WHY DOES SINGAPORE NOT HAVE A VARIATION OF TRUSTS ACT?

• Published date: 01 December 2011
• Author: Michael HWANG SC BCL, MA (Oxon); Barrister, Chartered Arbitrator. Nicholas THIO LLB (Hons) (UCL); Associate, Michael Hwang Chambers.
• Date: 01 December 2011

This article examines the trust as a tool for the transmission of wealth and discusses the duties of trustees and the rules by which they are bound. These restrictions give rise to some practical difficulties, especially in cases where the trust is of a long duration, or where the trustee wishes to undertake investments to enhance the value of trust property. The scope and operation of the English Variation of Trusts Act 1958 will be explored. It will be shown that the 1958 Act directly addresses these difficulties, but at the same time also requires the court to make difficult decisions in particular types of situations. In view of the fact that there is no equivalent to the 1958 Act in Singapore, this article discusses the various practical and legal steps that may be taken as alternatives. It will be concluded that trustees in Singapore are handicapped to some extent because the court does not have a general power to sanction variation of trusts, but this can be made up for with certain legal workarounds.

I. What is a trust? - Trusts as a tool for wealth management

1 What is a trust? A trust exists when someone (“the settlor”) gives away and entrusts his property to another person to manage (“the trustee”). The trustee therefore becomes the legal owner of the property entrusted to him, but remains under a duty to hold the property for the benefit of certain individuals (“the beneficiaries”). Although this results in a split in the ownership of the trust property between the legal owner and the beneficial owners, equity imposes a fiduciary duty on the trustee to hold the property for the beneficiaries and in accordance with the trust deed.

2 Why set up a trust? For the purposes of wealth management, the trust is an invaluable instrument. It has two principal uses: (a) the transmission of wealth and (b) the protection of assets. In respect of (a), a trust may be created in cases where one feels that an outright lifetime gift is not appropriate. Setting up a trust makes it possible to make a gift with conditions based on the client‘s wishes or the beneficiary‘s circumstances. In the case of discretionary trusts, letters of wishes providing guidelines for dealing with the trust are typically drawn up based on the age and circumstances of the intended beneficiaries. In respect of (b), the assets settled under a trust are free from claims of the settlor‘s creditors (or even claims against the discretionary beneficiaries) unless the trust was set up either to defraud them or within a certain restricted period before he becomes insolvent. If, however, a beneficiary has a fixed interest like a life interest or an interest in capital after the death of the life tenant, that equitable proprietary interest is available to satisfy claims of the beneficiary‘s creditors.

II. Duty of a trustee to obey the directions of the settlement

3 Theoretically, the most important of all the rules relating to the duties of trustees is that they must not act beyond the limits of the powers conferred upon them by law or the terms of the trust instrument.1 Trustees must comply with the terms of the settlement out of respect for the settlor‘s directions. The corollary of this is that, once a trust is completely constituted, it is too late for the settlor to revoke or otherwise vary the trust. This is in the interests of certainty of title and security of title.2

4 In practice, difficulties arise in cases where a trust is of a long duration, and changes in circumstances make it difficult or inexpedient to continue the trust in the manner initially directed by the settlor. The duty of a trustee to obey the directions of the settlement absolutely3 may tie his hands when dealing with situations that the settlor could not have foreseen. This is especially so in the case of a trust set up for the purpose of transmission of wealth to the next generation, where the trust generally outlives the settlor.

5 Consider the following Scenario A,4 where an irresponsible, immature and young beneficiary is entitled to a vested interest in income or in capital on attaining the age of majority, which she would reach in a few months‘ time. The trustee may think it fit to propose that her interest in income should be varied to become a protected life interest5 instead or that her interest in capital should be deferred6 (eg, to a later age of 25 or 30 years). Such a situation creates a real practical difficulty and indeed puts the trustee in a dilemma, because he would ordinarily be bound to obey the directions of the settlement. Worryingly, there would be no safeguard against a spendthrift beneficiary squandering her assets in the absence of the trustee‘s power to vary the trust.

6 Difficulties also sometimes arise in cases of older long-term trusts, particularly fixed trusts with life interests as opposed to discretionary trusts. Modern conditions require that the trustee undertakes investments to enhance the value of the trust property and often, as modern portfolio theory shows, a better return is produced by seeking capital growth rather than income yield. It was once rightly said, when “trustee investments” were a very restricted class of safe investments, that if “the capital can only be invested in trustee investments, heavy losses may be suffered in a period of inflation; if all the income is payable to one beneficiary, it may be largely absorbed by tax; if capital cannot be paid to beneficiaries but must be retained until the death of a life tenant, it may be largely swallowed up in death duties while some member of the family who has urgent need of capital for some reasonable purpose cannot be paid it”.7 Trustee investments are, however, now a very wide class, usually comprising any investments that an absolute beneficial owner could invest in, whether by virtue of statute,8 express provisions in the trust instrument, by virtue of an investment clause that may be inserted into the trust instrument by the court under s 56 of the Singapore Trustees Act9 (“Singapore Trustees

Act”) or s 57 of the English Trustee Act 1925.10 Accordingly, a Variation of Trusts Act would not assist in this particular aspect.11

7 Consider another case, Scenario B,12 where property is settled on a discretionary trust for the benefit of a specified class of which the settlor‘s future wife would be a member. Under subsequently introduced provisions in the tax statutes,13 however, once any future wife of the settlor becomes a beneficiary under the trust, any income received by her would be deemed to be the income of the settlor, and would be taxed accordingly. In the absence of any power of the court to sanction a variation of the trust, the operation of the new tax provisions cannot be avoided even though this could have been achieved by legitimate means if the settlement had been made on different terms excluding not just the settlor but also his wife.

III. The English Variation of Trusts Act 1958

8 It has been said that the English Variation of Trusts Act 1958 (“1958 Act”) gives the court a “very wide, and indeed, revolutionary discretion”14 to approve on behalf of certain defined groups of persons any arrangement to vary or revoke trusts. The jurisdiction of the court to vary trusts is set out in s 1(1) of the 1958 Act:

Where property, whether real or personal, is held on trusts arising, whether before or after the passing of this Act, under any will, settlement or other disposition, the court may if it thinks fit by order approve on behalf of-

(a) any person having, directly or indirectly, an interest, whether vested or contingent, under the trusts who by reason of infancy or other incapacity is incapable of assenting, or

(b) any person (whether ascertained or not) who may become entitled, directly or indirectly, to an interest under the trusts as being

at a future date or on the happening of a future event a person of any specified description or a member of any specified class of persons, so however that this paragraph shall not include any person who would be of that description, or a member of that class, as the case may be, if the said date had fallen or the said event had happened at the date of the application to the court, or

(c) any person unborn, or

(d) any person in respect of any discretionary interest of his under protective trusts where the interest of the principal beneficiary has not failed or determined,

any arrangement (by whomsoever proposed, and whether or not there is any other person beneficially interested who is capable of assenting thereto) varying or revoking all or any of the trusts, or enlarging the powers of the trustees of managing or administering any of the property subject to the trusts:

Provided that except by virtue of paragraph (d) of this subsection the court shall not approve an arrangement on behalf of any person unless the carrying out thereof would be for the benefit of that person.

[emphasis added]

9 As can be seen, the effect of the 1958 Act15 is broadly to enable the court to give its approval to a variation of the terms of the trust on behalf of persons who are unable to give approval for themselves (eg, because they are minors, unborn or not yet ascertained). It follows that the court is not asked to give its approval on behalf of ascertained adults who can either consent for themselves or refuse to consent (so holding the other involved parties to ransom unless the latter can invoke the court‘s jurisdiction under statutes such as s 56 of the Singapore Trustees Act16 or s 57 of the English Trustee Act 1925).17 It has been said that “[t]he court is merely contributing on behalf of infants and unborn and unascertained persons binding the assents to the arrangements which they, unlike an adult beneficiary, cannot give. The 1958 Act has therefore been viewed by the courts as a statutory extension of the consent principle embodied in the rule in Saunders v Vautier.18 The

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