C2M hosted a Trust Seminar for our clients on 16 August 2017 where Prof. Walter Geach discussed the future of trusts in for estate planning purposes. He also highlighted the importance of independant trustees. Click here to download the notes of the Trust Seminar.
Prof. Walter Geach provided the following explanation on requirements for independant trustees:
It is clear from legal judgments that one of the essential requirements of a trust is that there must be a separation of enjoyment of trust assets from the control of those assets. Beneficiaries enjoy trust assets, whilst trustees control and administer those assets. This separation is the very core of the idea of a trust. If a person both enjoys and controls trust assets, that person would be seen as the owner of those assets, and those so-called “trust assets” would be subject to the claims of personal creditors or be regarded as those of that person on death (for estate duty purposes), on divorce (subject to the claims of an ex-spouse) or on sequestration (and not be protected from claims of creditors). The trustees are therefore required to administer the assets under their control for the benefit of the beneficiaries of the trust. In other words, the persons who control the trust should be substantially different from and be independent of those that benefit from the trust. Ideally there should be a majority of independent trustees who control and administer trust assets for the benefit of the beneficiaries. A trust is likely to fail (in other words, the trust assets could be regarded as those of a founder, planner or beneficiary on death, divorce or sequestration or be subject to the claims of creditors) if the so-called trust is really the planner, founder or a beneficiary in disguise
In practice, the trustees of a trust are often also some of the beneficiaries of that trust. There is nothing wrong in law for a trustee of a trust to also be a beneficiary of that trust. In fact section 12 of the Trust Property Control Act specifically confirms that a trustee can be a beneficiary: ‘Trust property shall not form part of the personal estate of the trustee except in so far as he as the trust beneficiary is entitled to the trust property’. However, although a trustee can also be a beneficiary, the central notion is that the person entrusted with control exercises it on behalf of and in the interests of another. This is why, on the formation of a trust, a sole trustee cannot also be the sole beneficiary: ‘Such a situation would embody an identity of interests that is inimical to the trust idea, and no trust would come into existence.’
In a Supreme Court of Appeal judgment, it was clearly stated that when trustees are also some of the beneficiaries, such trusts ‘invite abuses’, and the courts have made it clear that they will not tolerate the abuse of any legal form, entity or institution. If a person has assets, and puts these into trust while retaining control and having beneficial ownership, the courts have stated that this conduct invites the inference that the trust is a mere cover for the conduct of business ‘as it was before’. In other words, if trust assets are controlled and dealt with in exactly the same way as was done before the formation of the trust., then the assets which allegedly are owned in the trust will be treated as belonging to the person or persons who control and benefit from those assets. If there is no separation between control and benefit of trust assets, the trust form is merely a veneer that a court will ignore in the interests of creditors and other claimants. Creditors would include suppliers, the South African Revenue Service and other claimants. In Jordaan v Jordaan, a wife claimed a share of certain trusts’ assets as part of the divorce settlement. The Court found that the manner in which the husband controlled and administered the various trusts was a relevant factor in arriving at its decision that it was just and equitable to take the assets of the trusts into account on divorce. In other words, some of the trust assets were awarded to the wife, and this would have been the case even if the wife was not a beneficiary of any of the trusts. In this case it appeared from the trust’s financial statements and from other evidence that money flowed freely between the various trusts without any formal decision-making by trustees, and this had been done on the initiative and instructions of the husband. Loans had also been made by the trust to the husband without any formal decision of the trustees. The Court found that the husband’s own evidence indicated that the trusts were in reality his alter ego.
Similarly, where it can be shown that trustees are the mere puppets of the founder and/or a beneficiary or beneficiaries, it may readily be inferred that a valid trust has not been created, and the benefits of ‘trust ownership’ will be lost. The problem of retention of control by a founder or beneficiary of a trust is also apparent from section 3(3) (d) of the Estate Duty Act 45 of 1955. Included in the estate of a deceased (for estate duty purposes) is property that the deceased was, immediately prior to his or her death, competent to dispose of for his or her own benefit. ‘Competent to dispose of’ includes a power that enabled the deceased to cause the trust to dispose of the property as he or she saw fit (section 3(4) (b)), no matter how the power was conferred.
The separation between control and benefit is therefore central to the notion of a trust. What this means, amongst other things, is that once a trust has been formed, neither the settlor nor a planner can treat the trust assets as his own (other than in terms of rights that they may have as a beneficiary in the trust deed), even though the trust’s assets previously belonged to the founder or to the planner.
Ideally, a trust should have a majority of independent trustees. At the very least there should be at least one independent trustee, who can be one of the professional advisers of the founder of the trust. This will ensure that there is indeed a separation of the control of trust assets from the beneficial use of those assets. In terms of a recent Chief Master’s Directive, the Master must consider appointing an ‘independent trustee’ where the trust is registered for the first time with the Master and it emerges from the trust deed that the trust is a ‘family business trust’. The expressions ‘independent trustee’ and ‘family business trust’ are defined in terms of the Master’s Directive.
Exactly what would be an independent trustee is neither defined nor prescribed, but it is submitted that common sense should prevail and that it is usually fairly obvious if a person is truly independent of another. Generally speaking, any relative or spouse of another would not be an independent person. A professional person, unrelated to the founder or to a beneficiary, would most certainly be independent.
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Professor WD Geach:
Professor Walter Geach is a respected advocate of the High Court for South Africa. He specialises in taxation, corporate law, trusts, financial planning and financial accounting. He is also the Departmental Chair of Accounting at the University of the Western Cape under the faculty of Economic and Management Sciences.