When a trust is created, whether under a will (testamentary trust) or during someone’s lifetime (inter vivos trust), many people assume it cannot be changed. But what happens when circumstances shift? Can the trust terms be altered to reflect new realities?
Consider these situations:
- A wealthy man creates a trust for his children, but later remarries and deeply loves his new wife. Can she be added as a beneficiary? Does the original trust deed prevent this?
- A trust states that three children can only receive income from the trust, while the capital must remain intact until it passes to their future grandchildren. If the children want access to the capital now, can they apply to the court? And if the variation requires “everyone” to agree, does that include unborn grandchildren?
A short statute called Variation of Trusts Act allows a trust to be changed in certain cases, but not just because the beneficiaries want to. Courts will only approve variations in specific circumstances, particularly when some beneficiaries cannot legally consent to changes.
A trust variation may be necessary when:
- Family circumstances change, making the original terms outdated.
- A trust structure causes hardship for beneficiaries.
- Some beneficiaries cannot consent, requiring court approval to protect their rights.
If a trustee thinks the terms of the trust should be changed, can they simply do so?
No. A trustee cannot unilaterally alter the trust. The law requires them to apply to the court for an order approving any variation.
This ensures that changes are fair and do not harm beneficiaries who cannot protect their own interests.
The Variation of Trusts Act allows the court to approve changes on behalf of certain beneficiaries who cannot legally give consent, including:
- Incapable persons
- Minors or individuals who lack mental capacity.
- Future beneficiaries
- Those who may become entitled to the trust later (such as unborn or unascertained beneficiaries).
- Persons with discretionary interests
- Those whose entitlement depends on a trustee’s discretionary decisions.
Since these individuals cannot approve changes themselves, the court must ensure any variation is in their best interests before granting approval.
Courts do not approve trust variations simply because the current beneficiaries want them. Several legal principles guide the court’s decision:
- No harm to incapable beneficiaries
- The court will not approve a variation that negatively affects individuals who cannot consent.
- Real purpose for the change
- A variation must serve a legitimate purpose, such as responding to changed family circumstances or improving asset management.
- Benefit beyond tax savings
- Courts will not approve a variation simply because it results in tax savings for the beneficiaries.
- Maintaining the trust’s “core purpose”
- While changes may be made, the trust must retain its original intent. A variation cannot be used to create an entirely new trust. Courts carefully distinguish between permissible variations and an impermissible resettlement of assets into a new trust.
- Recognizing a degree of risk
- Courts acknowledge that all financial decisions carry some risk. When assessing a variation, they consider whether a prudent adult would accept the risk under similar circumstances.
Can the wealthy man add his wife to his trust?
- If the trust deed does not include her, she cannot simply be added. A court application would be required, and approval would depend on whether the variation is in the best interests of all affected beneficiaries, including future beneficiaries.
Can the three children access the capital now?
- Even if all current beneficiaries agree, does the court just approve the change? The issue is that the unborn grandchildren also have a stake in the trust, meaning their interests must be protected. If the court finds that varying the trust would be detrimental to these future beneficiaries, it may reject the application.
A trust variation application must be filed under Rule 14.05(3)(f) of the Ontario Rules of Civil Procedure. The application should include:
- A clear explanation of the issue and why the variation is needed.
- An affidavit outlining the trust’s history and the reasons for the proposed change.
- A draft agreement signed by all beneficiaries who can legally consent.
- The involvement of the Children’s Lawyer, if there are minors, unborn, or unascertained beneficiaries.
In Ontario, the court does not mandate parties to be represented by lawyers, but trustees and next of kin should have separate legal counsel to ensure independent representation.
If you are involved in a trust that may need to be changed, consult a trust and estate lawyer to assess your options and navigate the court process under the Variation of Trusts Act.