People often agree to serve as trustees on a trust, without understanding the purpose of the trust and the objectives of the founder.
They underestimate the importance of communication and record keeping. It should all start with the first trustee meeting.
If these discussions did not take place between trustees (and the founder) yet, it is never too late to have them, especially when the founder is still alive.
That may save a lot of heartache, especially for later generations.
The chosen trustees
The trustees should discuss the rationale of the founder hand-picking them as trustees and whether the founder has selected any trustee/s with specific capabilities, for such trustee/s to provide specialist input and guidance to the other trustees.
Often trustees do not have these discussions and cooperate as a team, focusing on each trustee’s strengths, but rather perform their functions slap-dash, which negatively impacts the trust.
Instructions in the trust deed
Most trustees I deal with on a daily basis have never read the trust deed – the contract that binds the trustees. So they do not know what the founder’s specific instructions are.
A trust deed is a trust’s constitutive charter. Outside a trust deed, a trust cannot be bound (Land and Agricultural Bank of South Africa v Parker case of 2005).
The founder’s instructions to the trustees will be contained in the trust deed.
During the first meeting, the trustees should discuss in detail what the trust deed requires of them to do on an ongoing basis, such as what their powers are, who is to benefit from the trust and on what basis, the process to follow to make decisions, if the trust deed requires of them to meet a certain number of times a year, if they should have the trust financials audited or not, and any further specific instructions of the founder contained in the trust deed.
No trustee will be able to properly fulfil their duties as trustee without knowledge of the trust deed, the contract, in terms of which they have to act.
Some trustees are lay-persons who find it difficult to read and understand legal contracts.
It is therefore wise for the board of trustees to dissect the trust deed and get all trustees on the same page.
It is in the best interest of every trustee to work with their co-trustees, as trustees may be held personally liable, even for the wrong-doing of other trustees, in certain circumstances.
The founder’s objective
The founder’s objective is described in the trust deed.
The objective is important so that the trustees are guided in terms of how they should go about with trust assets.
The trust object (the beneficiaries) in an inter vivos trust should be defined with reasonable certainty and be determined or determinable from objective criteria such as “The children of X”.
The objective of an inter vivos trust is usually to provide an income for the beneficiaries or to provide funds for the housing, care, maintenance, education, general welfare, recuperation, health, entertainment, pleasure, or the advancement of the life of any beneficiary.
It is also used to transfer assets to the capital beneficiaries (i.e. the beneficiaries who may receive trust assets and profit on the sale of trust assets) during the lifetime and upon termination of the trust.
In the case of an impersonal trust (such as a charitable trust), the trust object relates to the way in which persons who are to benefit from such a trust (the beneficiaries) are typically described as a class of persons in such a way that they can be objectively determinable, such as “students meeting the following criteria…”.
The trust object cannot be vague. Phrases such as “those beneficiaries which the trustees will select as they see fit from no defined class” are not permitted.
If the trust deed contains such vague phrases, the trustees need to take that up with the founder in the first meeting to have it corrected, as such problematic clause may render the trust invalid and guarantees conflict between the trustees at some point in future. The trust deed should rather give clear instructions to trustees that they can understand and live by.
The founder’s purpose with the trust
There seems to be a material difference between the object of a trust and the purpose of a trust.
As discussed above, the object is generally openly stated in the trust instrument, and all parties who have dealings with the trust will be able to establish the object from the trust deed.
The trust’s purpose (the reason why the founder created the trust or their motivation to have created the trust) is, however, often not stated in the trust deed. It is therefore important to have discussions with the founder to understand the reason/motivation why they have created a trust, as it will give the trustees guidance in the interpretation and application of the trust deed provisions.
They should document these discussions in minutes of the first meeting to protect themselves from attack from beneficiaries who may have a different view and to guide future trustees, especially those trustees who are appointed after the death of the founder. Documenting the purpose of the trust should almost serve as a vision of the trust that the trustees should all agree to, understand and live by.
The founder’s wishes may, or may not, be clearly covered in the trust deed. Some estate planners create “letters of wishes” to serve as guidance to the trustees in the performance of their duties, which the trustees may or may not follow.
As long as those wishes are not instructions, the trustees should discuss these wishes and decide how they are going to apply them, if they so wish. This should also be documented in the first meeting, if relevant.
Phia van der Spuy is a Chartered Accountant with a Masters degree in tax and a registered Fiduciary Practitioner of South Africa®, a Chartered Tax Adviser, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze®, the provider of a digital trust solution.