A woman was married to a specialist surgeon and they had a son. The surgeon established a trust for the family. His attorney advised him to serve as a trustee with his brother and to be appointed as the sole beneficiary of the trust.
The trust deed stipulated that he could, in his will, appoint “follow-up” beneficiaries. This gave him the flexibility to exclude his wife and son, if the need arose. But the person who drafted his will was not aware of this stipulation in the trust deed and did not appoint follow-up beneficiaries in the will.
The surgeon went cycling one morning, suffered a heart attack and died. He was in his early fifties.
Seven years, many court cases and a lot of money later, the brother, who is now the only trustee (and also the executor of the estate), is obstructive and squanders trust money, and the estate is still not finalised.
The son approached his uncle, as trustee, for the trust to fund his medical studies, but the uncle said the trust did not have sufficient funds to pay for such an expensive education, even though the trust deed made it clear that one of the purposes of the trust was to fund education and the trust had more than R30 million in assets at the time.
The trust, however, funds all the costs for the brother to defend himself in court, and his travel and hotel expenses. He has the best legal team, flies business class and stays in five-star hotels when he goes to Johannesburg for court proceedings.
The mother and the son have not received a cent from the trust and have to pay their legal costs in attempting to protect the trust’s assets.
What is the lesson to be learnt from this true story? Read the trust deed! Most women whose husbands have established a family trust are not aware of the contents of the trust deed.
Specifically, look at who the different role players are. The founder should serve no purpose other than to create the trust. He or she should have no influence over decisions relating to the trust.
Be aware that the trustees make the decisions for the trust. If you are not a trustee, you cannot be part of any decisions relating to the trust. If you are a trustee, make sure that you attend trustee meetings and are involved in all decisions relating to the trust.
If you are not listed as a beneficiary, you cannot expect to receive anything from the trust. If you are a beneficiary, and it is a discretionary trust, you have absolutely no say in the running of the trust, or in any decisions relating to the trust or its assets.
It is, however, important to know that a beneficiary does have a right to reporting by the trust. It is also important to know that it is possible to be the founder, a trustee and a beneficiary. If anyone tells you otherwise, be alert to the possibility that they are trying to exclude you.
The trust deed
The important clauses in the trust deed to understand are:
The definition of “beneficiaries”.Are the beneficiaries clearly defined, and do they include you, your children and their descendants? All beneficiaries should be either identified (by their names and identity numbers) or identifiable (such as “the descendants of”). Any provision empowering the trustees to add future beneficiaries as they wish is invalid and may be open to abuse.
Does the trust deed have a mechanism whereby your children can become follow-up trustees after your and your spouse’s death? A trust deed should typically contain a clause enabling a trustee who is also a beneficiary to appoint a follow-up trustee in his or her will. This will ensure continuity in the family. If one or more of your children will never become a trustee (for well-considered reasons), will they at least be able to have a say in whom a follow-up trustee may be?
Does the trust deed contain any provisions whereby you and your children can be removed as trustees, and thereby prevent your participation in the management of the trust?
Is the trust deed clear about who cannot be a trustee? You typically do not want your spouse’s future spouse to become a trustee, because this may ruin your family’s legacy. You also do not want any of your children’s spouses to become trustees.
Does the trust deed contain a clause stipulating that the trust should at all times have an independent trustee, and is this trustee truly acting independently, or is he or she simply a puppet of your spouse?
Does the trust deed clearly set out the processes that must be followed when decisions are made, or are these provisions vague and open to abuse? Although many trust deeds state that a quorum for meetings is the majority of trustees, the courts set the legal precedent that all trustees are required for a quorum for any meeting. This enables all trustees to participate in decision-making.
It is good practice to allow trustees to make decisions on a majority basis for the day-to-day running of the trust, and to reserve unanimous decisions for major decisions, such as terminating the trust, amending the trust deed, and distributing the material assets of the trust to beneficiaries.
How are disputes resolved? Many trust deeds refer disputes for arbitration. This is not really practical for family trusts, where the family has to live together after a dispute has been settled. Mediation is the preferred method to deal with family disputes, because it is cheaper and there is often a lot of emotion involved when families have to make decisions about money. Mediation may deflate emotions, and serious intervention may not be necessary.
Can the trust deed be amended, and if so, what are the requirements? Even if the trust deed does not stipulate that the approval of the beneficiaries is required to amend a trust deed, and thereby change people’s rights and obligations, the courts set the legal precedent that beneficiaries who have accepted benefits from the trust are required to be included in a decision to amend a trust deed. This stems from the principle that beneficiaries become parties to the trust through the acceptance of their benefits, as a trust is a contract, and all parties are required to amend a contract. You have accepted benefits if you received any distribution from the trust, or you can merely write to the trustees and inform them that you accept your benefits as a beneficiary under the trust. This may be a good way to protect yourself from the abuse of trust assets.
l When and how does the trust terminate? Read these provisions carefully and ensure they are not open to abuse by any one person. Also ensure that the trustees are not allowed to create new trusts on terms of their choosing and transfer the trust’s assets to a new trust from which you and your children may be excluded.
Potential problems can be avoided by amending the trust deed. Rather be safe than sorry. Ensure you use a professional, independent trust service provider.
Although the sad story at the beginning of this article is typical of how trusts have been manipulated to the benefit of husbands, in our changing world the above lessons are equally applicable to husbands.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa and the founder of Trusteeze, which specialises in trust administration. She is the author of Demystifying trusts in South Africa (Createspace).