Unbeknown to many, the Master’s Office issued a directive in March 2017 stating that all new so-called “family business trusts” must appoint an independent trustee.
Firstly, what is a “family business trust”?
In brief, these trusts would have the following characteristics:
- The trustees have the power to contract with independent third parties, thereby creating trust creditors; and
- The trustees are all beneficiaries; and
- The beneficiaries are all related to one another.
After the directive was issued by the Chief Master, many trusts have still not appointed an independent trustee despite the fact that the Master has the authority to declare the whole structure to be invalid or void. This could have devastating effects not only on personal estate planning and tax structuring, but also for the beneficiaries for whom the trust was originally established.
If declared invalid/void, the assets of the trust can be deemed to form part of the founder’s estate.
The main benefit of setting up a trust is for asset protection, limited liability and the preservation of wealth. However, many individuals manage their trusts as if the assets were still their own, and not for the benefit of the trust’s beneficiaries.
In a famous divorce case (Badenhorst v Badenhorst) the wife claimed that their family trust was controlled by her husband and was in effect his “alter ego”, therefore entitling her to a claim in a percentage of the assets held in the trust.
The judge agreed and subsequently ordered the husband to pay a percentage of the net asset value of the trust.
The role of the independent trustee is to ensure that the individual who places the assets in the trust is not using it as if it is his/her own. Furthermore, the independent trustee’s role is to ensure that the provisions of the trust deed are complied with and upheld at all times, the trustees perform their fiduciary duties, and that the trust’s statutory requirements are met.
What makes a trustee independent?
In the past, it was acceptable to have family members as co-trustees; however the directive now clearly stipulates that the independent trustee may not have a family relation or connection, blood or other, to any of the other trustees or beneficiaries or the founder of the trust.
What characteristics should your independent trustee have?
Additional to your independent trustee not being a family relation, it is advised that they also have the following characteristics:
- Has a proper understanding of the responsibilities of trusteeship, and accepts office in order to ensure that the trust functions properly;
- Has knowledge of the laws governing trusts and their inner workings;
- May be a professional accountant, admitted attorney, advocate or individual who is affiliated to a relevant professional body or association, trust company, board of executors or fiduciary practitioner;
- Would not have any interest in the trust property as a beneficiary;
- Has knowledge and experience of the business field in which the trust operates;
- Must be competent to scrutinise and check the conduct of the other appointed trustees.
Under certain circumstances, the Master may repeal the requirement for an independent trustee if the founder can show good cause why it is not necessary to appoint one, or if the Master requests that the annual financial statements be audited.
As per the Tax Statistics report issued by SARS and the National Treasury, the number of registered trusts in South Africa as at the end of the 2016/2017 tax year is over 345 000; however, only approximately 44 000 of those trusts submitted their Income Tax returns for the relevant tax period. The independent trustee must ensure that the trust is compliant.
The cost associated with the appointment of an independent trustee is relative to each trust and depends on the complexity of the trust, the risks involved, and the nature of the assets that are being managed.
by Morné Janse Van Rensburg ACMA, CGMA
Director at Bannister Trust (Pty) Ltd