Trustworthy: can a beneficiary disrupt a trust?

A recent real-life case demonstrated the importance of estate planners and trustees staying alert. Essentially, the founder’s (the estate planner) daughter reached maturity, and her new attorney boyfriend influenced her so significantly that she believed she could claim her fair portion from the trust. In a knee-jerk reaction, the parents want to remove her as a beneficiary from the trust in an attempt to protect the assets held in trust as a generational wealth protection vehicle. Is that the right decision?

What was the intention of the founder?

When a crisis hits, people often lose sight of why they established trusts. The estate planner should revisit these reasons. The founder’s intention must be clearly stipulated in the trust deed. Additionally, the purpose of setting up the trust should be explained to and documented for both the first and subsequent trustees, especially when the founder is no longer present. Unfortunately, this clarification usually does not occur, leading to an unclear mandate for the trustees, which may result in future misuse of trust assets.

What does the trust deed say?

Many people establish trusts without thinking critically. Trust practitioners also share this fault, failing to apply their knowledge or adequately guide their clients. Many rely on a standard trust instrument template, merely changing the trust’s name, the founder’s name, and the trustees’ names, while also using a conventional list of beneficiaries. Establishing a trust and selecting beneficiaries necessitates a thorough understanding of trusts along with careful consideration of one’s personal circumstances. There is no one-size-fits-all solution! 

Most trusts are structured as discretionary trusts. When trustees have complete discretion over the trust’s assets, beneficiaries do not have the right to claim anything from the trust. They may literally not receive a cent from the trust, provided that the trustees can demonstrate they have thoughtfully considered their decisions when making distributions.

What rights do beneficiaries have?

There is a general misconception that beneficiaries have no rights and that trustees can do as they wish. Beneficiaries are often told that they have no rights when inquiring about the trust’s affairs. The truth is, beneficiaries – even discretionary beneficiaries – do have certain rights that everyone involved in trusts needs to understand. Generally, beneficiaries have the right to information, so they can request it. With a troublemaking beneficiary, this may make the trustees’ lives difficult. 

Beneficiaries also possess a personal right against the trustees regarding the trustees’ compliance with their duties. In the Griessel v de Kock case of 2019, the Court held that the “role of a trustee in administering a trust calls for the exercise of a fiduciary duty owed to all the beneficiaries of a trust, irrespective of whether they have vested rights or are contingent beneficiaries whose rights to the trust income or capital will only vest on the happening of some uncertain future event.”

Depending on the wording of the trust deed, a beneficiary may have a personal right to the trust income, capital gains, and/or capital/assets as stipulated in the trust instrument. They may also have a personal right to the trust income, capital gains, and/or capital/assets as vested by the trustees in a beneficiary. However, discretionary or contingent beneficiaries do not hold real rights (ownership) in the trust assets because those assets belong to the trustees in their representative capacity on behalf of all beneficiaries.

Depending on the wording of the trust deed and taking legal precedent into account, beneficiaries may have the right to participate in decisions regarding amendments to a trust deed or deregistering a trust. In cases of conflict among family members, the disruptive beneficiary may be uncooperative in agreeing to necessary amendments or even in deregistering the trust.

It is also important to control via the trust deed what beneficiaries can do with their rights, such as selling or ceding their right, and introducing the unwelcome attorney boyfriend.

Who controls the trust assets? 

Estate planners are reminded that the trustees are the individuals who own and control the trust assets on behalf of the beneficiaries. They are, therefore, the decision-makers. This is why it is crucial to ensure that the clauses concerning the appointment and removal of trustees (especially future trustees) are watertight. Do not allow for the abuse of trust assets, particularly in future generations. It is also essential to consistently have a trustworthy independent trustee (or rather, a professional trustee) who can guide the family trustees while remaining independent. 

Can you hire and fire beneficiaries?

Even though it may sound like the correct decision to remove the daughter as a beneficiary, it may have unintended consequences. Unfortunately, a trust’s objective is typically for the trustees to act for the benefit of defined beneficiaries in the trust deed. Frequently altering beneficiaries may invalidate the trust, as it could be perceived as changing its objective, potentially creating a new trust. If the trust holds significant property, frequently changing beneficiaries might even trigger Transfer Duty on the properties contained within the trust.

Conclusion

The advice - especially when emotions are running high - is for estate planners and families to seek professional guidance from someone who specialises in trusts, as poor decisions can lead to significant heartache. Avoid thinking in the moment. Remove emotions from the decision-making process and leave a legacy of love for future generations (if that was the founder’s intention).

* Van der Spuy is a Chartered Accountant with a Masters's 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.

PERSONAL FINANCE