The framework within which trustees have to act
Trustees should continually be guided by the purpose of the trust in exercising their duties. They are required to exercise their powers independently and objectively. They hold a fiduciary position and therefore must always exercise their powers to the advantage of the beneficiaries, and act within these powers.
When trustees act contrary to the provisions of the trust instrument, their acts are ultra vires (beyond the powers) and therefore invalid. It is therefore critical for the estate planner (or founder) to ensure that the trustees have sufficient powers to execute his or her intentions, without giving them powers that may conflict with such intentions.
Although the trust instrument may confer powers generally on trustees, it may also confer specific powers on trustees in respect of a specific matter. In order not to be restrictive, a trust instrument normally awards wide powers to the trustees to ensure proper administration of the trust.
Although wide powers may be given to the trustees of an inter vivos (living) trust, care should be taken that the powers of the trustees in a testamentary trust are not too wide, as these may be regarded as a delegation of the powers of a testator or testatrix.
Powers typically included in trust instruments are:
* Accepting the initial donation and subsequent donations;
* Opening and operating bank accounts or facilities;
* Buying and selling of trust property;
* Making trust assets productive;
* Borrowing money;
* Lending money;
* Determining and distributing distributions to beneficiaries; and
* Utilisation of professional advisers and contractors.
The trust instrument can also either remain silent in respect of certain matters or expressly exclude certain powers.
If a power is expressly excluded, the trustees will not be able to do something that is specifically prohibited. If the trust instrument is silent on a specific matter, it is usually likely that the trustees will not be able to do what the trust instrument does not specifically empower them to do.
Depending on the circumstances, a power could, however, be implied or assumed if it is naturally accompanying or associated with a given power. In Meijer vs Firstrand Bank (2013), the court held that, under the common law, trustees do not have the power to mortgage trust property and therefore such a power would have to be expressly given or implied by the trust instrument.
General and specific powers
South African law distinguishes between a general and specific power of appointment afforded to a trustee. Only a specific power of appointment is accepted under South African trust law (Braun vs Blann & Botha, 1984).
As a trustee is not acting in respect of his or her own affairs, he or she can act only in terms of a specific mandate provided in the trust instrument. If a trustee acts outside the powers granted in terms of a trust instrument, the actions of that trustee will have no legal consequences, and contracts entered into by that trustee will be invalid. The contracting party may, however, proceed against the trustee to make good any losses caused as a result of the invalidity of the contract.
Any attempt to empower trustees with an impermissible general power of appointment would lead to the trust being declared invalid. The trust instrument must be clear and specific in terms of what trustees are empowered to do.
It is also important to remember that even though a trustee may be given a power in the trust instrument, they still, at all times, have to act in the best interests of the beneficiaries, as determined by the purpose/objective of the trust.
In Liebenberg vs MGK Bedryfsmaatskappy (2003), the trustees used their wide powers (“to manage the affairs of the trust”) given to them in the trust instrument without considering the purpose of the trust. They entered into a deed of suretyship binding the trust as a surety and co-principal debtor for all amounts owing by one of the beneficiaries. The purpose of the trust was to secure the value of trust assets from being diminished and to ensure an equal distribution of the trust assets between all beneficiaries at the termination of the trust. Their behaviour clearly risked the trust’s purpose being undermined.
The court held that unless specific provision was made in a trust instrument, trustees had no power to expose trust assets to business risks. A power to stand surety could also not be implied as being reasonably incidental to the power to make advances to beneficiaries. The result could be that one beneficiary could receive all benefits from the trust with the other beneficiaries not receiving anything, which contravened the objective of the trust.
Certain powers provided to trustees create a duty to exercise them. An example is the requirement of trustees to appoint a replacement trustee. Another is to remove a beneficiary once he or she is sequestrated.
It is important to note that trustees could incur personal obligations and liabilities if they act improperly or beyond the powers provided and the purpose of the trust. Even if they have a power to act, they have to be mindful of their duty to act with the necessary care, diligence and skill and their common-law duty to act in the interests of all beneficiaries, not a selected few.
Care should be taken if an estate planner wants to specifically allow or disallow trustees to do certain things with the trust’s assets. Be mindful of “vanilla” trust instruments with standard clauses, which may bring about unintended consequences.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa, a Master Tax Practitioner (SA), a Trust and Estate Practitioner and the founder of Trusteeze, a professional trust practice.