The Pickering Family Trusts: no variation power… no options?

Variation powers in trust deeds are a key aspect of ongoing trust administration. They can provide flexibility, including keeping the trust deed up to date with changes in legislation, expand beneficiary classes and provide more tax planning flexibility. Some variation powers are broad, and some are narrow. But what if there is no variation power? Is that the end of the matter, only leaving advisers with a headache and no options?

The Victorian Supreme Court has just handed down its long awaited decision in Re The Pickering Family Trusts [2024] VSC 5. This case involved two discretionary trust deeds, both without any variation power, and is a good reminder that all is not lost if there is no variation power. In the right circumstances, the Court can use powers under the Trustee Act 1958 (Vic) to approve variations.

Background

The plaintiffs’ original application to vary the deed was refused by the Court in 2016, aspects of original decision were successfully appealed, and the case remitted back to the Court for further consideration. This decision provides the conclusion to these various proceedings.

W E Pickering Nominees Pty Ltd and GS & BW Pickering Nominees Pty Ltd were each the trustee of two separate trusts: the Ted Pickering Family Trust (TPFT), and George Pickering Family Trust (GPFT). Each Trust owned units in a unit trust that held significant assets and corporate holdings.

The beneficiaries of the TPFT were Ted and his wife and their children and grandchildren. The beneficiaries of the GPFT were George and his wife and their children and grandchildren.

On Ted’s and George’s death, their joint intention was to pass all income and assets from the business group to three children, James, Roger, and Daryl, who took over the business operations. James is the son of George (and beneficiary of the GPFT). Roger and Daryl are children of Ted (and beneficiaries of the TPFT).

The problem with implementing the plan was Roger and Darryl were not beneficiaries of GPFT, and James was not a beneficiary of the TPFT.

The arrangement

The original arrangement that was put to the Court was refused. The trustees were given the opportunity to put a revised arrangement, which included:

• revised proposed amendments that expanded the beneficiary class of each trust to include the children and grandchildren of the other brother, and certain family trusts (to give effect to the succession plan); and

• undertakings by the trustees and their directors that, despite the succession plan, the trustees were to give due consideration to existing underage beneficiaries and any future children born or adopted by specified beneficiaries within 18 years of the orders being made, and further undertakings regarding the use of the corpus distribution power (including obtaining Court consent in certain circumstances).

It was contemplated that the variations affected the interests of beneficiaries who are minors, are not yet born but might later come into existence and beneficiaries who are yet to be adopted and would fall within the class of beneficiaries on adoption.

Powers under the Trustee Act

Section 63A of Trustee Act gives the Court jurisdiction to approve an arrangement varying or revoking a trust on behalf of different classes of persons not capable of providing consent, including underage and unborn persons pursuant to s 63A(1)(a).

Before granting approval under s 63A on behalf of the relevant person, the Court must be satisfied of two things:

1. that the carrying out of the arrangement ‘would be for the benefit of’ the relevant person (the first stage); and

2. once the first stage has been satisfied, the Court may approve the arrangement if, in its nature, it is a proper and fair one (the second stage).

Court decision

The Court approved the revised arrangement.

There was a genuine benefit for the underage beneficiaries (first stage) by:

• making the underage and unborn beneficiaries become beneficiaries of both trusts, the potential pool of assets they could benefit from increased; and

• undertakings limiting corpus distributions providing a greater prospect of a larger pool of assets for the beneficiaries, including the underage and unborn beneficiaries.

It was also fair and proper (second stage) as it:

• provided significant tax and other savings;

• avoided risk to the commercial viability of the business;

• was approved by the litigation guardian of the underage beneficiaries and the contradictor; and

• struck a fair and reasonable balance between the succession plan and the interests of the underage beneficiaries and potential beneficiaries of the trusts.

Key takeaways

This judgement provides clarity from the Court on when it would be prepared to approve a variation to a trust deed when the interests of underage and unborn beneficiaries could be affected.

It is also a great reminder that all is not lost if there is no variation power. In the right circumstances, the Court can approve a proposed variation. This decision gives advisers another option to consider where the right circumstances exist, which has the potential to give significant benefits to their clients.