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Why it’s important to appoint an independent trustee

Even though cost may be a deterrent.

In many international jurisdictions, the beneficiaries of a trust may not be trustees of the trust as well, but in South Africa it was always acceptable that the beneficiaries of a family trust may be appointed as trustees.

But in a landmark case in 2005 – Land and Agricultural Bank of South Africa v Parker – the Supreme Court of Appeal ruled that there was no proper separation of ownership or control of the trust assets from their enjoyment or use. As the trustees are entrusted with the control of the assets in the interest of the beneficiaries, inadequate separation may result in the trust being regarded as an extension of the estate of the founder.

The court suggested the appointment of at least one independent outsider as trustee to every trust where all the beneficiaries are related to one another, which resulted in the Master of the High Court enforcing the principle and requiring all newly formed family business trusts to appoint at least one independent trustee.

Protection of assets

Dr Eben Nel, chairperson of the Fiduciary Institute of Southern Africa (Fisa), says the purpose of a trust is the protection of assets. But if the assets are not properly moved out of the estate of the founder or donor, and creditors or other parties can prove that there is no proper separation between the ownership of the assets and the enjoyment thereof (the trust is just the alter ego of the founder), the assets will form part of the founder’s estate (and will not be protected).

As a general principle, the trustees of all discretionary family trusts and family business trusts should appoint at least one independent person to the board of trustees to protect the integrity of the trust, its beneficiaries and the other trustees, he adds.

“An independent trustee is a person who cannot benefit from the income or assets of the trust, nor are they related to a beneficiary of the trust, and can thus play a crucial role in the proper separation between ownership of the trust assets and the enjoyment thereof.”

‘Willing to say no’

An independent trustee would be willing to speak up when other trustees want to take decisions that are not in the best interest of the trust and the beneficiaries. In other words, they would be “willing to say no”.

Nel says the appointment of an independent trustee should be about more than just ticking a few boxes.  

“The independent trustee fulfils a crucial role in the proper administration of the trust and should maintain their independence at all times, without allowing the other parties of the trust to unduly influence them,” says Nel. “Ideally, the independent trustee should be a natural person or a corporate specialising in fiduciary law.”

An independent trustee cannot be the founder or a beneficiary of the trust, or be in any way connected to the trust. As such, the Master would not appoint the spouse or children of a beneficiary of the trust as independent trustees.

Knowledge

The founder and trustees of most family trusts are not knowledgeable about the trust landscape, Nel says. In fact, it may be the only trust they are ever involved in. Against this background, it is important that the independent trustee can add value through their accounting, tax, legal and/or trust knowledge. The independent trustee will be required “to keep the house in order”.

Nel says a trust that is properly administered and which has a fiduciary specialist in office as the independent trustee would be in a better position to defend itself against any allegation that the trust has become the ‘alter ego’ of the founder.

The cost involved in appointing an independent trustee and the fact that they will become privy to what may be confidential matters may discourage some family trusts from bringing such an individual on board, but if things go wrong the consequences can be significant.

“A family trust or family business trust that continues to operate without an independent trustee in office does so at its own peril,” Nel says.

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

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I thought it was a requirement of SARS that all trusts have an independent trustee.

No, neither SARS nor the Income Tax Act have this as specific requirement. It is in the spirit of trust law, and the Master of the High Court thus enforces it now, as “best practice”.

The big problem is finding a genuinely independent trustee. For example in the retirement industry most if not all so-called independent trustees are in the pockets of large companies

Just be aware that in the retirement industry the rules of the retirement fund will determine the composition of the board of trustees of the fund (which is incidentally not a trust in the normal sense, although the fiduciary duty is similar). Independence w.r.t. a trustee of a retirement fund means that the trustee should not be an employee or a representative of the employer or the fund management.

A trust can be a very efficient vehicle to house assets for the benefit of beneficiaries. It can cause serious problems however if the beneficiaries are appointed as trustees. If the children of the founder are beneficiaries, and they are later appointed as trustees, they have the power to pay benefits to themselves. This power means they have actually “inherited” the assets. This may have unintended consequences and may even be to the detriment of the founder. I have seen how children as beneficiaries and trustees, put their father, the founder of the trust, off the farm and distributed the income amongst themselves.
Select your trustees wisely, before they come to bite you in the but.

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