Trust to trust: How wide is a trustee’s discretion?
JOHANNESBURG - Discretionary trusts are the more common forms of inter vivos trusts.
In these types of trusts, the vesting of benefits or assets in beneficiaries is done at the sole discretion of the trustees.
The beneficiaries only have contingent rights (a right that depends on a future event or the performance of an action by the trustees such as a decision to make a distribution) to the income, capital gains, assets or trust capital of the trust. Payments of income, capital gains and/or capital are made at the discretion of the trustees, and all non-allocated income and capital gains are taxable in the hands of the trust.
The trustees’ powers, competencies and obligations, including a clear description of the trustees’ discretionary powers and duties, must be clearly stipulated in the trust instrument. It is important to remember that the trust is a “creature of document” and that the powers given to the trustees in the deed are their only powers.
It was quoted in the Wiid v Wiid case of 2012 (discussed below) that “the object of the powers given to a trustee is to enable him to do justice to the fiduciary duties which attach to his office.
It is self-evident that there is a duty to exercise all powers in such a manner that the beneficiaries reap the benefits. Although the trustees duties can be listed under a number of headings the dominant consideration inherent in all the duties is the benefit of the beneficiaries.”
Where trustees have been given wide discretion in a trust instrument, it is important for them to have an understanding of what the founder had in mind when he/she created the trust, and exercise their discretion accordingly. Trustees have to exercise an independent judgement regardless of the views of the person/s appointing them, similar to a director’s obligation to exercise an independent judgement, regardless of the views of any party who may have procured his/her appointment as director (PPWAWU National Provident Fund v Chemical Energy Paper Printing Wood and Allied Workers Union case of 2008).
In this case the trustees were found to be acting in breach of their fiduciary duties to do the best that they could for the beneficiaries, by following the union’s (who appointed them) policy.
This case should be a caution to a trustee who is expected to take instructions from anyone to act in a certain way. Trustees must always be, and also be seen to be, acting independently.
Trustees must at all times be in a position to justify their decisions, especially if they have discretionary powers in terms of a trust instrument. It is advisable that trustees do not only record their decisions, but also their reasons for arriving at their decisions. Trustees must at all times be able to demonstrate that they have applied their minds and any decision to either make a distribution or withhold a distribution from a particular beneficiary should preferably be supported by written reasons for their decisions.
It may even be wise for trustees to request a motivation from beneficiaries when considering their needs, to support their decisions and to demonstrate that they have received inputs in order to apply their minds.
The Wiid v Wiid case of 2012 provides guidelines for trustees in terms of their discretionary powers provided in a trust instrument. The father registered a trust for the benefit of himself and that of his family.
The judge held that the discretion provided to the trustees in terms of the trust instrument as a whole demonstrated that the founder’s primary objective was to treat his children equally and that the clause granting discretion to the trustees allowing the trustees to favour one beneficiary over another was meant to be applied only in exceptional circumstances. It was clear that the founder did not intend to grant the trustees an unlimited and arbitrary discretion.
The trustees (the mother and the son) could not demonstrate that they have applied their minds, but were rather manipulated by the founder (the father, who was the dominant trustee) – they did not exercise their discretion in an impartial and independent manner.
The judge decided that the trustees were personally liable for the damages the trust and the beneficiaries suffered due to a non-market related rental contract concluded with the son (only one of the beneficiaries), and that the trustees should be removed from the trust – a harsh judgement.
It is clear that the fact that trust instruments, in many cases, contain a general stipulation that the trustees shall have an unlimited or unfettered discretion, does not allow them to do as they please. They have to be able to prove that they always act in the best interests of the beneficiaries.
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.