How wide is a trustee’s discretion?

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Discretionary trusts are the more common forms of inter vivos trusts. In these types of trusts, the vesting of benefits or assets in beneficiaries is done at the sole discretion of the trustees. The beneficiaries only have contingent rights (a right that depends on a future event or the performance of an action by the trustees such as a decision to make a distribution) to the income, capital gains, assets or trust capital of the trust. Payments of income, capital gains and/or capital are made at the discretion of the trustees, and all non-allocated income and capital gains are taxable in the hands of the trust.

Do financial statements demonstrate trust compliance?

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Often estate planners, and their family members serving as trustees with them in family trusts, hold the view that the preparation of financial statements by their accountants is sufficient to demonstrate their compliance as trustees. Little do they know that financial statements are not even a requirement in terms of the Trust Property Control Act (the Act) and certainly do not, on their own, serve as evidence that the trusts are compliant. What is required is that trustees collectively, actively manage the trust and document decisions for each transaction. It is imperative that all decisions made by trustees are recorded in minutes of meetings or resolutions taken - each important transaction should be supported by a duly authorised resolution of the board of trustees. This is critical to actively demonstrate the management of the trust with the necessary audit trail when substantiating actions taken by the trustees.

Trustee be mindful to purchase trust assets

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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.

Trustees must identify and record trust assets

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Estate planners often set up trusts without understanding the requirement that trust assets ought to be treated separately from the estate planner’s own assets. Further, many estate planners are often reluctant to give up control over personal assets moved into a trust, as well as new assets acquired by the trust. The result is that often trust assets, including investment and bank accounts, are opened and/or registered in the name of the estate planner, rather than in the name of the trust. Failure to open and/or register trust assets as trust property may cause such assets to be regarded as assets owned by the trustees in their personal capacities, which will expose the trust assets to unnecessary risk, especially in the event of the insolvency, sequestration or liquidation of a trustee. The trust may also be labelled the ‘alter ego’ (an extension of himself or herself) of the estate planner or person controlling the trust assets. If the trust is labelled an ‘alter ego’ trust, despite the fact that the trust does in fact exist, the Courts will disregard the trust and treat the assets as if they belong to such controlling person. Therefore there should be a clear separation of control from enjoyment of trust assets. All trustees - and not just one of them - should control the trust assets for the enjoyment of the beneficiaries.

Bequeathing your assets to an existing trust upon your death

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It may make sense in many instances to utilise your existing trust/s as part of your legacy plan. Your assets can be bequeathed to an existing trust, if that trust instrument allows for that - the trustees of that trust have to be specifically empowered in terms of the trust instrument to accept such a bequest. Review the trustee power clause to ensure that the trustees can in fact accept further donations/bequests.

The role and responsibilities of the trust auditor/accountant

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Often estate planners and trustees are of the views that trust information is to be kept secret and that they are under no obligation to account to beneficiaries and others. Many trustees are not aware of their fiduciary duties and responsibilities and often “silent” trustees do not participate in the administration of trusts. A combination of these factors result in inadequate record keeping for trusts.

Trustees are subject to the Master of the High Court's voice

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The Master of the High Court can play a role in ensuring that the trustees of a trust conduct themselves in a proper way in accordance with both the law and the trust instrument. In certain instances the Master may even remove a trustee from office.
The Master of the High Court does not have the power in terms of Section 19 of the Trust Property Control Act to remove a trustee if such trustee fails to comply with a request by the Master of the High Court to account to the Master of the High Court in terms of Section 16, but can apply to the Court for an order directing the trustees to comply with such request.

Trustees as shareholders or directors in a company

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Trusts are used to hold shares in businesses for asset protection and to ensure the continuity of ownership of assets. The trustees owe, both at common law and in terms of statute, a fiduciary duty (a legal obligation of one party to act in the best interests of another) to the trust’s beneficiaries. The trustees are required to administer the trust, including any shares held by the trust in a company, solely for the benefit of the trust’s beneficiaries. Often estate planners and trustees are uncertain about the role trustees have to play in such companies, especially when the trust is not the only shareholder and not all directors are trustees of the trust.