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TRUSTS, BENEFICIARIES

AND AMENDMENTS

Yolande Wessels

Fiduciary Partner

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Trusts serve many purposes, but when it comes to estate planning, they are set up to protect an estate and its beneficiaries in perpetuity. Yet, every now and again, family trusts need to be amended for a number of reasons. When they are, it is important to follow the correct procedure in doing this. The amendment of a trust deed is not always a simple or straight forward process.

 

Trust deeds can be amended in various ways in terms of the rules of the law of contract or in terms of the derived powers as stipulated in the trust deed itself. A trust deed can also be amended by way of an application to court either in terms of the common law or in terms of section 13 of the Trust Property Control Act, 57 of 1988.

 

However, when trusts are amended, there is sometimes confusion around what consent is required by a beneficiary who has previously accepted their benefits stipulated for them, specifically in a case where an amendment clause appears in a trust deed, and the clause does not require the consent of the beneficiary.

 

In light of this issue, a very recent court case highlighted the importance of making beneficiaries party to any amendments to the trust deed, especially if the beneficiaries had accepted benefits before.

 

In the matter of Ferreira and Another v Van der Merwe N.O and Others [2019] ZAECPEHC 39, the Johannes van der Merwe Trust was originally formed with only one trustee. The founder was the mother of the sole trustee and she passed away in 1994.

The trustee’s four children were the capital beneficiaries since the trust’s formation. However, the trustee’s relationship with two of his children, the applicants in this matter (R and G), deteriorated over the years and the trustee attempted on several occasions to get R and G to sign settlements that would effectively be prejudicial to their rights under the trust. The important factor is that R and G did, however, accept benefits from the trust.

 

In 2010, the trustees then in office (including the first trustee) passed a resolution to amend the Trust deed by replacing it with an entire new deed in terms whereof R and G were no longer beneficiaries of the trust. R and G brought the application then to set aside the amendment of the trust deed as of no force and effect.

 

The court (Mullins AJ) held that the amendment to the trust deed was indeed invalid for two reasons. Firstly, the original trust deed did not contain any provision allowing the amendment of the deed. As the founder had passed away years earlier, the deed could also not be amended by agreement between the founder and the trustees. Secondly, the court found on the facts that R and G had accepted benefits before, and consequently their permission was required in order to amend the original deed.

 

The acceptance of benefits by beneficiaries is undoubtedly authoritative when the validity of the amendments to trust deeds is considered from a common law perspective. However, does the acceptance of benefits have the same significance where an express variation clause is contained in the trust deed?

 

The question for consideration is whether the beneficiaries of a trust who have unequivocally accepted the benefits stipulated for them, are required to consent to an amendment of the trust deed where the trust deed contains a variation clause and, specifically, where the variation clause excludes the need for the beneficiaries’ participation and or involvement in the amendment.

 

The accepted view is that a trust beneficiary steps into an agreement with the trustees upon acceptance of benefits, where the beneficiary not only acquires certain rights, but also the obligations as stipulated in the trust deed. The beneficiary accepts the terms of the trust deed and is therefore bound by the terms of the trust deed. Should the trust deed be prescriptive about the power to amend the trust deed and does not require the beneficiary’s consent to it, such beneficiary is deemed to be bound to that provision too upon acceptance of the benefits.

 

Put simply, if the trust deed empowers the trustees to unanimously amend the trust deed, they may legally undertake such amendment regardless of whether beneficiaries have accepted benefits previously.

 

With regards to the rights of beneficiaries should a trust be amended, one should first determine what the provisions of the trust deed entail in order to establish the rights of the beneficiaries. Why was the trust set up initially and what is the position of the beneficiaries?

 

Trust beneficiaries can either be named in the trust deed or may be members of a class of beneficiaries (the children of the deceased, for example). Beneficiaries are also either defined as vested or discretionary beneficiaries. Vested rights are acquired by beneficiaries in a vested trust/bewind trust, where the assets vest in the beneficiaries; in other words, the beneficiaries are the rightful owners of the assets and therefore have a right to them, but the administration is taken care of by trustees until, for example, a child turns 25. The beneficiary cannot dispose of the assets until he or she takes over the control over the asset.

 

In the case of a testamentary trust which is set up in terms of the testator’s will, the wording is of utmost importance in determining whether the trust created in the will is a discretionary trust or a bewind trust. If it is a bewind trust, the ownership of the assets vests in the beneficiaries and cannot be taken away by the trustees.

 

Most of the trusts under our management at Citadel, are discretionary trusts which means that the beneficiaries only have contingent rights. The trustees have absolute discretion to distribute the capital and income to such of the beneficiaries they may decide and they may also decide the proportions of the distributions. The only ‘right’ beneficiaries have is to be considered for these benefits when the trustees decide to distribute the benefits.

 

Beneficiaries, however, do have the right to proper administration by the trustees. If a beneficiary is of the opinion that the trustees are not acting in their best interests and in line with their fiduciary duties, they can sue for breach of trust. Beneficiaries also have a right to request the Master of the High Court to demand an account of their administration of the trust from the trustees.

 

In a recent court case, Griessel NO & others v De Kock [2019] ZASCA 95, the court held that a contingent beneficiary in a trust does have rights worthy of the court’s protection.

 

Very briefly, the facts of the case are as follows:

The first respondent (FR) is a beneficiary of a discretionary trust and the appellants are the trustees of the trust. No distribution of income or capital to any beneficiary has ever been done during the existence of the trust. The trust owns all the shares in a private company, which in turn owns a piece of land. The land is part of a Game Reserve adjacent to the Kruger National Park.

 

Over the years, all the beneficiaries of the trust had the benefit of visiting the land belonging to the private company with the permission of the trustees. The trustees attempted to change the trust deed to remove FR as a beneficiary. After FR launched a court application against this, the matter was settled on the basis that the amendment was of no force and effect. The trustees then decided to refuse permission to the FR to enjoy this benefit in future. The reason being that the family had “issues” with FR.

 

FR applied to the High Court (Pretoria) to have his rights as a beneficiary of the trust restored, as well as to have the appellants removed as trustees. The court then ordered the reinstatement of FR’s rights as a trust beneficiary and also the appointment of a further independent trustee.

 

On appeal, counsel for the appellants argued that FR had no vested rights in the trust property and as such could not demand any benefits. During argument counsel conceded that FR did have contingent rights in the discretionary trust as a beneficiary who had accepted his benefits. The mere fact that he was allowed previously to use the property for holidays together with all the other beneficiaries ensured that. The court therefore ordered FR’s rights as a beneficiary be reinstated.

 

What the above two cases highlight is that it is important for trustees and beneficiaries to understand the rights of beneficiaries, especially when it comes to amending the terms of the trust deed. It can save a lot of time, money and family disharmony.

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Citadel Investment Services Proprietary Limited (registration number 1996/006847/07) is licensed as a financial services provider in terms of the Financial Advisory and Intermediary Services Act, 2002.