Variation(s) of a trust agreement, after it is settled, does carry the risk of causing a resettlement of a trust or a disposition of a beneficiary’s interest in the trust, with serious tax consequences. But not all variations lead to resettlement, fortunately.
Recently in an advance ruling, the Canada revenue Agency (“CRA”) was asked to consider whether a trustee seeking to amend a trust agreement for the appointment of the trustee’s spouse as a replacement in the event of his passing or mental incapacitation, the appointment of a third party as trustee in the event of both his and his spouse’s passing or mental incapacitation and the ability to insert a protector who would only be able to replace an appointed trust company (as the replacement trustee) for another, in the event of fees being charged are too high and/or the trust company is not managing the assets of the Trust in the best interest of the beneficiaries.
The CRA noted that the trust agreement could be amended at any time while the Settlor is alive, provided that the amendment is approved by the Settlor and the majority of the Trustees, and the amendment does not change the beneficiaries, any beneficiary’s beneficial interest in the Trust, and/or the person entitled to appoint Trustees. Currently, the Settlor is alive and has the mental capacity to approve any amendment to the Trust.
The CRA ruled that these amendments would not result in the resettlement of the trust or a disposition by the trust of its property, Further they would not result in a disposition by any beneficiary of the interest.
Sometimes, circumstances outside a variation can also lead to a resettlement of a trust. Several years ago the CRA confirmed in a technical interpretation that a commercial trust between two corporate settlors and beneficiaries would be resettled upon the majority’s beneficial sale of its interest, such resettlement rendering losses accumulating in the trust to be unavailable for use a subsequent to the sale. The CRA acknowledged that there was no specific variation of the trust but the change in circumstances changed the foundation of the trust and the original intention of the trust would be put aside.