Many people set up trusts without applying their minds. Trust practitioners often also do not apply their minds and guide their clients. They use a standard trust deed template, simply changing the name of the trust and the names of trustees, and use a standard template to list the beneficiaries.
Setting up a trust and selecting the beneficiaries require a good understanding of trusts, as well as a proper consideration of your personal circumstances. There is no one-size-fits-all solution.
Estate planners and trust practitioners generally do not pay much attention to the estate planner’s personal circumstances when selecting beneficiaries. This is because of the misconception that beneficiaries have no rights and trustees can do whatever they want.
The truth is that beneficiaries do have rights, which need to be understood by everyone involved in trusts. The blanket selection of beneficiaries may result in problems during the life of a trust.
Right to proper administration
Many trustees believe that beneficiaries have no rights, particularly if they are contingent beneficiaries in a discretionary trust.
In a case in 1996, the High Court made it clear that, although contingent beneficiaries have no vested rights in trust property, these beneficiaries have vested interests in the proper administration of the trust. This places a huge burden on trustees, because they can be held personally liable if they do not perform their duties as prescribed by law.
Right to information
Many people believe that trustees are not obliged to account to beneficiaries.
In a case in 1999, the High Court held that trustees have a duty to provide full trust administration reports and accounting records, dating back to when a discretionary trust was established, to trust beneficiaries, and even to contingent beneficiaries born later. The judge found that, as a result, a beneficiary is entitled to receive from the trustees full, true and proper accounting records of the trust, supported by vouchers.
The judge also found that beneficiaries are entitled to have access to the trust’s books of account, despite the fact that they have only a contingent right.
The court did, however, place limitations on these rights, and stipulated that the beneficiaries could not interfere with the trustees’ discretion in making decisions.
Asset and income rights
Beneficiaries have rights in respect of the trust assets or income as stipulated in the trust deed. These rights can be:
• Vested rights, where assets and/or benefits vest in the beneficiaries but are administered by the trustees. These rights are acquired by beneficiaries in a vested or bewind trust, where the assets vest in the beneficiaries. In other words, the beneficiaries are the rightful owners of the assets and therefore have a right to them, but the trustees take care of the administration until, for example, a child turns 25.
A beneficiary cannot dispose of the assets until he or she takes control of them.
The beneficiaries have vested rights to the trust income and/or assets. On the death of a beneficiary, these assets will be included in his or her estate.
The beneficiaries are liable for all taxes resulting from the assets.
• Discretionary rights, where the trustees have full discretion to determine the beneficiaries’ benefits. This applies to discretionary trusts. Beneficiaries have no right to income or capital until the trustees have exercised their discretion, and they cannot be party to such a decision.
Right to amend or deregister a trust
a) Discretionary trust
The trustees have a fiduciary duty to the actual and potential beneficiaries to act in their best interest. Amending or deregistering a trust would, therefore, have to be carefully considered by the trustees before they agree to it, even if they are instructed by the founder or any one of the trustees.
In a court case in 1956, it was held that, where a beneficiary has accepted benefits from a trust, he or she is deemed to be a party to the original agreement and would therefore be required to be a party to any amendment agreement. In this event, the parties will require the beneficiary’s consent to amend the trust deed. This is a requirement, regardless of what the trust deed stipulates. In other words, if the trust deed stipulates that the trustees can amend the trust deed on their own, but the beneficiaries have accepted benefits from the trust, this rule will overrule the provisions of the trust deed.
Beneficiaries may “accept” existing or future benefits in the following ways:
• If the beneficiaries made themselves part of the contract by writing to the trustees to accept their benefits, it is clear they have accepted the benefits of the trust, even if the benefits depend on the trustees’ exercising their discretion in the future. Although there is no prescribed form of acceptance, it is suggested that an unequivocal expression of intention to accept is required, as well as a communication of acceptance by the beneficiary to the trustees.
• If there were prior amendments to the trust and the beneficiaries accepted these amendments, it may imply the acceptance of benefits.
• If awards were made to discretionary beneficiaries in the past and the beneficiaries accepted these awards, it may imply that the beneficiaries accepted the benefits of the trust.
• In 2017, the Master used a 2012 court case to provide clarity on the involvement of beneficiaries in a trust deed amendment or trust deregistration, and made the following distinction:
– If the trust deed stipulates that the beneficiaries are required to be involved in a decision to amend the trust deed or deregister the trust, the trustees must involve the beneficiaries in such decisions.
– If the trust deed specifically stipulates that the beneficiaries are not required to be involved in a decision to amend the trust deed or deregister the trust, the trustees do not have to involve the beneficiaries in such decisions.
Often, the amendment clauses of trust deeds state that trustees cannot amend certain provisions of the trust deeds. In such cases, the trustees will be allowed to make amendments, other than such prohibited amendments, without the consent of the beneficiaries. They will, however, require the consent of the beneficiaries to amend those clauses that the trustees are prohibited from changing on their own.
– If the trust deed is silent on the involvement of the beneficiaries, but the beneficiaries have accepted benefits conferred by the trust instrument, the trust instrument can be amended or terminated only with the beneficiaries’ consent.
b) Testamentary trust
In the case of a testamentary trust, a beneficiary, as an interested person, may apply to the court to amend or deregister the trust. No other mechanism exists for the beneficiary.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa® and the founder of Trusteeze, which specialises in trust administration.