Can trustees be held liable?

What is expected of a trustee:

Trustees are the guardians of the trust assets and have a duty to manage these assets in the best interest of the beneficiaries. Trustees are akin to the managers of a company. They manage the assets of the trust for the purpose and the objectives set out in the trust deed, for the benefit of the beneficiaries. The trustees have a fiduciary duty to the beneficiaries of the trust. They may not act in a way that violates this duty or is outside the parameters of the trust deed.

Unlike the Companies Act, which is largely silent on the level of care, diligence and skills of a director, the Trust Property Control Act is quite specific as to what is expected of trustees. The Trust Property Control Act clearly stipulates the duties of trustees. Under Section 9(1) of Trust Property Control Act, trustees must “act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another.” This is a far reaching, onerous provision and the onus will be on the trustee to prove that he/she acted as such, in the event that he/she is accused of maladministration. No trust instrument can exempt a trustee from this liability. If the trust instrument contains such a clause, it may invalidate the entire trust instrument and cause the trust to cease to exist. 

What powers do trustees have:

Trustees are required to exercise their powers independently and objectively. Trustees 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 deed, their acts are ultra vires (beyond the powers) and therefore invalid. It is therefore critical for the estate planner to ensure that he/she awards sufficient powers to the trustees to execute his/her intention, without giving them powers that may conflict with such intention.

South African law distinguishes between a general and specific power of appointment afforded to a trustee. Only a specific power of appointment is accepted or permitted in terms of South African trust law (Braun v Blann & Botha case of 1984). A specific power of appointment is also known as special power of appointment, and refers to the power of choosing, or a right of disposal by the trustee. Any attempt to empower trustees with an impermissible general power of appointment would lead to the trust being declared invalid. The trust deed must be clear and specific in terms of what trustees are empowered to do. It is important to remember that a trust is a contract, and that the trustees should take guidance from the trust deed when performing their duties.

Who gets sued:

A trust itself cannot be sued, because it is not recognised as a legal person in South Africa, unless a statute defines it as such. The trustees, in their official capacity, can, however, be sued. An indemnity clause in the trust deed, which exempts trustees from liability for breach of trust, is void and does not exempt a trustee from actions involving ordinary or gross negligence, or intentional wrongdoing. Criminal liability may be imposed upon a trustee who commits a crime during the course of the trust’s administration, for example through theft or fraud. 

Trustees are jointly and severally liable for damages (delict). Beneficiaries, or third parties, such as creditors, who have suffered a loss as a result of breach of trust, are entitled to bring a damages claim against the trustees. Trustees can be sued for damages by beneficiaries, if such trustees are deemed to have acted negligently, both when acting in good faith and when intentionally acting wrongfully. 

A co-trustee who was not involved in such a breach of trust may still be liable for any wrongful action of another trustee in a situation where the “innocent” trustee’s ignorance and/or inactivity is causally connected to the damage incurred. For example, where the “innocent” trustee is aware of a breach of trust by co-trustees, but does not report it; or where the “innocent” trustee improperly allows trust funds to remain in the sole control of co-trustees. 

Can trustees be held personally liable:

Trustees could find themselves personally liable for losses suffered by the trust, if it can be proved that they did not act with the necessary care, diligence and skill that can reasonably be expected of a person who manages the affairs of another. Section 9(1) of the Trust Property Control Act states that a trustee shall, in the performance of his/her duties and exercise of his/her powers, act with the care, diligence and skill, which can reasonably be expected of a person who manages the affairs of another person. It is important to note that “skill” encompasses more than simply acting in good faith. Trustees may be proved negligent, not only if they invested in risky investments, but also if they invested capital too conservatively, resulting in the capital not growing sufficiently. 

Trustees must be aware that they can be held personally liable, even if only one trustee has signing power on behalf of the trust and that person makes a poor decision that finds all the trustees liable for his/her negligence. This is, in itself, an onerous provision. In a dispute, the Courts will enquire as to what any other person who takes care of people's affairs would have done under similar circumstances. A Court will ignore the fact that the trustee, for example, was a family member, and was therefore deemed to be acting within the family’s best interests.

Can a trustee be exempt from liability:

Any provision in a trust deed that exempts a trustee from liability for negligence is void, and a trustee may be held liable for any losses suffered by beneficiaries, if it is found that the trustee did not act with the required degree of care and skill, in the administration of the trust assets. A trust deed should always have a severability clause excluding such illegal provisions. The entire trust deed may be deemed null and void if this clause is found to have been omitted.

Can a trustee be removed:

In the Tijmstra v Blunt-Mackenzie case of 2002 it was held that a trustee may be removed from office, even if he/she acted bona fide (sincerely). It was argued that a trustee’s office should be terminated by the Court if he/she allowed maladministration of the trust by the other trustees, without acting on it. It further argued that mala fides (acting in bad faith) or even misconduct are not necessary requirements for the removal of a trustee. This view of the Court is a strong warning to trustees, who should be aware of this view, and the possible consequences for turning a blind eye.

By choosing your trustees wisely, you can ensure professional asset and investment management and that your assets are taken care of when you are not around or able to look after them yourself.