This article was taken from Mastermind, the official monthly newsletter of Sanlam Private Investments, a division of Sanlam Ltd. Visit the SPI Website
Some offices of the Master of the High Court (‘the Master’) refuses to register newly created South African trusts if there is no independent trustee in office. Although it is currently not a legal requirement, they often nevertheless apply it as such.
What the law says
South African legislation applicable to trusts demands the highest possible ethical standards from trustees. Therefore, although legislation does not specifically require an independent trustee, it imposes a general duty on trustees to avoid a conflict of interest.
Why the requirement for an independent trustee?
The Master adopted this practice following the judgement in the well-known Parker case. In this case Appellate Judge Cameron stated the following:
‘…the Master should in carrying out his statutory functions ensure that an adequate separation of control from enjoyment is maintained in every trust. This can be achieved by insisting on the appointment of an independent outsider as trustee to every trust in which (a) the trustees are all beneficiaries and (b) the beneficiaries are all related to one another… ’
What constitutes an ‘Independent Trustee’?
An independent trustee is one who is not a beneficiary of the trust himself, or is not related to the other beneficiaries or trustees of the trust and someone who fully grasps the significance and responsibilities of accepting trusteeship. Given the serious nature of such an appointment, it is strongly advised that the independent trustee’s office be filled by a professional trustee with the necessary legal background and experience. By using a professional trustee (such as Sanlam Private Wealth) continuity is also ensured.
The Master views the appointment of a family trust’s accountant as the independent trustee as not independent in the true sense of the word because of a conflict of interest and often questions the registration of new trusts with the accountant as independent trustee. Similarly, the Master and SARS may also perceive appointing the financial advisor or asset manager of the trust as the independent trustee as creating a serious conflict of interest as the advisor, in fear of losing his/her fees, could be swayed not to go against decisions of the founder/trustee.
Be mindful – far reaching consequences of recent case law
Acting Judge Gautschi, in the recent Morrell case, declared that the trustee was an ‘independent trustee’ in name only and that there was no real evidence of any interaction between him and the co-trustee (incidentally also the founder). The learned judge also held that given the evidence, the probable inference was that the said independent trustee allowed the founder to treat the trust assets as his personal property. Consequently the court deemed the trusts’ assets to be that of the founderfor all purposes, including for that of the redistribution order.
This is the first judgement in which the trust is regarded as the alter ego of the founder for all purposes. It effectively means that SARS may rely on this judgement to regard the trusts’ assets as the property of the founder for capital gains tax and estate duty purposes on his death, which could result in the demise of many estate plans with similar shortcomings.
To conclude
It has become of paramount importance to ensure that the trust administration is up to date and that a proper independent trustee is in office. Having properly dated and signed trust resolutions on file serve as proof that trustees acted together in making decisions concerning trust assets. One would be wise to take stock of the current affairs of one’s trust in order to give effect and reap the benefits of a well-devised estate plan.
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