Discussion paper on accumulation of income and lifetime of private trusts

171 Pages·2009·1.32 MB·English

by  Scottish Law Commission

(DISCUSSION PAPER No 142)
Discussion Paper on Accumulation
of Income and Lifetime of Private Trusts
discussion
paper
Discussion Paper on Accumulation
of Income and Lifetime of Private Trusts
January 2010
DISCUSSION PAPER No 142
This Discussion Paper is published for comment and criticism and does not represent the final views of the Scottish
Law Commission.
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ii
The Scottish Law Commission was set up by section 2 of the Law Commissions Act 19651
for the purpose of promoting the reform of the law of Scotland. The Commissioners are:
The Honourable Lord Drummond Young, Chairman
Laura J Dunlop, QC
Professor George L Gretton
Patrick Layden, QC TD
Professor Hector L MacQueen.
The Chief Executive of the Commission is Malcolm McMillan. Its offices are at
140 Causewayside, Edinburgh EH9 1PR.
The Commission would be grateful if comments on this Discussion Paper were
submitted by Friday 9th April 2010.
Please ensure that, prior to submitting your comments, you read notes 1-3 on the
facing page. Comments may be made on all or any of the matters raised in the paper. All
non-electronic correspondence should be addressed to:
Charles Garland

Scottish Law Commission

140 Causewayside

Edinburgh EH9 1PR

Tel: [phone]
1 Amended by the Scotland Act 1998 (Consequential Modifications) (No 2) Order 1999 (SI 1999/1820).
iii
Contents
Paragraph Page
Part 1 Introduction
Trust law review 1.1 1

Advisory group 1.2 1

Purpose of the Discussion Paper 1.3 1

Note on terminology 1.5 2

Structure of the Discussion Paper 1.6 2

Legislative competence 1.18 7

Part 2 The present law
Introduction 2.1 8

Accumulations of income 2.4 8

Introduction 2.4 8

Common law of accumulations 2.6 9

Peter Thellusson's will 2.8 11

The Accumulations Act 1800 2.15 14

The subsequent history of the provisions of the 1800 Act 2.19 16

Trusts (Scotland) Act 1961 2.25 18

Law Reform (Miscellaneous Provisions) (Scotland) Act 1966 2.28 20

Restrictions on the creation of future interests 2.35 23

A: Successive liferents 2.36 23

Entail Amendment Act 1848 2.38 24

Entail Amendment (Scotland) Act 1868 2.41 26

Trusts (Scotland) Act 1921 2.42 26

Law Reform (Miscellaneous Provisions) (Scotland) Act 1968 2.44 27

B: Common law rules: Frog's Creditors and Newlands 2.47 28

Trusts (Scotland) Act 1921 2.53 30

Lifetime of private trusts 2.59 32

Unintelligibility 2.66 34

Impracticability 2.67 35

Unreasonableness: the M'Caig cases and their legacy 2.68 35

Part 3 Criticisms of the current law
Introduction 3.1 40

Operation of the rules: complexity, uncertainty and inconsistency 3.4 40

A: Rule restricting accumulation of income 3.4 40

(i) What is an 'accumulation'? 3.8 42

(a) maintenance of trust property 3.9 42

(b what counts as income? 3.12 43

(c) 'retention' or 'saving' of income 3.13 44

(ii) What is a 'direction' to accumulate? 3.15 45

iv
Contents
(cont'd)
Paragraph Page
(iii) For how long may income be lawfully accumulated? 3.20 47
(iv) What application does the rule have in commercial contexts? 3.28 49
B: Rule restricting successive liferents 3.32 51
C: Rules in Frog's Creditors and Newlands and section 8 of the Trusts 3.43 55
(Scotland) Act 1921
Policy justification 3.53 59
(i) prevention of distortion in the economy 3.60 61
(ii) prevention of the accumulation of a 'vast fortune' for the benefit 3.62 62
of a beneficiary who is not yet born
(iii) prevention of disinheritance of living family members in favour of 3.63 62
future generations
(iv) prevention of 'dead hand' control 3.64 63
Common law rule governing the lifetime of private trusts 3.75 66
Part 4 Comparative law
Introduction 4.1 68
Reform of the rule restricting accumulation 4.4 69
Commercial and fiscal incentives for reform 4.5 69
'Classic case' reform 4.9 70
No rule restricting accumulation: South Africa: and the DCFR 4.15 72
Conclusion 4.17 73
Part 5 What restrictions should the law impose on the
duration of trust purposes?
Introduction 5.1 74
Commercial transactions 5.2 74
Are the existing Scottish rules restricting the duration of trust 5.6 77
purposes satisfactory?
Summary of criticisms 5.6 77
Developments in other jurisdictions 5.8 79
Disadvantages of fixed rules restricting duration of trust purposes 5.10 80
Policy considerations that remain relevant today 5.16 82
'Dead hand' control 5.16 82
Rules limiting 'dead hand' control 5.20 84
A suggested solution 5.22 84
The problem 5.22 84
A possible solution 5.25 86
(i) material change of circumstances 5.26 86
(ii) intentions of the truster 5.27 87
(iii) position of trustees, beneficiaries and members of the truster's 5.28 87
family
v
Contents
(cont'd)
Paragraph Page
(iv) period during which trust is immune from jurisdiction 5.30 88

(v) scope of Court's power 5.33 89

(vi) Court of Session 5.34 89

(vii) parties to proceedings 5.35 90

Further discussion of criteria for exercise of the proposed jurisdiction 5.38 91

Material change of circumstances 5.38 91

Intentions of the truster 5.39 91

Discretionary trusts 5.41 92

Comparable jurisdictions 5.43 93

Cy-près 5.43 93

Trusts (Scotland) Act 1961, section 1 5.44 94

Trusts (Scotland) Act 1921, section 5 5.45 94

South Africa 5.46 95

General arguments in favour of the proposed new jurisdiction 5.50 96

Arguments against the proposed solution 5.52 97

Proposals and questions 5.57 99

The rules in Frog's Creditors and Newlands 5.58 102

Retrospective application 5.69 105

Scope of reforms 5.71 105

The power of the Court to hold a trust purpose to be unreasonable 5.73 106

Part 6 List of proposals and questions 107

Appendix A 111

Comparative material on rules restricting the

accumulation of income

Introduction 1 111

Australia 2 111

Jurisdictions other than South Australia 2 111

South Australia 4 112

Bermuda 11 114

Canada: 12 114

Manitoba 12 114

Saskatchewan 18 116

Channel Islands 20 117

Jersey 22 118

Guernsey 25 119

England and Wales 27 120

Perpetuities and Accumulations Act 2009 32 121

Isle of Man 35 122

New Zealand 37 123

vi
Contents
(cont'd)
Paragraph Page
Republic of Ireland 38 123

Rule against perpetuities 39 123

Rule restricting accumulation 41 124

South Africa 46 126

United States of America 47 126

Rule against perpetuities 47 126

Rule restricting accumulation 53 129

Appendix B 132

Comparative material on rules restricting

successive liferents

Introduction 1 132

Spain 9 134

Civil Code 13 136

Catalan Civil Code 17 137

France 20 138

Germany 24 139

Austria 29 141

Malta 33 142

Greece 41 144

South Africa 43 145

Limitation of successive interests 52 148

Appendix C 150

Philosophical analysis of the basis for a rule restricting

accumulation

Appendix D 154

Relevant legislation

Appendix E 159

Advisory group

vii
Abbreviations

Burgess,
R Burgess, Perpetuities in Scots Law, The Stair Society, vol 31 (1979)
Cámara,
S Cámara Lapuente, "New Developments in the Spanish Law of Succession", InDret,
issue 4, 2007 (available at http://www.indret.com/pdf/493_es.pdf, last accessed on 4
December 2009). This article formed the basis of the Spanish National Report for
the XVIIth Congress of the International Academy of Comparative Law held in Utrecht
in July 2006
Dobie,
W J Dobie, Manual of the Law of Liferent and Fee in Scotland (1941)
Dukeminier and Krier,
J Dukeminier and J E Krier, "The Rise of the Perpetual Trust" (2003) 50 University of
California at Los Angeles Law Review 1303
Dyer and van Loon Report,
A Dyer and H van Loon, Report on Trusts and Analogous Institutions, Hague
Conference on Private International Law, 15th Session (1984)
Ford and Lee,
H A J Ford and W A Lee, Principles of the Law of Trusts, vol 1 (loose-leaf updated to
2009)
Gallanis,
T P Gallanis, "The Rule Against Perpetuities and the Law Commission's Flawed
Philosophy" (2000) Cambridge Law Journal 284
Gray,
J C Gray, Rule Against Perpetuities (4th ed, 1942)
Gretton,
G L Gretton, "Fideicommissary Substitutions: Scots Law in Historical and
Comparative Perspective" in K G C Reid, M J de Waal and R Zimmermann (eds),
Exploring the Law of Succession: Studies National, Historical and Comparative
(2007), pp 156-176
Honoré,
E Cameron, M de Waal, B Wunsh, P Solomon and E Kahn (eds), Honoré's South
African Law of Trusts (5th ed, 2002). All references are to this edition unless
otherwise stated
Keeton,
G W Keeton, "The Thellusson Will" (1970) Northern Ireland Legal Quarterly 131
Law Commission Report on Perpetuities and Excessive Accumulations,
Law Commission, Report on The Rules Against Perpetuities and Excessive
Accumulations (Law Com No 251;1998)
viii
Law Reform Committee Report,

Law Reform Committee, Fourth Report, The Rule Against Perpetuities (1956) Cmnd
18
M'Laren,
J M'Laren, The Law of Wills and Succession (3rd ed, 1894)
Morris and Leach,
J H C Morris and W Barton Leach, The Rule Against Perpetuities (2nd ed, 1962)
Polden,
P Polden, Peter Thellusson's Will of 1797 and its Consequences on Chancery Law
(Edwin Mellen Press, 2002)
Report on Variation and Termination of Trusts,
Scottish Law Commission, Report on Variation and Termination of Trusts (Scot Law
Com No 206; 2007)
Restatement,
American Law Institute, Restatement of the Law, Property, Division IV, Social
Restrictions Imposed on the Creation of Property Interests (1944)
Restatement (Second),
American Law Institute, Restatement of the Law Second, Property (Donative
Transfers), vol 1 (1983)
Schanzenbach and Sitkoff,
M M Schanzenbach and R H Sitkoff, "Perpetuities or Taxes? Explaining the Rise of
the Perpetual Trust" (2006) 27 Cardozo Law Review 2465
Simes,
L M Simes, "The Policy against Perpetuities" (1955) 103 University of Pennsylvania
Law Review 707 (also collected in L M Simes, Public Policy and the Dead Hand
(1955))
Sitkoff,
R H Sitkoff, "The Lurking Rule Against Accumulations of Income" (2006) 100 North
Western University Law Review 501
Stair,
The Laws of Scotland (Stair Memorial Encyclopaedia) (25 vols)
Sterk,
S E Sterk, "Jurisdictional Competition to Abolish the Rule Against Perpetuities: RIP
for the RAP" (2003) Cardozo Law Review 2097
Wilson and Duncan,
W A Wilson and A G M Duncan, Trusts, Trustees and Executors (2nd ed, 1995)
ix