We often get asked by charitable trusts to help vary their trusts and we are always happy to assist. In fact in the past year we have helped dozens through the process and assisted in preparing the documents needed.
A question often comes up though – whether the changes could unwittingly lead to what is known as a ‘resettlement’ of the Trust. We are going to answer what that is and why this may be relevant to your charitable trust in this article.
Why might a Trust vary its Trust Deed?
The desire to vary the Trust Deed itself could be for a variety of reasons. Some reasons we often hear from a group are:
- the document itself is very out of date – perhaps even written on a typewriter;
- the actual processes described in the Trust Deed are not even followed;
- the way Trustees are appointed or removed could use a refresh;
- the situation itself has changed – something fundamental is no longer the same; or
- other reasons, such as having a rotation of Trustees with term limits would be beneficial.
These are all very good and common reasons to update a Trust Deed. Perhaps some may even apply to your charitable trust.
A requirement to consider if rules are “fit for purpose”?
In fact, due to the recent changes to the Charities Act 2005, Trustees need to confirm that the rules they have are “fit for purpose” every three years (see section 42G which is at the end of this article). This includes not just a review of the Trust Deed but policies and procedures as well.
While we recommend a review of your charitable trust’s Trust Deed, it is also worth noting that if you decide to amend the purposes – which might seem like a good idea, then it could affect the Trust so much that it amounts to a ‘resettlement’, which might have consequences that are not intended.
The reason is that the Trust was set up for one purpose, or purposes, and if those purposes change enough, then it might result in the new purpose(s) being so different that the Trust itself has been resettled – in other words, a new Trust takes over from the original one.
Let’s consider how this might play out with a practical example.
Penguins or Children?Jane has always loved penguins and wanted to help preserve them since she was a little girl. She sold her tech company and decided to set up a charitable Trust by endowing it with $25 million dollars. While she was the donor and set up the Trust itself, she asks 4 trustees to provide the governance of the new trust. The Trust starts a rescue centre and works for 10 years for this purpose seeing thousands of people visit and get educated as well as saving many penguins every year. The Trust purchases a large property to run a recovery centre for the Penguins. However on the 10th anniversary the Trustees consider their Trust Deed as a result of attending some training by Parry Field Lawyers on how they need to make sure it is “fit for purpose”. They have a strategy day away and among many parts of the Trust Deed they consider the purposes as well. The Penguins are important but they realise that actually they are about education of the public about the environment – the Penguins are just one way that happens. The Trustees decide to vary the purposes to emphasise the education of young children about the natural environment, and change the name of the recovery centre for Penguins to the “Environmental Education Centre for Children”. The renewed focus is received well by everyone – except they forgot to include Jane, the donor. Jane disagrees with the new focus and sends a strongly worded message to the Trustees, as well as filing a Court application challenging the decision and describing it as a resettlement. The Attorney General takes an interest in this as well and the accountant – who they had not involved – mentions that there may be some major tax consequences as well… |
Hopefully the point of this is clear. Resettlement happens if the property of a trust is put into a different trust – this can happen if the purposes themselves change.
There could be two major consequences:
- a donor or former trustee or someone else interested might bring a claim that the variation was not valid, and challenge it in Court; or
- there could be tax consequences because if there has been a resettlement then that might trigger a transfer of the property the Trust holds (with tax resulting, potentially).
(Note that we are not tax specialists so you need to talk to an accountant – there are even more implications that they can outline for you but we just want to alert you to the issue.)
So what should you do?
For Trustees considering modifying their purpose they need to check that the purposes are essentially the same as they were before.
This will be a question of degree – but going too far introduces dangers. It is worth spending time thinking about this issue though rather than changing the purposes without being aware.
But what about practical risk?
In our experience there is a “who cares” question – in other words, if you did vary the Trust Deed then is anyone going to actually object? Is there an equivalent of the Jane in the story – or have they long since gone?
Our job is to point out the risks but it may be that the Trustees take on board the issue, consider it and then decide that they want to proceed anyway.
Either way, we hope this information has provided more clarity on why this can be an issue and how to consider it.
If you’d like to talk about your situation then feel free to get in touch with us.
The new section which introduces a requirement to consider if your rules are fit for purpose:
42G Duty to review governance procedures
(1) A charitable entity must review its governance procedures (whether those are set out in its rules or elsewhere) at least every 3 years.
(2) When conducting a review under subsection (1), the charitable entity must consider whether its governance procedures:
- (a) are fit for purpose; and
- (b) assist the charitable entity to achieve its charitable purpose; and
- (c) assist the charitable entity to comply with the requirements of this Act.