How to avoid conflict when a trust founder dies
Trusts remain integral to protecting and preserving assets and securing income for future generations of South Africans. Their popularity as an effective estate management tool has increased over the years and they are certainly not just for the wealthy but also serve to support vital needs in society, like providing for the living expenses of someone badly injured in an accident or ensuring the care of a loved one who no longer can manage their affairs. Their use in business as an effective way to separate assets and interests and avoid conflict is also on the rise.
The complex regulatory and economic landscape is heightening the need for more careful and stringent management of trusts. For instance, from 1 April 2023 trusts in South Africa must disclose beneficial ownership of assets. While this is an attempt to improve transparency and lift the veil on effective ownership, this rule change in essence makes trustees third-party providers of data for the South African Revenue Service. It also raises the administrative burden for smaller, family-focused trusts.
As these new requirements play out, one issue that is coming up quite often is disputes over money held in a trust. This can occur when a founder dies and the children as beneficiaries fight over access to the trust’s bank account. It also happens when a beneficiary is simply unhappy with the way trustees are administering (and paying out) trust funds. Other problems in practice tend to occur where a beneficiary has not made adequate provision for how to deal with trust benefits in their will (the risk is then that this is distributed via intestate laws, and hence the proceeds could land up with a family member the beneficiary does not have a relationship with and even who the founder did not want to access those funds); or where a founder dies and faces the hefty tax consequences of having had an interest-free loan sitting in the trust.
Simply approaching a court to have a trust shut down, or the deed amended to ensure a desired change is not easy either.
As a general principle, a court has no power at common law to vary trusts that are established by will or by contract. There are, however, exceptions to this. A court may intervene at common law, for example, where it is necessary to avoid frustrating the stated object of the trust or prejudicing the beneficiaries
In addition, a court has a statutory power to intervene under the provisions of section 13 of the Trust Property Control Act, 57 of 1998, which provides as follows:
“If a trust instrument contains any provisions which bring about consequences which in the opinion of the court, the founder of a trust did not contemplate or foresee and which –
- hampers the achievement of the objects of the founder;
- prejudices the interests of the beneficiary; or
- is in conflict with the public interest,
the court may, on application of the trustee or any person who, in the opinion of the court, has a sufficient interest in the trust property, delete or vary any such provision or make in respect thereof any order which such court deems just, including an order… terminating the trust”.
The restrictions on varying or terminating a trust do not, of course, apply where the variation or termination is contemplated by the trust or its founder when it was established.
Yet despite the above, many problems are rearing their head in practice. One is the more severe tax consequences of an interest-free loan – the difference between the official interest rate and the low- or no-interest rate on the loan account is now deemed a donation made by the lender – and so the founder should ensure these consequences are dealt with in his or her will to avoid any unexpected and costly tax surprises.
Other issues are a little simpler to understand and plan for but equally unpleasent when they happen. They often relate to accessing the keys to the money vault of a trust – the bank account. When a founder dies, remaining trustees may be at loggerheads, for instance, and those with authority to act could take advantage.
Remember, trustees must legally administer trust assets separately from personal assets. Section 11 of the Trust Property Control Act explicitly requires the separate identification of trust assets. Any bank account or investment at any financial institution should be identifiable as a trust bank account or investment. This bank account should, therefore, never serve as a personal piggy bank.
More thought must therefore go into providing proper authorisation to which trustees can authorise bank transactions.
As explained above, courts will be reluctant to change the trust deed or allow a trust to be shut if this contradicts the founder's intention. The solution is to plan early and to think of every eventuality.
Trust deeds should be amended during the founder's lifetime to ensure appropriate signing powers to access bank assets. Beneficiaries could also either be vested with assets on the death of the founder (in a bewind trust), or they may vest in the trust itself (ownership trust), so each person must make sure their own will deals with the assets appropriately in each scenario to avoid nasty headaches – and even nastier family squabbles – afterwards.
While trusts are potent tools when constructed correctly, every eventuality must be carefully thought through to avoid unintended surprises.