Trusts on Divorce - Are You Stuck with an Ex-Spouse as Trustee?

“Love is grand. Divorce is a hundred grand.” (Anon)

Trusts may be formed for a variety of reasons, and the purpose and structure of each trust will inform the choice of trustees. When it comes to families aiming to preserve and protect family assets for future generations, often both spouses are appointed not only as beneficiaries, but also as trustees.

That’s a great scenario whilst the marriage prospers, but what happens on divorce? A recent High Court decision addressed one such scenario –

‘Not the Titanic’ – this marriage took six years to sink

In 2014, whilst a marriage was (as the Court put it in a judgment rich in nautical imagery) “still in calm waters”, the spouses formed four trusts. Two were called business trusts, one a property trust, and the fourth a family trust. Naming choices aside, the critical issue is that both spouses had been appointed as trustees.

Regrettably in 2015 the couple “drifted” apart and their marriage “ran aground and settled on the rocky shores of the divorce courts door” with the institution of divorce proceedings. “Unlike the Titanic” observed the Court, the relationship took six years more to be finally laid to rest - the divorce was only granted in 2021.

The ex-spouses apply for each other’s removal as trustee

The ex-husband then applied to the High Court for removal of his ex-wife as trustee of all four trusts on the grounds that she had breached her duties as trustee. Most significantly, he said, she had failed to attend trustee meetings for some five years despite being invited to them.

Her main defence was that, in the context of the ongoing divorce proceedings, her ex-husband’s conduct made it impossible for her to attend to her duties as trustee.

The Court was unconvinced by her various allegations in this regard, and two aspects in particular bear mention –

• She complained that being in the minority her decisions were overruled – not an excuse for failing to attend meetings held the Court.
• Her ex-husband failed to provide a vehicle to enable her to attend meetings – again no excuse, said the Court, there being a provision in the trust deed for virtual meetings.

Also counting against her was the fact that she was living in a trust-owned property “but fails to maintain such and pays no rent at all despite receiving the amount of R10 000,00 per month towards property expenses incurred.”

Finding that she had not been involved in the trust’s affairs and did nothing to safeguard them, the Court ordered her removal as trustee.

The Court then rejected as being without merit her counterclaim for her ex-husband’s removal as trustee on the grounds of a breach of his duty of trust towards her and a conflict of duty between his private interests and his duties as trustee.

Let’s have a look at the law behind those decisions -

What are a trustee’s duties?

Per the Trust Property Control Act: "A trustee shall in the performance of his/her duties and the exercise of his/her powers, act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another".

Must a trustee be impartial?

The Court: “It is not required of a trustee to be total[ly] impartial or [to have] no connection with the beneficiaries, but rather that he or she is capable of bringing the necessary independent mind to bear [to] the business of the trust and of deciding what is in the interests of the trust.”

When will a court remove a trustee?

The court has a discretion which it must exercise “with circumspection”.

Per the Court: “The court has to be satisfied that the requested removal will be in the best interest of the trust and the beneficiaries … a mere conflict of interest between trustees and beneficiaries or amongst the trustees [is] insufficient for the removal of a trustee … the overriding question is always whether or not the conduct of the trustee imperils the trust property or its administration".

There is no requirement to prove bad faith or misconduct, rather “the essential test is whether such disharmony, as in the present matter, imperils the trust estate or its proper administration … It is therefore clear that the court may remove a trustee from office in the event that such removal will be in the interest of the trust and its beneficiaries.” (Emphasis supplied)

In closing…

If you are faced with a divorce scenario, avoid a situation such as the ex-spouses in this matter faced by making sure that all questions around any trusts involved – such as who is to remain as trustee, who is to remain as beneficiary and so on – are resolved as part of the divorce process, and not left for future resolution.

Even better, take professional advice upfront when setting up trusts on how to avoid any future disputes that may arise should your marriage ever sail into stormy waters.

Provided by Anthony Whatmore & Company

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Disclaimer

The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.