April 1, 2025
Having recently posted an article about termination of trusts, we now consider the situation where you want the trust to continue, but some of the terms are no longer appropriate, because circumstances have changed.
This may be a change in tax rules, or circumstances of beneficiaries changing from those expected when the trust was established. Though the trust made sense at one time, now a change is needed.
This applies both to trusts established under a will (testamentary trusts) and those established while the settlor is alive (inter vivos trusts)
In Ontario, there are several ways to vary a trust of either sort:
- An express power to amend may be reserved to the settlor
- If all beneficiaries are of legal age, have mental capacity, and are not bankrupt, they may agree to amend the trust.
- The most common, but most costly way to amend the trust is an application to Superior Court under the Variation of Trusts Act.
A Power to Amend
This power must be reserved to the settlor in the document creating the trust. Any terms or conditions of the power must be strictly complied with, both as to substance and procedure. Like any variation there may be tax consequences, including the attribution of income back to the settlor if CRA contends that the power is in essence a power of revocation.
Agreement to Amend
It is difficult to estimate how often beneficiaries agree to change the terms, as it may be done informally. This is however not recommended unless you are certain that all beneficiaries are identified and have legal capacity. Third parties may not recognize the effect of the amendment. However, for simple changes in clear situations, it is cost effective.
The Variation of Trusts Act
This very short but complex law governs applications to court to vary a trust. This is a preferred method over simply having the beneficiaries consent, because the judicial approval tells the world that the change has been approved and is legally valid. It is also the legally approved way to vary trust in the absence of a living settlor with a power to amend where there are children as beneficiaries; contingent beneficiaries; beneficiaries otherwise incapable of consenting or unborn beneficiaries. The main test for the court is whether the proposed variation is a benefit to the beneficiaries requiring court protection. In some cases, the original intention of the settlor is also considered.
Takeaways
- If the trust no longer works to maximize the benefits to the beneficiaries, it may be time to consider variation.
- To make sure the variation fits the law, sound legal advice is the best approach.
What Weilers LLP can do to help you
Whether you want to establish a trust, are a trustee, or are a beneficiary, our lawyers can give you sound advice on the entire life cycle of the trust, from establishing it, to administering it, and to variation or termination. If you have questions about a trust, give us a call. We might be the right lawyers for you.