Trust to trust: Trustee be mindful to purchase trust assets
JOHANNESBURG - In a typical South African discretionary trust trustees have full discretion to deal with trust assets. Trustees, however, are the custodians of such assets, for the benefit of beneficiaries, no one else, and their decisions should reflect that.
In exercising their responsibilities they have to observe the law, the trust objective, which typically includes the preservation and maintenance of the trust’s assets for the benefit of well-defined beneficiaries, and further relevant terms of the trust instrument.
Although our law allows an estate planner to be a founder, trustee and beneficiary (Goodricke and Son (Pty) Ltd v Registrar of Deeds case of 1974), all trustees have to act with the necessary care, diligence and skill which can reasonably be expected of a person who manages the affairs of another person (Section 9(1) of the Trust Property Control Act).
Trustees also have a fiduciary duty (a legal obligation to act in the best interests of the beneficiaries), and may not act in a way that violates this duty, or which is outside the parameters of the trust instrument. It is clear that these obligations may cause, or can be perceived as, a conflict of interest in the event that a trustee plans to purchase a trust asset for himself/herself, as usually the purchase is to the advantage of the trustee.
Although it may seem quite clear that a conflict of interest between trustees and the trust beneficiaries should be avoided, sometimes the lines are blurred and certain conduct could be allowed even though it may technically be a conflict of interest; i.e. where trustees are authorised to contract with the trust in terms of the trust instrument and treat the transaction in such a manner that there can be no detriment to the beneficiaries.
Buying assets from a trust, whether it is property or other assets such as investments, for his/her personal use or benefit, whether directly or indirectly, could result in a trustee being accused of acting with self-interest and deriving a benefit that is detrimental to the beneficiaries of the trust, or of mismanagement of the trust. There are a number of court cases which dealt with, or is relevant to, the sale of trust assets to a trustee, or for his benefit - from claims that the benefit derived by the trustee is detrimental to the beneficiary (Wiid v Wiid case of 2016), allegations of potential mismanagement of the trust funds being levied at the relevant trustee (Gowar v Gowar case of 2016), to allegations that the trustees had breached their fiduciary duties (Kidbrooke Place Management Association v Walton case of 2015).
The board of trustees has to take these actions to avoid a potential attack:
Establish whether they even have the specific power to enter into such a transaction in terms of the trust instrument;
Determine whether the purchase of the relevant trust asset will not be contrary to the purpose or object (in family trusts typically for the benefit of the beneficiaries) for which the trust was created;
If a trustee has an interest in the transaction, which may affect the trust property, the nature and extent of the interest must be disclosed beforehand by such trustee to other trustees and the trust beneficiaries;
Approach independent advisers to determine if the purchase is allowed in terms of the trust instrument and to confirm that the purchase will not be to the detriment of the trust beneficiaries;
Obtain the approval of the trustees in terms of the trust instrument and obtain the signature of the resolution by all trustees (Joint Action Rule - Nieuwoudt v Vrystaat Mielies case of 2004);
If the trustees nominate one of them to sign the deed of sale and related transfer documents required to pass transfer of a property, the signatory must be authorised to do so by a resolution, which must be signed by all the trustees prior to the date of signature of the deed of sale and transfer documents; and
Consider the appropriateness of an application to the court, likely by way of seeking a declaratory order, asking the Court’s leave and sanction in order to proceed with the purchase of the asset.
It should be noted that it should rather be the exception, not the norm, for trustees to purchase trust assets. Should a trustee have breached his/her fiduciary duties towards the beneficiaries, the consequences may be severe – these could range from removal from office as trustee together with potential costs orders being made against him/her to potential claims for damages being instituted against him/her by the beneficiaries of the trust.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa®, a Master Tax Practitioner (SA)™, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze®, a professional trust practitioner.