Which powers to give to trustees in the trust deed

A trust’s constitutional document is a trust deed. This is a contract that sets out the framework within which the trustees must operate, including their powers and limitations. The trustees’ powers, competencies and obligations, including a clear description of the trustees’ discretionary powers and duties, as well as their remuneration, must be clearly stipulated in the trust deed. The estate planner must ensure that the powers provided to trustees in the trust deed are in line with his/her intention for setting up the trust. It is important to remember that the trust is a “creature of document” and that the powers given to the trustees in the deed are their only powers.

The trust deed usually awards wide powers to the trustees in order to ensure proper administration of the trust. These powers include:

• Accepting the initial donation and subsequent donations
• Buying and selling of trust property
• Making trust assets productive
• Allowing the use of trust assets by beneficiaries
• Borrowing money
• Lending money
• Determining and distributing distributions to beneficiaries
• Utilisation of professional advisors, tradesman and contractors
• Opening and operating bank accounts or facilities

Ensure your trust deed specifically empowers the trustees to distribute a capital gain to beneficiaries to enable trustees to make use of the lower Capital Gains Tax rate in the hands of the beneficiaries. However, be mindful of the fact that should you distribute a capital gain to a beneficiary in order to pay less Capital Gains Tax, you will increase the estate of the beneficiary for Estate Duty purposes, and possibly defeat the object of creating a trust in the first case.

If your primary residence is held in trust, ensure that the trustees are provided with the following specific powers in the trust deed: “The trustees have the power in their sole discretion to allow any beneficiary, or his/her parents and/or his/her guardian, if such a beneficiary is still a minor, and/or the founder and/or his/her spouse, free of charge or at a cost, to occupy or use any immovable or movable property forming part of this trust”.

Excessive powers given to a specific trustee could amount to said trustee taking control of the trust. In terms of Section 7(6) of the Income Tax Act, all distributed trust income will be taxed in the hands of the donor/funder if he/she can veto distributions or terminate the trust. A similar provision applies to capital gains distributed to beneficiaries (Paragraph 71 of the Eighth Schedule to the Income Tax Act).

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. For example, trustees cannnot be allowed to decide who future beneficiaries should be.

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. 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.

In order to prevent conflict, the trust deed should stipulate in great detail how the trust is to be administered, along with any formalities that must be complied with. These formalities typically include issues such as the powers given to trustees. Trustees may only act within the powers granted to them.