In the context of estate planning, a trust can be described as a legal relationship that has been created by a person (known as the founder or donor) placing assets under the control of another person (known as the trustee) either during the founder’s lifetime (an inter-vivos trust) or on the founder’s death (will trust, testamentary trust or trust mortis causa), for the benefit of third persons (the beneficiaries).
A trust, generally speaking, is an arrangement that allows a person to hold assets (without owning them) for the benefit of the trust beneficiaries. This definition makes it clear that someone sets up a trust for the benefit of beneficiaries (not only for yourself, as one of the beneficiaries), transfers assets into a trust, and appoints trustees to manage the trust’s assets on behalf of such beneficiaries.
A person cannot be the founder, the only trustee and the only beneficiary, because a trust is a contract, and you cannot contract with yourself.
If you want to be the founder, a trustee and the only beneficiary, you have to appoint an independent trustee for the trust to be valid.
Many people cannot get their minds around the fact that a trust’s assets no longer belong to them, but to the trust, and that it should be managed accordingly. This often leads to the abuse of trust assets by trustees, who act for their own benefit and not for the benefit of all the beneficiaries.
Any indication that the founder and/or trustees have retained control over the assets may result in the trust being labelled as an alter ego trust – in other words, an extension of yourself.
If you intended to create a trust, but you deal with the trust assets as if they are your own, your creditors, the South African Revenue Service (Sars) or your soon-to-be-ex-spouse can attack the trust and have it labelled as an alter ego trust. Although the trust does, in fact, exist, the courts will disregard the trust and treat the assets as if they belong to you.
The control over and the enjoyment of trust assets must be entirely separate. All the trustees – not only one of them – should control the trust assets for the enjoyment of the beneficiaries.
As a result of the manipulation and abuse of trust assets, typically by one dominant trustee, to the detriment of creditors, the courts became impatient with trustees who compromise creditors.
In 2005, in the landmark Land and Agricultural Bank of South Africa vs Parker case, the court suggested that each family trust should appoint an independent trustee.
‘Family business trusts’
In March last year, the Chief Master issued a directive that sets out the requirements for the appointment of an independent trustee for trusts that are defined as “family business trusts”. These are typically trusts set up for the protection of family assets, where all the beneficiaries are trustees and they are all related. The trust deed empowers the trustees to enter into transactions that create debt in the trust.
If an independent trustee is not appointed, the Master of the High Court will refuse to register such a “family business trust”. The reason for the requirement is to provide creditors with the comfort that the trust is run properly, and they can do business with the trust with the assurance that the trust deed is being observed.
The intention is not for the independent trustee to make decisions on behalf of the trust, or to override the other trustees, but to help the other trustees adhere to the terms of the trust deed and relevant trust legislation.
An independent trustee must be an independent outsider who accepts office in order to ensure that the trust functions properly and that the provisions of the trust deed are observed.
The independent trustee should be a person or an entity that is not related, by blood or otherwise, to the other trustees, beneficiaries or the founder of the trust, and who is not a beneficiary of the trust. For example, you cannot appoint your son-in-law, accountant or financial adviser as the independent trustee, because he or she will not be regarded as acting independently.
An independent trustee is not required to be a professional, but he or she should understand the responsibilities that he or she is accepting when agreeing to act as a trustee.
He or she must, in the opinion of the Master of the High Court, be qualified to act as a trustee.
The less an independent trustee is related to the other trustees, the more creditors and Sars will regard him or her as independent.
In many cases, non-independent trustees do not have enough knowledge of and experience in the administration of trusts. Furthermore, they may not have the expertise to use a trust to maximise benefits on behalf of the beneficiaries. This expertise includes the ability to negotiate and enter into business contracts, holistic tax and succession planning, and ensuring the optimal growth of the trust assets.
It is in the best interests of the trust that the independent trustee understands how legislation, including tax law, affects the trust, and how changes to legislation may affect the trust.
Make sure you appoint a reputable independent trustee, typically through a professional body or association recognised by the Master of the High Court, such as the Fiduciary Institute of Southern Africa.
The Master of the High Court may, in certain circumstances, dispense with the appointment of an independent trustee and adopt the following alternatives:
• Request security from the trustees; or
• Request that the financial statements be audited annually, and that the auditor be instructed to inform the Master of the High Court when there is potential for the creditors to be harmed.
The independent trustee will have to complete and sign a J417 Master of the High Court form and sign a sworn affidavit, making various declarations and undertakings.
Although the appointment of an independent trustee is compulsory for new trusts only, a change in the trustees of an existing trust will trigger the requirement for the appointment of an independent trustee.
You should ensure that the trust deed provides for the independent trustee to be replaced if the other trustees are of the view that he or she is not acting in the best interests of the beneficiaries, or according to the intentions of the founder, as stipulated in the trust deed.
Be careful of professionals who, by drafting the trust deed in a certain way, create a permanent role for themselves in a trust.
Sars, creditors and soon-to-be-ex-spouses often try to attack a trust by labelling it as an alter ego trust. You can mitigate this risk by appointing an independent trustee, so it you may be in your interests to embrace this requirement, rather than see it as a nuisance.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa and the founder of Trusteeze, which specialises in trust administration.