Trust to trust: Are your and your family’s wealth protected in a trust?
JOHANNESBURG - A real life example illustrates the risk of being compromised as a beneficiary of a trust. A businessman was asked by his friend to sign as surety for his debt as a developer.
The businessman was happy to do that, as all his assets were transferred to a trust, which protected the assets from any creditors.
Unfortunately, the friend experienced financial difficulty and the bank approached the businessman who signed surety for his friend’s debt to recover its loan.
When the businessman informed the bank that he did not hold any material assets in his personal name, the bank decided to sequestrate the businessman. The effect of this was catastrophic – this action caused the businessman to be removed as trustee and beneficiary of the trust. How could that happen?
REMOVAL OF TRUSTEE
The trust deed – like most of the vanilla/standard trust deeds – contains a clause, which triggers the immediate removal of a trustee in the event of his or her sequestration or liquidation. Wording of these vanilla clauses has its origin in the Trust Property Control Act, which states that the Master of the High Court “may” remove a trustee in certain
instances, including the instance where a trustee is sequestrated or liquidated.
This clearly gives the Master of the High Court discretion to remove the trustee upon the occurrence of such an event, rather than an automatic removal.
This trust deed left the remaining trustees with no discretion to retain such a trustee, as the trust deed demands the immediate removal of such a trustee. This is very risky. A trustee is the decision maker of a trust. If you are not a trustee, you can never part-take in trustee decisions, which affect the trust and the beneficiaries.
REMOVAL AS BENEFICIARY
This trust deed – like most of the vanilla/standard trust deeds – contains a clause, which triggers the immediate disqualification of a beneficiary in the event of him or her being sequestrated or liquidated. This is normally a wide reaching protection clause, which is inserted in trust deeds to protect the trust’s assets from attacks from beneficiaries’ creditors.
As beneficiary you are entitled to receive information on the operations of the trust, including the financial statements, supported by vouchers (such as bank statements, invoices and other paperwork). If you are not a beneficiary of the trust – as in this instance – you will not be entitled to receive any information on the trust. As beneficiaries’ consent is normally required to amend a trust deed, this right will also be lost.
This allows the remaining trustees to interfere with the original intention of the trust. In a discretionary trust – the nature of most family trusts – the beneficiary has a hope to receive income/capital gains or trust assets. However, if you are not a beneficiary, you will not be allowed to receive anything from the trust, unless the trustees make a donation to you and the trust will then be liable for donations tax on that amount. This is not ideal.
Often estate planners and their families do not make the effort to read and understand the contents of a trust deed where they are the founder, trustee and/or beneficiary. This may lead to unintended consequences such as which the businessman experienced. He lost complete control over his and his families’ financial destiny and was no longer entitled to receive anything from the trust, which he set up for him and his family.
Every estate planner should ensure that the trust deed does not contain any potentially compromising clauses. He or she should make the effort to read through the trust deed and demand that the trust deed reflects his or her wishes and do not compromise him or her and/or his or her family. This is important for both existing trusts and new trusts an estate planner wants to form.
Timing is of the essence, as it is easier to amend a trust deed while the founder is still alive. Once the founder has passed away, reliance has to be placed on the trust deed. Often existing trust deeds do not contain instructions regarding amendments and the trustees may have to revert to court to have it amended. Be proactive and prevent financial and emotional hardship.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa®, a Master Tax Practitioner (SA)™, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze®, a professional trust practitioner.