Trustees can manipulate a trust
October 25th, 2019 07:47
Trustees are the guardians of a trust’s assets. They are also the decision makers of a trust. The founder should ensure that the trust deed, the constitutive charter of the trust, deals in sufficient detail with the appointment and removal of trustees. If it does not, trustees may manipulate the trust and may cause the objective of the trust not to be met. Many court cases deal with the abuse by trustees of trust assets and the appointment and removal of trustees to influence voting.
Most trust deeds allow for majority voting, which means that the majority of trustees can out-vote the minority. This is practical for day-to-day decisions, as it may not always be possible for all trustees to agree on all matters. It is practical to allow a majority vote for day-to-day decisions, but to reserve unanimous voting for important decisions, such as the distribution of large amounts of capital to beneficiaries.
When the founder sets up the trust, he/she should consider his/her personal circumstances. Some people prefer having an uneven number of trustees, for example three, where two trustees can out-vote the one trustee. This is quite risky, as the chance is good that two trustees can side against the other trustee. In typical family trusts, where the husband and wife are trustees, together with the independent trustee (as now required by the Master of the High Court), it may be easy for the husband and wife team to out-vote the independent trustee, if the independent trustee does not agree with the husband and wife team. This may create a risk for the independent trustee if two family members do not act for the benefit of all beneficiaries of the trust, but for their own. It may also expose the trust if the court can prove that the independent trustee’s appointment was just “window dressing” and that his/her vote does not really count. On the other hand, if, for example, the trust deed requires the appointment of an even number of trustees, e.g. four trustees, it may be harder to achieve a majority vote. It is therefore important to make provision for a proper dispute resolution clause in the trust deed to cater for a deadlock, i.e. equal votes in favour of and against a decision. Considering that it is normally family members who are trustees on the trust, who have to live in harmony, it is suggested to cater for mediation first when a dispute or deadlock arises. It often helps to have an objective person remove the emotions from decisions to be made, as emotions often run high when families have to make financial decisions. If mediation fails, the trust deed should make provision for arbitration as a last resort. Such a process is favoured by the courts and is much cheaper. Dispute resolution mechanisms are also important if only two trustees are appointed, in which event unanimous voting is normally required.
The manipulation of the appointment or removal of a co-trustee by trustees can swing the majority voting in favour of a certain group of trustees, as a result of such appointment or removal. The result is an unintended consequence, which was never anticipated by the founder. Often trust deeds provide trustees with a power of assumption. This means that trustees can appoint additional trustees to act with them. A power of assumption may be provided unconditionally or only on the happening of a certain event, such as once a vacancy occurs. It is important to consider the terms of the trust deed as there may be other requirements impacting the trustees’ power of assumption, such as a requirement to have a minimum number of trustees. In the Smit v van der Werke case of 1984, even thought the trustee of the testamentary trust applied the power of assumption clause in the trust deed after the only other trustee resigned, the Court held that the requirement of the trust deed that there should at all times be a minimum of two trustees override the power of assumption clause. This means that the single trustee could not exercise the power of assumption alone. The minimum number of trustees (two in this instance) had to be in place for them to exercise their power of assumption to appoint further trustees.
If the office of trustee cannot be filled or becomes vacant, and the trust instrument does not provide for the appointment of a new trustee, the Master of the High Court may appoint any person as a trustee, after consultation with interested parties (beneficiaries) (Section 7(1) of the Trust Property Control Act). The Master of the High Court may also, notwithstanding the provisions of the trust instrument, appoint a co-trustee (additional trustee) if he/she considers it desirable, without consultation with anyone (Section 7(2) of the Trust Property Control Act). This may assist interested parties (beneficiaries) to prevent the manipulation of the number of trustees by existing trustees to force a vote in favour of a specific group of trustees.
Founders should apply their minds and consider their personal circumstances when drafting trust deeds, especially the clauses dealing with the appointment and removal of trustees and how decisions are made in the trust. Be mindful of unintended consequences.
~ Written by Phia van der Spuy ~