South Africa has seen a significant increase in the number and payouts of claims against the Road Accident Fund (RAF) as well as in medical negligence cases. A major concern is the protection of the awards made to people who were severely injured or who have reduced legal capacity.
Our legal framework offers protection through court order trusts, the appointment of a curator bonis (legal representative appointed to manage the affairs of someone who is incapacitated), or of an administrator, says Penelope du Plessis, vice chair of the Fiduciary Institute of Southern Africa (Fisa).
In the case of court order trusts the trustees take control of the award and have the discretion on how to manage the funds, whereas the Master of the High Court must approve all decisions relating to the award when a curator bonis or administrator manages the estate of the patient.
The nature of the trust
Du Plessis says it is important that trustees understand the nature of the court order trust as it is not a “normal” discretionary trust.
The RAF trust award covers general damages and loss of future income. The trust is given an undertaking from the RAF that future accident-related medical expenses will be covered. This includes trustee fees.
Trustees should separate the amounts, she advises. The general damages part is the “cream on top”. The future loss of income must be treated as a salary and the amount must be invested and managed taking inflation into account. There must be sufficient funds to last the expected lifespan of the beneficiary.
“People see the payout and get all excited, but it is our job to ensure that we dampen the excitement. The hardest part is to make sure that the money is used for the purpose it was awarded for.”
Awards made due to medical negligence cases are generally higher than RAF payouts. Du Plessis explains that the medical negligence award covers general damages, future loss of income and future medical expenses. “In this instance, the general damages and future loss of income are the nice-to-haves. The future medical expense is the main part of the award that must be spent and managed with care.”
She says in practice when the medical experts suggest that the award be protected, the legal representative of the plaintiff will suggest to the court whether to have the money administered by a trust, curator bonis or administrator.
In instances where the person is unable to make legal or financial decisions the curator ad litem (someone who litigates on behalf of the patient) will recommend the most suitable vehicle.
Trustee fees
The Master of the High Court has raised concerns about the fees earned by trustees and the powers of the Master to regulate trusts and trustees.
In 2020 the Master approached the Pretoria High Court advancing the view that the appointment of a curator bonis should be the default option in all cases where the plaintiff in a medical negligence or RAF claim is a minor or fully or partially incapable of managing their own affairs.
The Master argued that the use of a trust should not be authorised under existing legislation. Fisa, which joined the case as a friend of the court, severely criticised the argument, together with several other parties.
Du Plessis says the Master argued that it does not have sufficient powers to prevent abuse of trusts and that trustees could set their own fees. The Master also mentioned that court orders were ambiguous.
Own merits
The court found that there was no legal basis to prevent the use of trusts in the case of RAF or medical negligence claims and that each case should be dealt with on its own merits.
The court also held that the court order creating the trust must specify the trustee fees or a method of calculating the fees.
Du Plessis suggests that concerns about trustee fees or potential abuse in a court order trust can be addressed by limiting the fees to 1% of the market value of the assets under administration. That is generally the norm. The court order should also clearly set out the powers of the trustees.
Each trust must have a bond of security that acts as an insurance policy should a trustee “run away” with the trust funds or make a “really bad” investment decision.
Obviously, it is not in the best interests of any trust company to have a bond of security called up, says Du Plessis.
There are only about three companies in SA that offer these bond-of-security policies and they “will not touch” a trust company that has had a bond called up due to the mismanagement of trust funds. It is a major reputational risk for anyone to find themselves in such a position, notes Du Plessis.
This article was written by FISA.