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The obligations and responsibilities of trustees

Indemnity clauses in family trusts not worth the paper they are written on.

 

Many people are quite happy to be appointed as a trustee, but often the responsibilities that accompany this role are not well understood.

My name is Ingé Lamprecht, and to explain what exactly these responsibilities are, and what you need to keep in mind if you are appointed as a trustee, I’m joined by the CEO of the Fiduciary Institute of Southern Africa, Louis van Vuren.

INGÉ LAMPRECHT: Louis, let’s start at the beginning. Broadly speaking, what would my responsibilities be if I’m appointed as the trustee of a trust?

LOUIS VAN VUREN: The trustees have the overall responsibility to manage the affairs of the trust and they must do so in the best interest of the trust fund or the trust estate and all its beneficiaries. I have to tell you that I’m seeing more and more instances where trustees acted way outside their powers and in total disregard of their responsibilities.

One of the first responsibilities that any trustee has to comply with is to read and understand the trust deed or the trust instrument (it could be a will as well), and to understand the powers and duties and responsibilities and to also become familiar with the duties and obligations in law and specifically the Trust Property Control Act of 1988. I find that many people become trustees without doing these things and without understanding the huge responsibility that they are taking on when they become trustees.

INGÉ LAMPRECHT: Louis, we will talk about the responsibilities in a moment, but just taking one step back, can you briefly explain what types of trusts there are, and how this would impact the powers awarded to trustees?

LOUIS VAN VUREN: A trust is not a separate legal persona like a company, unless there is specific legislation that says it is. A trust, according to our Supreme Court of Appeal, is an accumulation of assets and liabilities – an estate if you like – but not a separate legal persona. A trust can be regarded as a person if specific legislation makes provision for it. An example of that is the Income Tax Act, where for obvious reasons a trust has to be regarded as a person and a taxpayer.

Now trusts can be divided into different groups on more than one basis. The first basis we find in the Trust Property Control Act and that is on the basis of who owns the trust assets. The act distinguishes between two types of trusts. The first is what is called an ownership trust, where the trustee or trustees own the assets in their representative capacity and for the benefit of the beneficiaries.

A ‘bewind’ trust is the second type of trust. It is quite interesting where these two types come from. The Afrikaans word ‘bewind’ [‘administration’] comes from the Dutch – in old Roman Dutch law there was an office called ‘Die bewindhebber’. In a ‘bewind’ the beneficiaries own the assets, but the assets are placed under the control of the trustees. In contrast, your typical family trust is an ownership trust, so the trustees own the trust assets, but they do so in their capacity as trustees and they do so for the benefit of the beneficiary or beneficiaries.

You can also divide trusts into different types according to where they come from. How did they come into being? Or how were they created? And your typical so-called family trust is what is called in law an inter vivos trust, which is just the Latin that means ‘between the living’ and that in our law is a contract. The founder of your typical family trust will enter into a contract, which is called the trust deed, with the first trustees of that trust and that is how the trust comes into being.

The second type of trust according to where they come from is your testamentary trust, where the trust comes into being by way of a will, where a bequest in a will is made to the trustees or to the beneficiaries, and that will determine whether it is an ownership trust or a ‘bewind’, but it comes into being by a bequest in a will. The will will also then contain the trust instrument – the trust deed – by which the trustees will be bound, and which will set out what they can and cannot do.

The third type is a trust created by a court order and a good example of that is a court order that creates a trust for the beneficiary of a Road Accident Fund claim, where somebody injured in a car accident is the beneficiary of that trust and the award that the court makes and which the Road Accident Fund must then pay over to the trustees is for the benefit of that person.

Your trust instrument can therefore be a trust deed or a will or a court order. This trust instrument – and let’s call it a trust deed because we are going to talk mostly about your typical family trust – is, as the Supreme Court of Appeal called it, the ‘Constitutive Charter’ of the trust (so it is basically the constitution of the trust) and the trustees can generally only exercise powers given to them by law and this trust instrument. Outside these two sources of powers they have no other powers.

INGÉ LAMPRECHT: Upon accepting trusteeship the trustee must take control of the trust assets. What does that mean practically?

LOUIS VAN VUREN: Taking control of the trust assets means, among other things, that any immovable property must be registered in the name of the trustees of the trust, if it is an ownership trust obviously. If it is a ‘bewind’, it must be registered in the names of the beneficiaries but placed under control of the trustees. Trustees must also ensure that any movable property is properly secured and insured. Insurance is quite an important thing. If you let slip on that one, it could have serious consequences.

The trustees must also take control of existing investments, private company shares. They must ensure that any private company of which they are now the shareholders, is actually managed properly. In your typical will trust – testamentary trust – trustees will have to sit down and seriously think whether they are going to keep those private company shares or whether it would be in the best interests of the beneficiaries to sell the company if the deceased person who bequeathed the company shares to a testamentary trust was the owner. They will have to seriously think whether they are going to keep that, but as a starting point, they must take control of the assets and exercise proper control over the assets.

INGÉ LAMPRECHT: What other responsibilities does a trustee have?

LOUIS VAN VUREN: Well one of the first things that you have to do is to create a proper record or inventory of the trust assets. It is sort of obvious, because you can’t control assets if you don’t know what you are controlling. There has to be a proper record and an inventory of all assets and statements reflecting the financial side of the trust.

Now there is no requirement in the Trust Property Control Act that a trust must be audited, but to be able to keep proper accounts, then it sort of stands to reason that you will have to, in some form or format, create annual statements reflecting the business and the financial situation of the trust.

Trustees must also open a bank account in the name of the trust as soon as they receive money on behalf of the trust. You can’t just say: “I’m the trustee, I’m running this trust” and mix the trust monies with your own money in your own bank account. You have to open a bank account as soon as there is money that should be deposited into an account.

The Master of the High Court can demand an account from the trustees with regards to the administration and their disposal of the trust property. There is a section in the Trust Property Control Act that gives the Master of the High Court that power to demand an account and that is a safety measure to help prevent the abuse of their position by trustees.

Trustees must also always act jointly unless the trust instrument makes provision for delegation of powers to one or more trustees – and, even if the trust instrument makes provision for that, the delegate can only act when properly empowered and that means that all trustees must have had the opportunity to attend the meeting and take part in the decision where that delegate was empowered to act, otherwise it will not be a valid decision.

In fact, all decisions by trustees must be taken on that basis, that all the trustees must have been placed in a position where they could take part in the decision, otherwise it is not a valid decision.

INGÉ LAMPRECHT: What happens if a trustee becomes insolvent?

LOUIS VAN VUREN: Once again, the Trust Property Control Act makes provision for the fact that the trust assets under the control of a trustee, or owned by a trustee in an ownership trust, are separate from the personal estate of that trustee but the trustee has a duty to keep the trust assets separate. I earlier referred to the bank account situation where you can’t just keep trust money in your own account – there has to be a separate account – and you must make every effort to ensure that trust assets do not become mixed with your own assets if you are a trustee.

Trust assets are also, because of this, protected against the insolvency of the trustee, because the trustee in an ownership trust does not own the trust assets for their own benefit but for the benefit of the beneficiaries. The trust assets are protected against the insolvency of the trustees. If the trustee goes insolvent, the trust assets are safeguarded and secured.

INGÉ LAMPRECHT: Trustees also have a general fiduciary duty to act in the best interests of the beneficiaries. What does that mean?

LOUIS VAN VUREN: The Trust Property Control 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 general duty is so important that the act then goes further and says you cannot even put a clause in a trust instrument that indemnifies a trustee against a breach of this duty. I always smile when I read some of the indemnity clauses that you find in some family trust deeds, which basically says unless the trustee participated in fraud, the trustee will not be liable for any loss or damage to the trust assets. Frankly, those indemnities are not worth the paper they are printed on because the act specifically says you cannot contract out of this deed. This duty is paramount.

Regardless of whatever powers and discretions the trust deed grants to trustees, the trustee may not take any action that will be in breach of this general fiduciary duty. This overarching fiduciary duty is to look after the best interests of the beneficiaries of that trust, and that is the highest duty of the trustee; nothing else can trump that.

INGÉ LAMPRECHT: Trust funds must be invested properly. Does that mean cash investments only?

LOUIS VAN VUREN: A hundred years ago, it did – well, almost a hundred years. In the 1920s there was an Appeal Court decision here in South Africa that basically said that trustees should not expose trust assets to any risks, any business risks. It was actually a very interesting case in which the trustees took trust money and invested it in a hotel somewhere in KwaZulu-Natal, and the business went belly-up. The trustees were then sued for breach of their duty and the court made this remark that trustees should not expose trust assets to any risk.

The reality is that inflation is (in the late 20th century and the beginning of the 21st century) one of the more serious risks that have an influence on any investment and so, since the late 1990s, that decision was basically overruled by a new decision of the Supreme Court of Appeal, which said you have to guard against inflation and because of that, trustees will have to take on some risk to safeguard the trust assets against the effects of inflation. Now obviously if you hold immovable property, that should be a safeguard against inflation, but if the trust assets that are placed under your control happen to be a sum of money, then you will have to think very carefully about how you invest.

It is true that you should not, as a trustee, take the kind of risks that you would have been prepared to take with your own money – but you cannot be overly conservative and basically reduce the value of the trust assets by being too conservative and too cautious in the investment. It would certainly not be reasonable to invest trust capital at no interest or at low interest or lend it out at no interest or low interest regardless of to whom you make that loan. It is a balancing act between protecting the trust assets against inflation and not taking on unreasonable levels of risk in doing so.

INGÉ LAMPRECHT: Louis, just lastly, how should trustees deal with conflicts of interest?

LOUIS VAN VUREN: That is something that unfortunately happens far too often, that trustees find themselves in a conflict of interest and then do not deal with that properly. I’ve recently consulted with a client in a situation where the trustee exceeded many times the allowable trustee fee that was made provision for in the trust instrument.

The first thing a trustee needs to do is to identify situations where a conflict of interest may arise, and then do everything possible to avoid those situations. But sometimes conflicts of interests are unavoidable, and then the trustee must just treat those situations correctly and the way to do it is – if a conflict is unavoidable – to disclose the conflict and not take part in any decision from which a benefit might be derived.

Now that sometimes is not that easy. I’ve dealt with situations where only one trustee is appointed in a testamentary trust and that trustee has an inherent conflict of interest because that trustee also happens to be one of the income beneficiaries. Now that kind of situation – you can’t handle it correctly because you have a fatal inherent conflict situation, but trustees must also treat beneficiaries impartially and treat different classes of beneficiaries fairly – and there, in your typical family trust situation, the potential for conflicts of interest is vast. It would be in any trustee’s interest to be wide awake to this.

Now obviously the question is what is a conflict of interest? If you are a professional trustee obviously there is always going to be some conflict because you are there to earn a fee, but again the yardstick is what is reasonable in this circumstance. And a further conflict will then arise if you are in a position where you can derive an additional benefit from being a trustee – in other words, doing other contract work or whatever for the trust – and in those circumstances, or in the kind of circumstances where you have an interest in a business that is going to do business with the trust, then you have to disclose and recuse yourself from any decisions which could have the effect of gaining an extra benefit for yourself.

INGÉ LAMPRECHT: Thanks Louis. That was the CEO of the Fiduciary Institute of Southern Africa, Louis van Vuren.

Brought to you by the Fiduciary Institute of Southern Africa (Fisa).

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