The rule in Saunders v Vautier (1841) 41 ER 482 provides a mechanism by which beneficiaries can terminate an unwanted trust by giving a suitable notice to their trustee. That case laid down the rule of equity which provides that, if all of the beneficiaries in the trust are of adult age (sui juris) and are under no disability, the beneficiaries may require the trustee to transfer the legal estate to them and terminate the trust. The rule has been affirmed repeatedly in common law jurisdictions. The trust is thereby terminated, notwithstanding any directions to the contrary, in the trust instrument.

Probably the most common instance of a restriction imposed on a vested interest is a direction to accumulate the income until the beneficiary attains an age greater than twenty-one years. It is not uncommon for testamentary trusts to provide that beneficiaries named in a Will are not to take their testamentary legacy until attaining the age of twenty-five years. The rule in Saunders v Vautier allows such beneficiaries to require the testamentary trustee to pay the capital sum, together with any undistributed income, when the beneficiary turns eighteen years of age.

As a consequence of the requirement that the beneficiaries must be adults of full capacity, a right of termination of the trust cannot be exercised, under the general law, if any beneficiary lacks legal capacity.

Many jurisdictions have introduced general statutory reforms to deal with problems of incapacity. Individuals, while they still have full capacity, are now able to execute Enduring Powers of Attorney which authorise an agent to act upon their behalf, regardless of any later loss of capacity. Courts or Tribunals may also appoint a guardian or administrator to act on behalf of the person suffering from the capacity. The question arises, however, whether either of these two categories of authorised person can validly terminate a trust, on behalf of an incapacitated beneficiary, under the rule in Saunders v Vautier.

In the recent Queensland decision of Re Tracey [2016] QCA 194, a divided Court of Appeal provided a framework within which questions of this kind may be resolved. Those proceedings were instituted by the Public Trustee of Queensland, to seek judicial guidance about the extent of its statutory power to act on behalf of various incapacitated adults. The extent of the statutory power vested in the Public Trustee was to do anything in relation to a financial matter that the adult could have done if the adult had capacity for the matter when the power was exercised.

By a majority, the Court of Appeal held that this statutory power was sufficient to authorise the Public Trustee to exercise, in the place of an incapacitated adult, the power to terminate a trust established under the general law or under various statutes. However, the Public Trustee was found to have no power to terminate trusts established by Court order, because the rule in Saunders v Vautier simply did not apply to trusts of that kind. While there was some discussion in the judgments of the analogous position of an agent acting under an Enduring Power of Attorney, the majority did not seek to resolve that question.

The decision in Re Tracey has been followed in subsequent Supreme Court of Queensland cases: Nicotra v State of Queensland [2017] QSC 303, and Re Narumon Pty Ltd [2018] QSC 185. There have been no similar decisions in New South Wales, nor the Australian Capital Territory.

A recent NSW Court of Appeal decision – Beck v Henley [2014] NSWCA 201 – provides an interesting discussion and application of the rule in Saunders v Vautier. If the conditions for the application of the rule apply, the beneficiaries of a trust are, collectively, able to terminate the trust, irrespective of the terms of the trust, and the purposes of the trust. This is a right vested in the beneficiaries and the trustee is under a duty to wind up the trust. The main precondition for the rule to apply is that the beneficiaries have an absolute and indefeasible interest in the trust property. This case demonstrates that the rule in Saunders v Vautier will still apply where not all beneficiaries wish to terminate the trust, so long as the trust property is divisible, and the allocation of the trust property will not prejudice those beneficiaries. This is because the trust’s operating expenses will be spread over fewer assets and it will not constitute prejudice sufficient to preclude a partial winding-up.

The rule in Saunders v Vautier applies to fixed trusts. For example, in a limited recourse borrowing arrangement, where the acquired asset is held by a custodian, on holding trust for the trustee of the superannuation fund, the trustee, as the only beneficiary and the trustee of the superannuation fund, has an absolute and indefeasible interest in the acquired asset. Consequently, the trustee of the superannuation fund can terminate the holding trust (irrespective of the terms of the holding trust’s deed) at any time.

Similarly, the rule in Saunders v Vautier can apply to discretionary trusts, if all the potential beneficiaries are adults, they all agree, and they are collectively entitled to absolute and indefeasible interests in the trust property.