Many people who agree to take on the role of trustee are not fully aware of their duties and obligations, nor the extent to which they can personally be held liable.
When setting up your trust, whether through a trust deed (as in the case of an inter vivos trust) or through your will (in the case of a testamentary trust), you are required to appoint trustees to administer the assets of the trust. Selecting the most appropriate people to administer the trust assets for the benefit of its beneficiaries is important and is not a decision to be taken lightly.
Your trustees will have a fiduciary duty to look after the assets of the trust and will be required to exercise care and objectivity when performing their functions. Similar to managers of a company, your trustees are duty-bound in terms of the Trust Property Control Act to be guardians of the trust’s assets and to manage them as mandated in the trust deed.
Many people who agree to take on the role of trustee are not fully aware of their duties and obligations, nor the extent to which they can personally be held liable. Let’s have a closer look at the duties and responsibilities of trustees.
When setting up a living or inter vivos trust, the trust deed is your trust instrument and would appoint your trustees. As the trust founder, you would effectively enter into an agreement with the trustees in order to give effect to the trust. Where you set up a testamentary trust, your will becomes the trust instrument through which your trustees are appointed. Whether appointed to an inter vivos or testamentary trust, the first job of the trustees is to lodge the trust deed with the Master of the High Court and ensure that they are granted authority to act before acting or transacting on behalf of the trust. A trustee only has authority to act on behalf of the trust once the Master has issued the letters of authority. Bear in mind that where a trustee acts prior to being formally appointed, such action is void and cannot be subsequently ratified. When entering into transactions with a trust, it is therefore important to establish that the trustees have been formally appointed and have contractual capacity.
The independent trustee
From a governance perspective, it is always advisable to appoint an odd number of trustees to administer your trust, with three being the optimal number. Bear in mind that having too many trustees can be highly impractical especially when it comes to obtaining signatures, co-ordinating meetings and making decisions. Although not a legal requirement, appointing an independent trustee has become common practice in that it ensures a degree of objectivity in the management of the trust assets. In March 2017, the Master issued a directive to the effect that where South African trusts meet certain criteria, they are required to appoint an independent trustee to ensure that the trust is administered legally.
Specifically, trusts which have the power to contract with independent third parties, in which all the trustees are beneficiaries, and where all the beneficiaries are related, are required to appoint an independent trustee. While not required to be a professional person, it makes sense to appoint an independent trustee who specialises in fiduciary law or who has a sound understanding of trusts and the legislation pertaining to trusts. When appointing a professional trustee, bear in mind that they are entitled to be paid a fee as set out in the trust deed or as agreed to by the trustees.
Taking control of trust assets
To ensure the validity of a trust, the trust donor must relinquish control of the trust assets to the trustees. As such, one of the first functions of the trustees is to identify the various assets of the trust, prepare an inventory of assets, and then take control of them. In the event of immoveable property such as a holiday home or farm, the property must be duly registered in the name of the trust. The trustees are also required to set up a bank account in the trust’s name in which money received on behalf of the trust should be held. Any shares or investments should also be registered in the name of the trust. In the case of moveable property such as artwork or jewellery, the trustees have an obligation to make sure it is secured and appropriately insured.
Duties of trustee
The trustees are expected to exercise their discretion independently and without the influence of any other person. As such, their ability to act in good faith is paramount, and any conflict of interest should be avoided. Other than reasonable remuneration for their services, no trustee should stand to gain personally from the trust in their capacity as trustee. Trustees should also bear in mind that they can be held personally liable for any losses suffered by the trust as a result of their negligence (ordinary or gross) or intentional wrongdoing, and that their duty of care, diligence and skill is onerous.
A trust is not recognised as a separate legal person in South Africa, and it is therefore the trustees in their official capacity that can be held liable. Bear in mind that a clause in a trust deed which indemnifies a trustee against a breach of their duty is ineffective because the fiduciary duty of the trustee is paramount and cannot be contracted out of.
The powers of the trustees are set out in the trust deed which commonly grants the trustees fairly wide powers in the administration of the trust, including buying and selling trust property, making decisions regarding distributions to the beneficiaries, entering into contracts, opening bank accounts and making investment decisions.
When it comes to investing the capital of the trust, the trustees need to make prudent investment decisions in the best interests of the beneficiaries to ensure that the trust capital is protected against inflation while at the same time not exposed to unnecessary investment risks. This can be a difficult balancing act for trustees and may require them to seek independent investment advice, bearing in mind that trustees can be held liable if it is found that the trust’s money was not prudently invested.
In managing the trust’s assets, the trustees are also required to keep accurate records which must be kept for a period of five years. Although there is no requirement for trusts to be audited, the trustees are required to prepare annual financial statements and to submit the trust’s tax returns timeously. However, trustees should bear in mind that they remain at all times accountable to the Master who is able to request at any time a full account of the administration of the trust. He also has the power to request any document, account, statement or record in relation to the trust. The duties of the trustees also extend to ensuring that the trust complies with all related legislation, including the Income Tax Act, Tax Administration Act, the Banks Act amongst others.
From an administrative perspective, the trustees are required to keep the trust deed updated at all times, record all decision-making, prepare agendas and minutes of all meetings, draft resolutions, and facilitate regular trustee meetings.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE