In the Trustees We Trust

The Duties, Responsibilities and Risks of being a Trustee of a Trust in South Africa

Have you ever looked at a Dollar bill?

If you have, you will have noticed the words – “In G-d we Trust”.

But did you know that the words “In G-d We Trust" is also the official motto of the United States of America (having been adopted by the U.S. Congress in 1956)?

Well, this may not be the place for a discussion on the history of the United States. Or what appears on their Dollar bills. But, whenever the term Trustee is brought up, it’s the first thing that comes to mind - Trust. It’s in the name of the role for crying out loud – a Trustee.  And it is in this person that others must place a degree of trust.

Therefore In The Trustees We Trust seems like a pretty accurate description. At least on the face of it.

How is a Trustee appointed?

Firstly, one has to set up a trust before a trustee can be appointed.

Now a trust can be set up through a trust deed as in the case of an inter vivos trust  –

What is an inter vivos trust?

A Latin phrase meaning “while alive” or “between the living”, an inter vivos trust is actually set up during the founder of the trust’s lifetime. The goal of an inter vivos trust is to protect estate planning goals and (usually specific) assets. Once formed, the trust can be used to house certain assets or investments for the benefit of the trust’s beneficiaries and is effective in protecting (the usually specific) assets by limiting estate duty liability, bolstering succession planning, or protecting certain assets from creditors. The trust assets are managed and administered by the appointed Trustees of the trust as per the trust deed.

Or through a person’s Will as in the case of a testamentary trust –

What is a testamentary trust?

Sometimes referred to as a will trust, it is commonly used in estate planning, only coming into existence on the death of the testator when it is created by the inclusion of a trust clause in a Will. A testamentary trust can be effectively used to protect and preserve assets bequeathed to minor children, mentally or physically disabled beneficiaries or a surviving spouse.

As you can see from the above, whichever trust is formed and whenever it is done, the purpose of trusts is essentially to protect and preserve assets. Generally.

Therefore, one could reasonably assume that the people appointed to administer the trust (aka the Trustees) will have a fiduciary duty to look after the assets of the trust and naturally will be required to exercise due care and objectivity when performing these duties or functions.

Wait. What is a fiduciary duty?

A fiduciary duty is a legal obligation (of the highest degree) for one party to act in the best interests of another. The party charged with the obligation is the fiduciary, or one entrusted with the care of property or money.

Also, how many Trustee’s must be appointed?

The Master of the High Court, requires trusts to have a minimum of three Trustees with one of them preferably being an independent third party.

Getting to the nitty gritty – the appointment of the Trustees

When setting up an inter vivos trust, the trust deed is your trust instrument and would appoint your Trustees. The trust founder would effectively enter into an agreement with the Trustees in order to give effect to the trust.

When setting up a testamentary trust, the Will becomes the trust instrument through which the Trustees are appointed.

But 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. The Trustees will only have authority to act on behalf of the trust once the Master has issued the letters of authority.

Always bear in mind that where Trustees 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 crucial to establish that the Trustees have been formally appointed and have contractual capacity.

What is expected of Trustees?

The Trustees are (importantly) duty-bound in terms of the Trust Property Control Act 57 of 1988, to be guardians of the trust’s assets and to manage them as mandated in the trust deed. Further to this and under Section 9(1) of Trust Property Control Act, the Trustees must “act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another.” This is a far reaching, onerous provision and the onus will be on the Trustees to prove that they acted with such care, diligence and skill, in the event that they are accused of maladministration.

Further to this, the Trustees may not act in a way that violates this duty or is outside the parameters of the trust deed. No trust instrument can exempt the Trustees from this liability i.e. acting outside of the parameters of the trust instrument. If the trust instrument does contain such a clause, it may invalidate the entire trust instrument and cause the trust to cease to exist (Eish!).

What are the risks of being appointed a Trustee?

Be forewarned - the risks are big!

Likened to Directors of a Company, who according to Section 76(3) of the Companies Act 71 of 2008, (and when acting in the capacity of a Director), must exercise the powers and perform the functions of a director in good faith and for a proper purpose, in the best interests of the company and with the degree of due care, skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company as carried out by that director, and having the general knowledge, skill and experience of that director. Trustees, likewise and as stated above, must also act with the same due care, diligence and skill which can reasonably be expected of a person who manages the affairs of another.

And both a Director (in terms of section 77(2)(a) of the Companies Act) and the Trustees (in terms of the trust deed and the Trust Property Control Act) could find themselves held personally liable for losses suffered (by the company or the trust) if it can be proved that they did not act with the necessary due care, diligence and skill that is reasonably expected of the people in their positions.  

Can a Trust be sued?

No. A trust itself cannot be sued - it is not recognised as a legal entity in South Africa. However, as seen from the above, the Trustees, in their official capacity, can be sued. Again, an indemnity clause in the trust deed, which exempts Trustees from liability for breach of trust, is void and does not exempt a trustee from actions involving ordinary or gross negligence, or intentional wrongdoing. Criminal liability may also be imposed upon a Trustee who commits a crime during the course of the trust’s administration (i.e. through theft or fraud). Incidentally, the Trustees are held jointly and severally liable for damages (delict).

Beneficiaries, or third parties, such as creditors, who have suffered a loss as a result of breach of trust, are entitled to bring a damages claim against the Trustees. Trustees can be sued for damages by beneficiaries, if such Trustees are deemed to have acted negligently, both when acting in good faith and when intentionally acting wrongfully.

And that is a “hellava” risk!

What about the duties and powers of Trustees?

There must be some?

As can be gathered from the above (i.e. exercising due care, skill and diligence) Trustees are expected to exercise their discretion independently and without undue influence. As such, their ability to act in good faith is paramount, and any conflict of interest should be avoided. A Trustee should not stand to gain personally from the trust in their capacity as Trustee (besides expecting to receive a reasonable remuneration for their services).

Mind you, Section 22 of Trust Property Control Act only permits a Trustee to receive remuneration as provided for in the trust deed, or where no such provision is made, a reasonable remuneration, which shall in the event of dispute be fixed by the Master of the High Court. The act does not, however, contain any further expletive on the Trustee’s actual remuneration i.e. how much or what is reasonable.

The duties of the Trustees are set out in the trust deed which commonly grants the Trustees fairly extensive powers regarding the administration of the trust. However before they can reasonably exercise these duties, the Trustees must know, understand and observe the trust instrument – it is the founding document which give the Trustees their powers.

But, they include (following the acceptance of the trusteeship) -

1. Taking control of the trust assets – in fact the Trustees first function is to identify the various assets of the trust, prepare an inventory of assets, and then take control of them (with immoveable property such as a holiday home or farm, the property must be duly registered in the name of the trust);

2. opening bank accounts in the trust’s name in which money received on behalf of the trust must be held;

3. making investment decisions - investing of the capital of a trust (the Trustees must make prudent investment decisions that are in the best interests of the beneficiaries to ensure that the trust capital is protected against inflation whilst at the same time not exposed to unnecessary investment risks);

4. buying and selling trust property;

5. registering any shares or investments in the name of the trust;

6. appropriately securing and insuring moveable property such as artwork or jewellery;

7. making decisions regarding distributions to the beneficiaries;

8. entering into contracts, and

9. ensuring that the trust complies with all related legislation, including the Income Tax Act 113 of 1993, Tax Administration Act 28 of 2011 and the Banks Act 94 of 1990 (amongst others).

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. In addition, Trustees must remember that they remain (at all times) accountable to the Master of the High Court who is able to request (at any time) a full account of the administration of the trust. The Master also has the power to request any document, account, statement or record in relation to the trust.

Therefore it is crucial that when managing the trust’s assets, that the Trustees are not only required but must keep accurate records (at all times) which must be kept for a period of five (5) years. This will make the preparation of annual financial statements and full accounts of the administration of the trust much easier and always readily available.

Any parting advice for Trustees?

We are sorry to say that being a Trustee is an onerous role. To say the least.

Which is why we started with saying “In the Trustees we Trust”.

Trust itself is a serious thing.

And it should be quite evident from the above that the role of Trustee is not an appointment to be taken lightly. It is therefore important when appointing a Trustee to ensure that the person appointed actually understands the legal requirements applicable to Trustees and has the necessary experience. Appointing someone who is a member of a professional body may be a wise decision.

It is therefore practical for the Trustees to have a working knowledge of the law of contract, property and marriage, be familiar with prudent investment vehicles, know what Foreign Exchange Control Regulations are and have (at least a working) knowledge of the Financial Sector Conduct Authority (previously the Financial Services Board) and its reporting requirements

In addition (and understandably) the Trustees should be or become (well) acquainted with all relevant laws that govern and/or impact Trustees, such as -

1. Trust Property Control Act 57 of 1988;

2. Immovable Property Act 94 of 1965;

3. Income Tax Act 58 of 1962, and

4. Estate Duty Act 45 of 1955.

Amongst a host of other things!

But we recommend that if you do accept the appointment as Trustee, that you consider the role carefully. Very carefully. Are the benefits from contributing as a Trustee worth the risk of personal liability that you may incur? If you decide that the risks are worth taking, manage those risks by ensuring that the trust is well managed, pays its liabilities when due and that you and the other Trustees that are appointed keep strictly within the limits of your powers under the trust deed.

If you require any assistance with the formation of a trust or deciding who to appoint as a Trustee, the attorneys at Benaters have in-depth knowledge and are able to assist you with all trust related issues and queries.

Get in touch today to see how we can assist you with what is, a really important decision. You can put trust in us too.

Written by Alicia Koch on behalf of Benaters