Trustees can manipulate a trust
Trustees are the guardians of a trust’s assets. They are also the decision-makers of a trust.
The founder should ensure that the trust deed, the constitutive charter of the trust, deals in sufficient detail with the appointment and removal of trustees. If it does not, trustees might manipulate the trust and cause the objective of the trust not to be met.
Many court cases deal with the abuse by trustees of trust assets and the appointment and removal of trustees to influence voting.
Most trust deeds allow for majority voting, which means most trustees can outvote the minority. This is practical for day-to-day decisions, as it might not always be possible for all trustees to agree on all matters.
It is practical to allow a majority vote for day-to-day decisions, but to reserve unanimous voting for important decisions, such as the distribution of large amounts of capital to beneficiaries.
When the founder sets up the trust, he or she should consider his or her personal circumstances. Some people prefer having an uneven number of trustees - for example, three, where two trustees can outvote one trustee. This is risky as there is a good chance two trustees can side against the other trustee.
In typical family trusts, where the husband and wife are trustees, together with an independent trustee (as required by the Master of the High Court), it might be easy for the husband-and-wife team to outvote the independent trustee if the independent trustee does not agree with the husband-and-wife team.
This could create a risk for the independent trustee if two family members do not act for the benefit of all beneficiaries of the trust but rather for their own benefit. It could also expose the trust if the court can prove that the independent trustee’s appointment was just “window dressing” and that his or her vote does not really count.
On the other hand, if, for example, the trust deed requires the appointment of an even number of trustees - for example, four - it might be harder to achieve a majority vote. It is therefore important to make provision for a proper dispute resolution clause in the trust deed to cater for a deadlock - equal votes in favour of and against a decision.
Considering that family members are usually the trustees on a trust, it is suggested to cater for mediation first when a dispute or deadlock arises.
It often helps to have an objective person remove the emotions from decisions to be made, as emotions often run high when families have to make financial decisions.
If mediation fails, the trust deed should make provision for arbitration as a last resort. Such a process is favoured by the courts and is much cheaper. Dispute resolution mechanisms are also important if only two trustees are appointed, in which event unanimous voting is normally required.
The manipulation of the appointment or removal of a co-trustee by trustees can swing the majority vote in favour of a certain group of trustees, as a result of such appointment or removal. The result is an unintended consequence, which was never anticipated by the founder.
Often trust deeds provide trustees with a power of assumption. This means that trustees can appoint additional trustees to act with them. A power of assumption may be provided unconditionally or only on the occurrence of a certain event, such as a vacancy. It is important to consider the terms of the trust deed, as there could be other requirements affecting the trustees’ power of assumption, such as a requirement to have a minimum number of trustees.
In Smit v Van der Werke (1984), the trustee of a testamentary trust applied the power of assumption clause in the trust deed after the only other trustee resigned. But the court held that the trust deed required that there should at all times be a minimum of two trustees to override the power of assumption clause. This meant that the single trustee could not exercise the power of assumption alone.
The minimum number of trustees (two in this instance) had to be in place for them to exercise their power of assumption to appoint further trustees.
If the office of trustee cannot be filled or becomes vacant, and the trust instrument does not provide for the appointment of a new trustee, the Master of the High Court may appoint any person as a trustee, after consultation with interested parties (beneficiaries), under section 7(1) of the Trust Property Control Act).
The Master may also, notwithstanding the provisions of the trust instrument, appoint a co-trustee (additional trustee) if he or she considers it desirable, without consultation with anyone (section 7(2) of the Act). This might assist interested parties (beneficiaries) to prevent the manipulation of the number of trustees by existing trustees to force a vote in favour of a specific group of trustees.
Founders should apply their minds and consider their personal circumstances when drafting trust deeds, especially regarding clauses dealing with the appointment and removal of trustees and how decisions are made in the trust. Be mindful of 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 practitioner.