Trust lessons for spouses and partners

The real life story shared in this article provides certain lessons for spouses and partners where trusts are involved. Although trusts have been around in the world for almost a thousand years, it remains one of the most misunderstood and sometimes abused vehicles where families’ assets are housed.

A couple got married when they were young, with no assets in their names. They both worked in the retail industry and soon realised that they could start their own business. They captured a niche market and the business started doing really well. This enabled them to start other business ventures, which collectively increased their wealth substantially. They were advised to transfer their assets into various trusts. Luckily the wife acted as trustee on the trusts and was also a beneficiary.

The wife was the hard worker, whilst the husband was the spendthrift. Working eighteen to twenty hours a day in their retail business, it unfortunately took its toll after many years, causing burn-out for the wife, after her health suffered from the stress and little sleep. She decided to take a sabbatical to take care of her health. During this period, the husband, the so-called independent trustee and the accountant (who was acting as both a trustee and the accountant, which naturally causes a conflict of interest) colluded to restructure the businesses so the wife could not lay her hands on any money. They relied on the majority rule in terms of the trust deeds to make all decisions in the trust, so excluded her from all meetings and decisions.

When she returned to the business, she realised that all the restructuring has happened behind her back and when she asked questions, she was told that all the money that she previously loaned to the trusts were converted to shares, after they moved all the assets into companies, held by the trusts. She could therefore not claim repayment of her loans, nor did she have any say in the businesses, as her husband was appointed as the sole director in all the companies, where all their assets are now held.

When all her husband’s plans were put in place, he asked her for a divorce. She had no access to money and the husband offered to pay her R 100 000 per month for twenty years as a settlement. This would add up to about 8% of the total estate, in today’s terms, without taking inflation into account. They were married out of community of property, with accrual, entitling her to 50% of the total estate. She was devastated and helpless. She got the assistance of a trust specialist and all the trustees’ wrongdoings were exposed and reported to the Master. The Master then asked them to report to him. They knew what they have done was not above board and could simply not account to the Master. Based on that, the Master started a process to remove them. Only then, the husband’s bravado stopped and he entered into settlement negotiations. The wife got what she was entitled to and was divorced in days, literally.

What are the lessons spouses and partners can learn form this story?

Firstly, when you set up a trust, you can be the founder, trustee and beneficiary (Goodricke and Son (Pty) Ltd v Registrar of Deeds case of 1974), and you should be if wealth built up with your partner is transferred into a trust. Often spouses are told that they cannot be a trustee or should only become a trustee upon the death of the other spouse. Trustees are the decision-makers in a trust. If you are not a trustee (especially in a discretionary trust), you cannot be involved in decisions relating to the trust, neither can you influence or question trustee decisions. Once you are a trustee, you cannot be excluded from trustee decisions, where people typically rely on the majority rule in trust deeds. The courts have, in many cases, established the “Joint Action” rule, whereby trustees are required to act jointly in dealing with trust property. The principle stems from the fact that trustees of a discretionary trust are co-owners of a trust property, albeit in a non-beneficial sense. The basic rule is that decisions regarding any transaction in respect of trust matters must be reached by all trustees unanimously. It is not the majority vote, but the resolution (signed by the entire complement of trustees) that binds a trust. A trust operates on resolutions and not on votes. In the Steyn v Blockpave case of 2011, it was decided that, when dealing with third parties, even if the trust deed states that a decision may be made by the majority of trustees, all the trustees must be involved in the decision. And all the trustees must be informed of all decisions to be taken.

Secondly, in order to receive any benefits from a trust, you need to be appointed as a beneficiary of the trust. You can be either an income beneficiary, which may only allow you to receive income that the trust generates, and/or a capital beneficiary, which may allow you to receive capital (assets) from the trust. Beneficiaries have rights to receive information and can ask for detailed information since the existence of the trust, including vouchers (Doyle v Board of Executors case of 1999).

Thirdly, if the trustees are dishonest and not acting in the best interest of all beneficiaries, they can be held accountable. The Master has the power to request the trustees to account and if they ignore the Master, the Master can remove them. Even if they do provide inadequate information to the Master, just to satisfy the Master, but the information is not complete or is obviously problematic, the Master can cause an investigation to be carried out.

Although there are remedies for the abuse of trust assets, which spouses and partners have access to, it is critical to ensure that you are either a trustee and/or beneficiary, depending on what entitlement you would have had to the trust assets in terms of your marriage regime, if a trust was not used. Without being a trustee and/or beneficiary you have no right to trust information and you cannot question or influence any decisions trustees make.