Tips for women in trusts - How to protect your family’s legacy

A true story

A woman was married to a specialist surgeon and one son was born from the marriage.  Her husband created a trust for the family, but was advised by his attorney to serve as trustee with his brother, and to be appointed as the only beneficiary of the trust. The trust deed stipulates that he can, in his will, appoint “follow-up” beneficiaries. This obviously gave him flexibility to exclude his wife and son, should the need ever arise. Unfortunately, the person who drafted his will, was not aware of this stipulation in the trust deed and did not appoint the required “follow-up” beneficiaries in the will. The husband 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 wasted money later, the brother, now the only trustee (and also the executor of the estate) is obstructive, 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 in excess of R 30 million in assets, at the time. The trust however funds all the costs for the brother to defend himself in Court, his travelling and hotel costs. He got the best legal team, flies business class and only stays in 5 star hotels, when he comes to Johannesburg for Court procedings. He uses trust money to fund his fights, but the mother and son have not gotten a cent from the trust and even have to pay for their own legal costs, in an attempt to protect the trust’s assets.

What is the lesson to be learnt from this true story? Read the trust deed!

Most spouses are not aware of the contents of the trust deed. Specifically look out for the different role players. The founder should serve no other purpose, but to create the trust. He/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 are involved in all meetings and 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 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. Should anybody tell you otherwise, be mindful of a strategy to exclude you.

Important clauses to understand in the trust deed:

• Read the definition clause of beneficiaries carefully. Are the beneficiaries clearly defined, and include you, your children and their descendants? All beneficiaries should either be identified (such as name and ID number) or identifiable  (such as “the descendants of”), so any provision empowering the trustees to add any future beneficiaries, as they wish, is invalid and may be open to abuse.
• Does the trust deed have a mechanism that 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/her will. This will ensure continuity in the family. If one or more of your children will never become trustees (for well-considered reasons), will they at least have the ability to have a say in who a follow-up trustee may be? 
• Does the trust deed contain any provisions whereby you and your children can be removed as trustees, and in such a way prevent your participation in the management of the trust?
• Is the trust deed clear about who cannot be trustees? You typically do not want your spouse’s future spouse to ever become a trustee, as that may ruin your family’s legacy. You also do not want any of your childrens’ spouses to ever become trustees.
• Does the trust deed contain a clause stipulating that the trust should at all times have an independent trustee, and is such trustee truly acting independently, or is he/she just a puppit of your spouse?
• Read the decision making provisions in the trust deed carefully. Does the trust deed lay out clear processes to follow for decision making, or is it vague and open to abuse? Although many trust deeds state that a quorum for meetings is the majority of trustees, the Courts set legal precedent that a quorum for any meeting is all trustees. 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, but to reserve unanimous decisions for all major decisions, such as to terminate the trust, to amend the trust deed, and to distribute material assets of the trust to its 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 the next day after a dispute. Mediation is a much more preferred method to deal with family disputes, as it is cheaper and often there is a lot of emotion involved when families have to make decisions around money. Mediation may very well 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 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. One has accepted benefits if you received any distribution from the trust, or if you merely write to the trustees and inform them that you accept your benefits as beneficiary under the trust. This may be a good way to protect yourself from abuse of trust assets.
• 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 as they wish, and transfer the trust’s assets to a new trust, where you, and your children, may be excluded.
• Any of the abovementioned anticipated potential issues can be pro-actively prevented, through an amendment of the trust deed. Rather be safe than sorry. Ensure you always make use of a professional, independent trust service provider.

Although the sad story described above is typical of the historical treatment of trusts, where trusts were typically manipulated to the benefit of the husbands, in the ever changing world, the above lessons are equally applicable to the husbands of today.