Trusts are appropriate legal structures in many circumstances. However even a well thought out trust structure supported by an excellent trust deed will fail the settlor’s aims if the trustee is untrustworthy.
What is a Trust?
A Trust is an arrangement where X holds or controls property for Y. In this case X is the Trustee, who has certain powers and responsibilities. In this case Y is the Beneficiary.
A Trustee or Beneficiary can be a person, a company, a group of one or both of these. The Trust is not a legal entity in itself.
Trusts arise in Wills or Trust Deeds or without formal documents and even without a specific intention on the part of Trustee and Beneficiary. Where there is a specific document, it should spell out the various duties and powers of the Trustee and the Trustee Act 1936 (SA) imposes duties and powers as well.
Essential Quality of Trustee
Trustworthiness is, of course, the essence of the Trustee’s character and conduct. Because X controls property for Y, it is crucial that Y is not deprived of the benefit of the Trust. The overriding principle of a Trust is that it exists for the welfare of the Beneficiary.
Untrustworthy Trustees
There are many examples where a Trustee may be liable to Court action or supervision:
- The Trustee has a conflict of interest;
- The Trustee fails, refuses or neglects to carry out the proper workings of the Trust;
- Fraud or misconduct by the Trustee;
- The Trustee breaches the Trust Rules;
- Meddling with Trust property.
A Trustee is liable for loss of trust property if he breached Trust rules or was negligent. He may be forgiven by the Court however, in cases where he acted honestly or reasonably.
Removing a Trustee
Where a Beneficiary has good grounds to doubt that the Trustee is carrying out the Trust obligations (or through no fault of the Trustee, the Trustee is unable to continue in the role or the Beneficiary is better served by a replacement), it is open to remove the Trustee, via a mechanism in the Trust document or by the SA Supreme Court.
Court Can Direct Trustees to Act
The Supreme Court has powers to order a Trustee to do things that should have done under the terms of the Trust but it can also give the Trustee permission to do something beyond the rules of the Trust. The Court can even wind up the Trust or change its rules. The Court will not help the Trust avoid or reduce tax and will probably only proceed if it is in the interests of all the Beneficiaries.
Records and Inspection
A beneficiary has the right to inspect Trust records, which must be kept in good order by the Trustee. The Court can appoint an inspector to investigate the Trustee’s management of the Trust. A trustee can be compelled to account for the assets of the Trust.
For further information please contact Peter on 8362 6400 or email Peter Jakobsen. Join our mailing list to receive updates and advice on current issues.
