trust terms.(fn6)
This Comment argues that similar legislation would be desirable in Washington.(fn7) Even though the proposed statute would entail a substantial deviation from the common-law rule, the resulting benefits justify the change. This Comment also examines the retroactive application of variation of trusts statutes and concludes that a retroactive application is constitutional. A requirement that courts consent(fn8) on behalf of the beneficiaries only when the variation benefits the beneficiaries in some manner(fn9) sufficiently protects the beneficiaries' constitutional interests under the contract clause(fn10) and the due process clause(fn11) of the federal Constitution. Finally, this Comment proposes that a Washington variation of trusts statute include: (1) a provision directing the court to consider the settlor's intentions before approving a requested variation, to maintain the stability of trusts validly created under Washington law; (2) a provision for separate representation for minor, disabled, unborn, or unascertained beneficiaries, to ensure that their interests are accurately represented to the court; and (3) a provision directing costs to be charged to adult beneficiaries when a variation is denied, to discourage frivolous trust litigation.
II. Background
The majority common-law rule followed by Washington courts permits a court to authorize a variation from the terms of a trust if, because of circumstances unknown or unanticipated by the settlor, compliance with the original trust provisions would defeat or substantially impair the accomplishment of the trust's purposes.(fn12) Under this rule, the court asserts equitable power to vary only the administrative provisions of the trust.(fn13) The court may authorize the trustee to sell, lease, mortgage, or improve trust property, or to invest trust funds in specified ways even when the trust terms expressly or impliedly deny these powers to the trustee.(fn14) Nevertheless, the nonstatutory authority of the courts to permit a trustee to deviate from the terms of a trust is restricted. First, a change in circumstances must occur that was unforeseen by the settlor.(fn15) Second, the trustee must demonstrate not only that the deviation would benefit the trust or the beneficiaries but also that a failure to deviate would impair the accomplishment of the trust's purposes.(fn16) Third, without statutory authorization a court cannot permit deviation from the trust terms in a manner that benefits some beneficiaries at the expense of others.(fn17)
In 1925 Parliament enacted legislation that eliminated the first two restrictions in England by authorizing the court to empower the trustee to perform any act of administration deemed expedient.(fn18) A number of states have enacted legislation resembling the 1925 English Act.(fn19)
Courts of equity in this country do not have the power to vary the relative shares of the beneficiaries.(fn20) The courts have refused to make such variations on the theory that a court has the duty to carry out the intentions of the settlor unless the trust provisions violate settled principles of public policy.(fn21) This restrictive doctrine often prevents the authorization of variations that would benefit the beneficiaries when the variations are not essential to carry out the purposes of the trust.(fn22)
Several exceptions to this common-law doctrine exist, but they fail to cover many situations. For example, one exception provides that when the settlor is the sole beneficiary of a trust and has the legal capacity to revoke the trust, the settlor can revoke the trust even though the original trust purposes have not been accomplished.(fn23) Because most trusts are created for persons other than the settlor, however, this exception rarely applies. Another exception allows the settlor to revoke a trust if all the beneficiaries consent, even if the trust purports to be irrevocable.(fn24) This exception provides no relief, however, when the settlor is deceased or when certain beneficiaries are legally incapable of consenting because they are minor, disabled, unborn, or unascertained.(fn25) Variation of trusts statutes solve this problem by permitting the court to consent on behalf of those beneficiaries who are incapable of consenting. The underlying theory is that the court, upon a determination that the variation will benefit the minor, disabled, unborn, or unascertained beneficiaries, will make the decision that the beneficiaries would have made if they had been competent adults.(fn26)
Variation of trusts statutes can solve a wide range of problems, depending on specific trust terms and the specific needs of the trust beneficiaries. For example, variation of trusts statutes have been used to create tax savings,(fn27) to advance money to life beneficiaries in need,(fn28) to increase the trustees' investment powers,(fn29) to eliminate unfair restrictions on beneficiaries,(fn30) to equalize benefits to children born after the creation of a trust,(fn31) and to redistribute trust assets among the beneficiaries so that each beneficiary can make the best use of his or her trust assets.(fn32)
III. Protecting the Settlor's Intent
Under the common law of Washington and throughout the United States, courts have taken special care to carry out the intentions of the settlor in trust litigation.(fn33) In
A settlor who creates a trust under valid state law wants . assurance that the trust will be carried out substantially as the settlor intended.(fn36) Under present common law, when the court allows an administrative change in a trust, the court does so only to accomplish the real intent and purpose of the settlor.(fn37) Similarly, the court should consider the settlor's intentions before authorizing a variation in the relative shares of the beneficiaries. Any variation that destroys the underlying purpose of the trust should be denied. Without this protection, trusts would cease to be useful devices for settlors because a settlor would have no assurance that the trust purposes would be carried out once the settlor relinquished control over the trust.
The economic theory behind upholding the settlor's intentions is that settlors will be encouraged to accumulate wealth if they have control over their property.(fn38) The countervailing argument, however, is that trust beneficiaries should receive the maximum benefit from the trust property. A variation of trusts statute would allow beneficiaries to take advantage of opportunities that would otherwise be unavailable, by allowing the beneficiaries more freedom to use trust property without unnecessary restrictions.(fn39) In analyzing the settlor's intent, the court should consider that the settlor's primary intent is to benefit the beneficiaries named in the trust. If the beneficiaries collectively can use the trust fund in a more efficient manner, the court can determine whether the settlor would have acquiesced if the settlor had foreseen the future events.
Most courts in this country would probably consider the settlor's intentions with or without statutory direction. Nevertheless, a legislature adopting a variation of trusts statute should avoid ambiguity by including language in the statute directing the courts to consider the settlor's intentions before authorizing a variation. Such statutory protection might also encourage settlors to state their primary intentions and purposes in trust documents to aid later judicial interpretations.
Several English decisions interpreting the Variation of Trusts Act(fn40) illustrate how the settlor's intentions can be ignored without a specific statutory mandate. Early decisions under the Act indicated that the court should consider the wishes of the settlor when...
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