Changing or Terminating a Trust: Legal Processes and Considerations

Changing or Terminating a Trust: Legal Processes and Considerations

Trusts are commonly used in Scotland to manage assets for beneficiaries, whether for tax planning, asset protection, or providing financial support. However, circumstances can change, and there may come a time when a trust needs to be altered or brought to an end. This article explains the key legal processes and considerations involved in changing or terminating a trust in Scotland.

Common Types of Trusts in Scotland

There are several types of trusts, but the most common include:

• Discretionary Trusts – Trustees have full discretion over how and when to distribute assets to beneficiaries.
• Liferent Trusts – One person (the liferenter) has the right to benefit from the trust assets during their lifetime, with the capital passing to another beneficiary after their death.
• Bare Trusts – Beneficiaries are entitled to the trust assets outright once they reach a certain age, typically 16 or 18.

Other types of trusts, such as charitable trusts and purpose trusts, also exist but are less frequently changed or terminated in the same way as personal trusts.

Changing a Trust

A trust can be changed in various ways, depending on how it was originally set up. The main ways to alter a trust are:

1. Using a Power of Amendment

Some trust deeds include a power of amendment, allowing changes to be made by the trustees or the settlor (the person who created the trust). The extent of this power will be outlined in the trust deed and must be followed strictly.

2. With the Consent of the Beneficiaries

Under the Trusts (Scotland) Act 1921 and section 1 of the Trusts (Scotland) Act 1961, if all beneficiaries are of full legal capacity (aged 16 or over and mentally capable), they can collectively agree to amend the trust terms. This is known as the rule in Saunders v Vautier.

3. By Court Application

If beneficiaries do not all agree or if the trust deed does not allow amendments, an application can be made to the Court of Session or Sheriff Court under the Variation of Trusts (Scotland) Act 1968. The court can approve changes if they are in the best interests of the beneficiaries, particularly if minors or incapacitated individuals are involved.

Example: Changing a Trust

A discretionary trust was set up to benefit two siblings. As circumstances change, one sibling becomes financially independent while the other requires more support. The trustees, with the beneficiaries’ consent, may alter the trust to provide a greater share of the assets to the sibling in need.

Terminating a Trust

A trust can come to an end for several reasons, including when its purpose has been fulfilled or when it is no longer practical to maintain it. The methods for terminating a trust include:

1. Trust Reaches Its Natural End

Some trusts are created for a fixed period or until a certain event occurs, such as a child reaching adulthood or the death of a liferenter. Once the purpose is fulfilled, the trust automatically ends, and the assets are distributed according to the trust deed.

2. Agreement of Beneficiaries

As with changing a trust, if all beneficiaries agree and are legally capable, they can decide to wind up the trust and distribute the assets among themselves.

3. Trustees Decide to End the Trust

In some cases, trustees have the power to bring a trust to an end if it has become uneconomical to manage. For example, if the trust fund is small and administrative costs outweigh the benefits, the trustees may choose to distribute the assets and close the trust.

4. Court Intervention

If there is a dispute or if some beneficiaries are unable to consent (such as minors), the court can be asked to approve the termination of the trust.

Example: Terminating a Trust

A liferent trust was set up for an elderly woman, allowing her to live in a property for life. After her passing, the property is automatically transferred to her children, bringing the trust to an end.

Key Considerations

Before changing or terminating a trust, it is important to consider:

• Legal Advice – Trust law is complex, and professional guidance is essential to ensure compliance with legal requirements.
• Tax Implications – Changing or ending a trust may have tax consequences, such as Capital Gains Tax or Inheritance Tax liabilities.
• Beneficiaries’ Interests – Trustees must always act in the best interests of beneficiaries and follow their fiduciary duties.
• Trust Deed Restrictions – Some trusts have strict terms that limit changes or termination options.

Conclusion

Trusts are flexible tools, but they are not always permanent. Whether due to changing family circumstances, financial considerations, or practical reasons, it is possible to modify or terminate a trust in Scotland. Understanding the legal processes and seeking professional advice ensures that changes are made correctly and in the best interests of all parties involved.

If you are looking for an experienced Private Client solicitor, would like to discuss matters or gain a greater understanding Trusts, then please contact our experienced Private Client Team on 01324 622 888 or contact help@randa-fa.co.uk and we would be delighted to assist.