Formalities in trust deeds that assist with proper administration

A family trust is by its very nature an intimate part of the financial and personal lives of a family, but the estate planner often loses sight of the fact that the trust - represented by the trustees - and the estate planner, are separate entities.

It is often the case that the estate planner is also a trustee, which results in the line between estate planner and trustees being blurred. The other trustees, who may be the estate planner’s spouse and children, may end up being ignored, or playing no active role in the administration of the trust. It may also happen that the trust is drawn into the business dealings of the estate planner, a practice that tends to defeat the object for which the trust was established in the first place. It is this behaviour that often leaves the Courts, funders and other parties reluctant to deal with trusts in any way other than with caution.

Regardless of the type of trust, the main role of a trustee is to administer the trust assets in the best interest of the beneficiaries, while having the utmost regard for the provisions of the trust deed. All decisions and actions taken by the trustees must be made with reference to the trust deed and the Trust Property Control Act. The Trust Property Control Act does not provide much detailed guidance and direction in terms of the way in which a trust should be administered, or how specific behaviour or requirements should be dealt with. If this information is not stipulated in the trust deed, it can lead to conflict between the trustees and other interested parties. There are many recent Court cases that have brought trustees’ behaviour, or a lack thereof, under the spotlight. In order to prevent conflict, the trust deed should stipulate in great detail how the trust is to be administered, along with any formalities that must be complied with. These formalities typically include issues such as:

• The powers given to trustees: Trustees may only act within the powers granted to them, for example, where the trust deed does not grant trustees the power to acquire shares, they may not do so.
• The process to follow in the appointment and removal of trustees: It is critical that these provisions should be laid out in detail in the trust deed. Abuse often arises when there is a lack of prescription in the trust deed. It is acceptable for the estate planner, who acts as a trustee, to appoint and remove trustees during his/her lifetime. Provided all trustees are allowed to participate in the trust’s decisions and are permitted to exercise their discretion, such a requirement (in isolation) will not be indicative of an alter ego trust.
  In addition, such a provision may not, in isolation, trigger the provisions of Section 3(3)(d) of the Estate Duty Act, whereby the trust’s assets may be included in the estate of the estate planner upon his/her death. 
• The frequency of compulsory meetings: Trust deeds typically stipulate that a meeting is at least held annually. This meeting should be held before the financial year end, in other words, the last day of February. This will allow the trustees to make use of the Conduit Principle (principle to distribute income or capital gains to beneficiaries to be taxed in their hands instead of the trust), in order to have income and/or capital gains taxed in the hands of the beneficiaries, instead of in the hands of the trust. Many trust deeds stipulate that, no matter when this meeting takes place, it will be deemed to have taken place before the financial year end. SARS does not permit this, and trustees will lose this favourable tax treatment if meetings are held where distribution decisions are made after the financial year end. In this case, the income and capital gains will be taxed in the hands of the trust at 45% and 36% respectively, instead of between 18% to 45% and 7.2% to 18% respectively, in the hands of the individual beneficiaries.
• The process to follow in order for meetings to take place: This would include factors such as who can call meetings, notice periods, agendas, the manner in which meetings can be held, quorums, a casting vote, and so forth. Certain trust deeds stipulate that the estate planner, in his/her capacity as trustee, should be part of a quorum, and that he/she can veto decisions. Provided all trustees are allowed to participate in the trust’s decisions and are permitted to exercise their discretion, such a requirement will not, in isolation, be indicative of an alter ego trust. However be mindful of the fact that all distributed trust income will be taxed in the hands of the donor/funder if he/she can veto distributions. A similar provision applies to capital gains distributed to beneficiaries. Such a provision will also, on its own, not trigger the provisions of Section 3(3)(d) of the Estate Duty Act, whereby the trust’s assets may be included in the estate of the estate planner upon his/her death. However, if the trust deed permits the estate planner to have a casting vote, the trust’s assets may be included in the estate of the estate planner upon his/her death in terms of the provisions of Section 3(3)(d) of the Estate Duty Act, thereby defeating the object of creating a trust in the first place.
• The number of trustees required in order to reach agreement on certain issues: It is advisable to allow a majority decision for day-to-day decisions, but to reserve a unanimous decision for important decisions such as the amendment or deregistration of a trust. It is important to remember that although a majority decision is allowed, the Joint Action rule applies, whereby trustees ought to act together.
• Requirements for distributions: The trust deed should stipulate the processes to be followed when making distributions. In order to qualify as a discretionary trust, the trust deed should make it clear that the trustees have a “sole, absolute and unfettered discretion” to make distributions. Neither the founder, nor the beneficiaries, can pressurise the trustees to make distributions.
• The signing of documents: The trust deed may authorise specific trustees to sign documents by the name, or it can provide for trustees to elect a certain number of trustees to sign documents on behalf of the trust. It is acceptable for the estate planner, who acts as a trustee, to be required to sign documents on behalf of the trust during his/her lifetime. Such a requirement will not be indicative of an alter ego trust. 
• Accounting and auditing: It is not a requirement that a trust is audited. 
• Dispute resolution: The trust deed should clearly stipulate the procedures to be followed by trustees in order to resolve disputes. Disputes should preferably be resolved informally, through mediation, and if that is not successful, only then through arbitration.