If you plan on setting up a trust, whether inter vivos or testamentary in nature, keep in mind that the primary function of your trustees is to administer the trust assets for the benefit of your nominated beneficiaries. As such, it is absolutely essential that your trustees have, among other skills, financial acumen and a solid understanding of the investment landscape.
Many trust founders choose to nominate close friends or family members as trustees without fully understanding the significant responsibilities that accompany the position. In this article, we explore the financial duties and responsibilities of trustees, and why choosing financially astute trustees is so important.
Trusts, being legal arrangements through which a trust founder transfers ownership of certain property to a trust, are vehicles that provide for the efficient management of the trust assets for the benefit of the beneficiaries. In managing the property of the trust, the trustees have overall responsibility to manage the trust assets in compliance with the Trust Property Control Act, common law, and the trust instrument. In administering the trust assets, it is important for the trustees to know and understand the scope of their powers, and to ensure that they do not act outside of their mandate.
It is important to note that the act requires trustees to act ‘with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another’. This means that the trustees have a fiduciary duty in relation to the trust beneficiaries which is an onerous legal duty to act at all times in the best interests of the beneficiaries. As such, trustees are held to a higher standard than is required of them when managing their own affairs. They are required to be more careful and cautious when making investment decisions on behalf of the trust assets, creating a fine balancing act between protecting the trust assets from inflation and not taking on too much investment risk. The fiduciary duty of a trustee is paramount, and no trust instrument can indemnify a trustee from this duty of care.
Taking control of the assets
When it comes to taking control of the trust assets, in the case of an ownership trust, the trustees are required to take control of the assets and ensure that they are duly registered in the names of the trustees. In the case of a bewind trust, the assets must be registered in the names of the beneficiaries and placed under the control of the trustees. In the case of immovable property, the trustees will need to ensure that the title deeds of the property are amended and registered accordingly. With regard to moveable property, such as an art collection or jewellery, the trustees must make sure that the valuables are appropriately insured and secured. Other trust assets may include investments, shares in a private company or bank accounts, and the trustees are required to take control of these as well. Once all assets and liabilities have been identified and collated, the trustees are required to make a full inventory of the trust assets.
Managing trust assets
Once the assets are transferred into the trust, they no longer belong to the trust founder and the trustees are required to take over full control of the assets and to ensure that they are managed to achieve best outcomes for the beneficiaries. In fact, the principal focus of a trustee’s fiduciary duty is the manner in which they administer the trust’s assets. As soon as the trustees receive money on behalf of the trust, they are required to open a bank account in the trust’s name, keeping in mind that trustees may not use their personal bank accounts to house monies belonging to the trust.
In the case of investable assets, this will require that the trustees have a good understanding of investments and the associated risks in order to ensure the optimal growth of the trust assets. To safeguard the trust assets against the effects of inflation, it will be necessary for the trustees to assume some investment risk, and it is important that the trustees have a sound understanding of how investments work in order to get the balance right. Bear in mind that trustees may be held liable for any losses suffered by the beneficiaries if it is found that the trustees did not act with the necessary degree of care and skill in the administration of the trust assets.
In managing the trust’s assets, the trustees have the power to transact and contract on behalf of the trust and, as such, can bind the trust when it comes to debt. Trustees are required to determine capital and income distributions to beneficiaries, contract professionals such as lawyers, accountants and auditors, and operate bank accounts. They may negotiate and enter business contracts on behalf of the trust, make investment decisions, and buy or sell assets for the trust as they deem appropriate. In performing such functions, they are also required to ensure that the trust complies with all relevant tax legislation while fulfilling the trust’s objectives in respect of succession planning.
In accordance with the Trust Property Control Act, the trustees are required to ensure that the trust assets are kept completely separate from the assets held in a trustee’s personal estate. In doing so, the assets of the trust are protected against the insolvency of the trustee.
When it comes to the trust’s finances, the trustees are accountable to the Master of the High Court and to the trust’s beneficiaries. While there is no legal requirement that a trust must be audited, trustees are required to create financial accounts for the entity, including a balance sheet, income statement and cash flow statement, and must make them available to the Master and the beneficiaries when requested to do so. The trustees must keep records of the administration and disposal of trust property, keep accurate records and accounts, and ensure that all accounting records are securely stored. The trustees must be able to explain and justify all transactions and ensure that the records fairly reflect the trust’s financial state of affairs. In addition, the trustees must ensure that all statutory filing requirements such as tax returns and the submission of VAT or PAYE are attended to.