The framework within which trustees have to act
March 27th, 2020 08:27
A trust instrument should clearly set out the purpose of the trust and trustees’ powers should be stipulated in the trust instrument to support and achieve such purpose. Trustees should continuously be guided by the purpose of the trust in exercising their duties. 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 instrument, 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.
Although trust instruments may confer powers generally on trustees, it may also confer specific powers on trustees in respect of a specific matter. In order to not be restrictive, normally a trust instrument awards wide powers to the trustees to ensure proper administration of the trust. Although wide powers may be given to trustees in an inter vivos trust, care should be taken to not give too wide powers to trustees in a testamentary trust, which may be regarded as a delegation of the testamentary power 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
· Utilisation of professional advisors, tradesman and contractors
A 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 have the power to do something that is specifically prohibited. If a trust instrument is silent in respect of a specific matter, then it is usually likely that the trustees will not be able to do what the trust instrument does not specifically empower trustees 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 the Meijer v Firstrand Bank Limited case of 2013 the Court held that in terms of the common law trustees do not have the power to mortgage trust property and therefore such power will have to be expressly or impliedly given by the trust instrument. Trustees therefore do not automatically have the right to enter into a loan agreement and/or mortgage trust property.
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). As a trustee is not acting in respect of his/her own affairs, he/she can only act 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.
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 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 the Liebenberg v MGK Bedryfsmaatskappy (Pty) Ltd case of 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 and 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 this 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/objective to be undermined. The Court held that unless specific provision was made in a trust instrument, trustees have no power to expose trust assets to business risks. It also held that a power to stand surety could 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 is in contravention with the purpose/objective of the trust.
Certain powers provided to trustees in a trust instrument create duties to exercise them. An example is the requirement of trustees to appoint a replacement trustee in terms of the trust instrument (Meijer v Firstrand Bank Limited case of 2013). Another example is to remove a beneficiary once he or she is sequestrated, if so instructed in the trust instrument.
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/objective of the trust. Even if they have a power to act they have to be mindful of their duties to act with the necessary care, diligence and skill (Section 9(1) of the Trust Property Control Act) and their common law duties to act in the interests of all beneficiaries, and 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.
~ Written by Phia van der Spuy ~