Solving for the trustee conundrum in generational wealth transfer trusts - 5 June 2024

When a trust is registered, typically the patriarch or matriarch estate planner plays a role in the trust – that of the founder and/or trustee. That gives them some insight and/or influence over the trust’s affairs. As a result of many of these roleplayers passing away, the typical family trust in South Africa starts facing challenges – the patriarch or matriarch either appoints only one of the children as their follow-up trustee (who may act for their and their family’s benefit alone due to a conflict of interest as trustee and beneficiary), the family as a whole is adversely affected as a result of the remaining non-family trustees abusing trust assets, and the remaining spouse may even be influenced by a new spouse to abuse trust assets. Often the remaining trustees do not even have the required skills and knowledge to effectively manage specialised assets held in the trust, such as farms, investments in companies, etc. Assets in a rich, generational wealth transfer trust are worth protecting, and the estate planner should put proper structures in place to prevent family conflict and abuse.  

A real-life example

There is a court case where the estate planner structured all his wealth in trust. His friend approached him to provide security for his borrowings from a bank. Unfortunately, things went wrong and the bank knocked on the door of the estate planner. He ‘laughed’ at the bank and informed the bank that he did not own any assets. The bank took him to court and sequestrated him. Similar to many other trusts, protection was built into the trust deed to protect trust assets - if a trustee is sequestrated, he would be automatically removed as trustee, and similarly, he would seize to be a beneficiary of the trust. Although he did not lose money (as he did not hold any assets in his personal name), all of a sudden he was completely removed from ‘his trust’. His ‘friends’ who were his co-trustees quickly kicked him off the trust and started abusing the trust for their benefit. The last straw was when the entire plantation burnt down and the trustees were reckless by not renewing the insurance (they were not specialists in the field) losing the major trust asset. The estate planner was left with heartache and loss of all his assets.

A possible solution

Instead of appointing multiple trustees, a ‘private trust company’ (“PTC”) may be formed to serve as the single trustee of a trust or trusts holding substantial assets, intended to be preserved for generations. A PTC is a ‘special purpose vehicle’ which is incorporated for the sole purpose of acting as the trustee of the family’s trust or trusts and it allows for tailoring around a family’s unique requirements and circumstances. A PTC provides a succession planning framework that enables estate planners and wealthy families to transfer their assets in a structured way from generation to generation. It therefore allows wealthy families to structure their wealth in a way to not be impacted by family conflict, divorce, death of a family member, and other adverse events. The family may (through a family charter) establish rules, policies, and governance mechanisms to ensure the smooth transition of control and management of family assets.

The terms private trust company, family trust company, and private family trust company are used interchangeably. It is a legal entity that offers fiduciary and trustee services to a single family group – it is therefore not created to serve the general public. A PTC is a powerful option to structure family wealth, streamline governance and optimise succession planning.

Private trust companies originated in the gilded age when wealthy American families used them to protect their wealth for future generations. This estate planning tool is still used today to allow families to play an active role in the management of family assets held in one or more trusts. Although it is a well-known vehicle used in many foreign countries (such as the Isle of Man, Jersey, Cayman Islands, Bermuda, the British Virgin Islands, the Bahamas, and some US states including Wyoming, New Hampshire and Nevada), it is not widely used by South African families. Although it is not for everyone, it may be a solution for families with material wealth worth protecting.

The PTC does not hold any family assets directly. It rather acts as a trustee of a family trust or trusts that typically hold different valuable, complex assets, such as operating companies, investment portfolios, private equity, venture capital, property, art, and other luxury assets.

A PTC may be set up in a way to involve family members, trusted family friends, professional service providers (including a specialist in South African trusts), and other advisors as directors, who take care of the trust. Family members can either be appointed to the board of directors of the PTC, or they can serve on advisory committees to the board. A correctly structured board will have a good understanding of the family enabling better management of the family’s wealth. Board members may be added or removed to keep in line with the changing requirements of the family. It therefore allows for a diverse set of skills and experience in the management of the trust’s assets, makes the requirement for replacement trustees redundant (which often results in trusts falling below the sub-minimum number of trustees, paralising the trust until the required number of trustees are appointed by the Master), prevents favouratism of appointing only one of the siblings as follow-up trustee, prevents heartache and family feuds, allows the family a measure of control over trust assets, and achieves further benefits described below. The Memorandum of Incorportion may provide the directors with stronger powers and the shareholder with less to achieve the objectives of having a PTC. A PTC provides the estate planner with the comfort that major decisions made by the PTC are made with the input of their family and trusted advisers, both during and after their lifetime. It also ensures continuity in the trusteeship of the family trust or trusts and the ownership of the family’s assets. 

Motivation for a PTC

Many estate planners have reservations when it comes to setting up a traditional family trust because the separation of control from enjoyment of trust assets as a fundamental requirement of a trust (held in the Parker case), means they will lose direct control of their assets. South Africans are struggling to relinquish control over their assets. This often leads to structuring trusts in such a way as to allow them some form of control, which may leave the trust open to attack.

High-net-worth families increasingly want to be hands-on in managing and preserving their wealth. This structure allows younger generations to be allowed in the management structures and to grow into responsible contributors to the family wealth, rather than becoming demanding spendthrift ‘trust fund babies’.

A recent court case (Shepstone and Wylie Attorneys case) complicated trustee decisions as resolutions dealing with transactions with third parties now have to be agreed to by all trustees, which may now allow a minority trustee to ‘veto’ trustee decisions. The PTC is a workaround in that the single trustee (managed by the board of directors, which may still allow the majority decision rule) makes a decision.

Considerations and possible shortcomings

In South Africa, a single person has to be appointed with the Master as the representative of the legal entity trustee. The replacement of this person has to be registered with the Master before the new representative can act. It may paralyse the trust in the event the Master experiences delays in the issuing of fresh Letters of Authority. It is, however, easy for the board of directors of the PTC to replace the representative (much easier than replacing a problematic trustee, as the courts reckon the powers to remove a trustee should be exercised with “circumspection” - de Beer v the South Gauteng High Court case of 2017). The replacement of directors of the PTC is also a much easier and quicker process compared to the replacement of a trustee.

Shareholding of the PTC may pose a challenge. Internationally, the shares of a PTC are usually owned by a dedicated ‘purpose trust’ that does not have beneficiaries and is managed by a professional trustee. In some instances family members directly own it, but that may undo the succession planning benefits of the PTC. In South Africa, some people believe the trust can hold the shares in the PTC, while others register another trust and appoint the wealth trust as the only beneficiary.

A consideration for the constitution of the PTC’s board of directors is whether the Master will accept the PTC as an “independent trustee” as defined by the Master. The estate planner will have to motivate to the Master that they can get away without appointing another “independent trustee”.

The benefits of a PTC structure have to outweigh the costs of setting up and maintaining it.