Trust investments can’t be too risky or too conservative

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The trustees are required to administer the trust in terms of the law and the provisions of the trust instrument and act with the highest degree of diligence and caution. Trustees are required to be more careful and prudent with the affairs of the trust than they would be with their own affairs. In carrying out their duties, trustees fulfil a fiduciary position. A fiduciary duty is an onerous, legal obligation of a person managing the affairs of another to act in the best interest of such a person. A fiduciary relationship arises from the nature of the actual relationship undertaken; i.e. in the instance of a trust the trustees should act in the best interest of the beneficiaries. When there has been a breach by a trustee of a fiduciary duty, the beneficiary may claim the trustee’s gain out of a transaction, or may hold the trustee liable for breach of trust, even if the trustee did not financially benefit. Trustees are not permitted to play an inactive role in the administration of the trust, and may be held accountable should they behave in this manner. Trustees cannot exempt themselves from their fiduciary duties as is often found in trust instruments – that is against the law.

The uniqueness of a trust from a legal perspective may pose a risk for estate planners

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The uniqueness of a trust from a legal perspective may pose a risk for estate planners

The importance of valid trustee decisions

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All trustees must act together when making decisions that affect the trust, not simply the majority of the trustees. It is not the majority vote, but the resolution (signed by the entire complement of trustees) that binds a trust. A trust operates on resolutions and not on votes.

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.