The appointment of an Independent Trustee in Trusts

The appointment of an Independent Trustee in Trusts

Trustees are the guardians of the trust assets and have a duty to manage these assets in the best interests of the beneficiaries. SARS and creditors frequently make attempts to attack trusts, but this can be mitigated through the appointment of an independent trustee.

Does a trust need an independent trustee?
Until recently, it was not a requirement to appoint an independent trustee. In 2005, in the landmark Land and Agricultural Bank of South Africa v Parker case, the Court suggested that each family trust should appoint an independent trustee. However, in March 2017, the Chief Master issued a directive which sets the requirement for the appointment of an independent trustee for all trusts which are defined as “family business trusts”. This is typically a trust set up for the protection of family assets, where the trustees are all beneficiaries, and they are all related. These trustees are also empowered in terms of the trust instrument to enter into transactions which create debt in the trust. If no independent trustee is appointed for such a family business trust, the Master of the High Court will refuse the registration of the trust. The Master may, in certain circumstances, dispense with the appointment of an independent trustee.

Do you qualify to act as independent trustee?
An independent trustee must be an independent outsider who accepts office in order to ensure that the trust functions properly and that the provisions of the trust instrument are observed. The independent trustee could be a person or an entity who has no family relation or connection, blood or otherwise, to the trustees, beneficiaries or founder of the trust, and who is also not a beneficiary of the trust. You can, therefore, not appoint your son-in-law as the independent trustee. Take note that the Master also has issue with any connection (family or otherwise) to the trustees, beneficiaries or founder of the trust. It will, therefore, be difficult for a person who is the accountant, attorney, business partner – or even a friend – of the trustee(s), beneficiary(ies) or founder(s) of the trust to accept appointment as an independent trustee and comfortably sign the Sworn Affidavit (see below) that each independent trustee is required to sign upon their appointment with the Master.

It is in the best interests of the trust that the independent trustee has sufficient knowledge of the impact of statutory requirements on the trust, including an understanding around compliance with relevant tax law, and the effect of changes in legislation on the trust. Take note of the declaration (see below) that you are “knowledgeable in the law of trusts”.

Does an independent trustee have a higher responsibility or accountability when compared to other trustees?
The Master requires the independent trustee to sign a Sworn Affidavit upon their appointment.  Any person considering an appointment as independent trustee needs to (especially) carefully consider the following points on the Sworn Affidavit before accepting such appointment:
“As independent trustee I declare and undertake the following:…
4.    That I have no family relation or connection, blood or other, to any of the existing or proposed Trustees, beneficiaries or founder of the trust.
5.    That I am competent to scrutinize and check the conduct of the other appointed trustees who lack a sufficiently independent interest in the observance of substantive and procedural requirements arising from the Trust instrument.
6.    I have no reason to conclude or approve transactions that may prove to be invalid, because I am knowledgeable in the law of trusts.”

Are you the minority?
Even if an independent trustee is appointed, there is no assurance that the trustees will act independently to achieve a separation between control and enjoyment of trust assets.
Some people prefer having an uneven number of trustees. This presents a risk, as there is a good chance that – in the case of three trustees – two trustees can side against and even outvote the other trustee. In typical family trusts, where the husband and wife are trustees, together with the independent trustee (as required by the Master), it may be easy for the husband and wife team to out-vote the independent trustee if the independent trustee does not agree with the husband and wife team (Merwe NO and Others v Hydraberg Hydraulics CC and Others, van der Merwe NO and Others v Bosman and Others case of 2010). This may create a risk for the independent trustee if two family members do not act for the benefit of all beneficiaries of the trust, but rather for their own. It may also expose the trust if the Court can prove that the independent trustee’s appointment was just “window dressing” and that their vote does not “really” count. The Courts frown upon this practice and expect an independent trustee to be involved in decisions relating to the trust.

~ Written by Phia van der Spuy ~

WHICH ONE WINS THE BATTLE – THE TRUST DEED, THE WILL OR THE LETTER OF WISHES?

WHICH ONE WINS THE BATTLE – THE TRUST DEED, THE WILL OR THE LETTER OF WISHES?

People, generally speaking, do not pay sufficient attention to what they want to happen with their assets upon their deaths. This can be ascribed to estate planning not being given priority at a given time, or to people shying away from dealing with thoughts around death, or even ignorance. As the saying goes, ‘nothing is certain, except death and taxes’.

Many people believe that estate planning is having a will, but having a will is just one part of the plan. Where people also have trusts and letters of wishes, those documents will have often been drafted by different service providers, who may not have considered, or even been aware of other relevant documents, and who may not even specialise in providing such services. This may cause a conflict between the various documents, leaving the testator/testatrix having not achieved his/her objectives upon death, which may even be  abused.

The Court expressed its concerns around the bad quality of wills in the Raubenheiner v Raubenheimer case of 2012, but the same can be said about the drafting of trust deeds and letters of wishes. The Court concluded that estate planning, wills, succession and the administration of deceased estates are inextricably linked to the proper drafting of a will. The following was said in this case:
“It is a never-ending source of amazement that so many people rely on untrained advisors when preparing their wills, one of the most important documents they are ever likely to sign. This is by no means a recent phenomenon. Some 60 years ago, in Ex Parte Kock NO, a high court decried the number of instances in which wills had to be rejected as invalid due to a lack of compliance with prescribed formalities and the regularity with which the courts were being approached to construe badly drafted wills, before urging intending testators ‘in their own interests as well as in the interests of those whom they intend to benefit when they die . . . to consult only persons who are suitably trained in the drafting and execution of wills and other deeds containing testamentary dispositions’. Despite this, the courts continue all too often to be called on to deal with disputed wills which are the product of shoddy drafting or incompetent advice.”

Will
In South Africa there is freedom of testation, where an individual has the right to determine the heir(s) to his/her property upon his/her death as he/she wishes. This is done in a will. Since 1 January 1954 all wills must be in writing. A will is a formal, signed, written (written by hand, typed or printed) document, in which a testator voluntarily sets out his/her instructions in unambiguous terms as to how his/her assets are to devolve following his/her death. Your will is a living document and should always be up to date and reflect your current wishes in terms of how you would like your assets to be distributed upon your death.

Trust
In the context of estate planning, a trust can be described as a legal relationship which has been created by a person (known as the founder, donor, or settlor) through placing assets under the control of another person (known as the trustee) for the benefit of third persons (the beneficiaries). The legal principles applicable to inter vivos trusts are to be found in the Law of Contracts. This means that the principles that apply to the execution of a valid contract also apply to the execution of a valid trust deed. A trust is either a contract (Crookes v Watson case of 1956) that is brought about by a person (the founder) when he/she is alive (an inter vivos trust) or it is a testamentary disposition (a testamentary trust) that is brought about on the death of a person. A trust can also be created in terms of a court order (court order trust), such as divorce order.

Because a trust is regarded as a contract, the Courts will look at the substance of the arrangement rather than simply looking at the trust deed – the constitutional document of the trust.

Letter of Wishes
A letter of wishes is a way for you to inform others of matters to be taken into account after your death. It may, for example, contain guidance to the guardians of minor children detailing how you might want your children brought up in terms of education, religion or residence. A letter of wishes is a separate document to your will, but it accompanies your will. It is not legally binding but can guide your executors and trustees to ensure that your personal wishes are carried out. You should take care that a letter of wishes does not contain anything that could conflict with your will.

A letter of wishes should be written in plain English, signed and dated, but not witnessed, so as to avoid any claim that it has become a legal will or codicil (an addition or supplement that explains, modifies, or revokes a will or part of one).

Conclusion
There is an ongoing debate as to the role of a letter of wishes and whether a letter of wishes should be seen as part of the trust deed. A letter of wishes is not legally binding on the trustees, but could be taken into account by them. Where trustees have been given wide discretion in a trust deed, it is important for them to have an understanding of what the founder had in mind when he/she created the trust, and exercise their discretion accordingly. The trustees should certainly be influenced, but never dictated to, by a letter of wishes. If the trustees only follow the letter of wishes and do not apply their discretion, they risk being attacked by beneficiaries and creditors.

~ Written by Phia van der Spuy ~

POLITICAL RESEARCH NOTE AN INDEPENDENT ANALYST’S VIEW

POLITICAL RESEARCH NOTE AN INDEPENDENT ANALYST’S VIEW

COVID-19 VACCINE SUPPLY 21 JANUARY 2021
A proverbial storm has developed around South Africa’s procurement, or the perceived lack thereof, of Covid-19
vaccines. People are understandably anxious. I therefore compiled this note from publicly available information, and
trust readers find it useful.

What is approved and available?
Currently (though this changes all the time), there are five approved vaccines available in the world. All of them require
two shots, administered roughly three weeks apart. One must therefore distinguish between doses and number of
people treated – two doses are needed for each person.

Full PDF Report Available below:

JPLandman_Political_Comment_21012021 (1)

KEY ISSUES WHEN CREATING A TESTAMENTARY TRUST

KEY ISSUES WHEN CREATING A TESTAMENTARY TRUST

In a recent court case, van Rensburg v van Rensburg N.O. and Others (24 March 2020) issues around a testamentary trust were highlighted yet again. As the will of a deceased person forms the trust instrument, no further trust instrument is required to be lodged with the Master of the High Court. A will typically does not provide detailed provisions of how the trust should be administered. This often leads to issues arising at a later stage.

In this case, the joint will of the mother and father provided that upon the death of the father a testamentary trust had to be established for the benefit of the mother; i.e. the trustees had to apply the trust income, and even trust capital, of the trust, for the maintenance and benefit of the mother until her death. Upon her death the trust should have terminated and the trust assets were to be divided equally between the four children, or the survivors of them. All four children had also been appointed trustees of the testamentary trust in terms of the will. After the mother’s death the brother, requested the banking details from his sisters, so he could pay over their respective portions of the trust assets as required in terms of the will, in an
effort to wind up the trust.

Unfortunately the one sister’s emails were intercepted and fraudulent bank account details were confirmed, upon which payment was effected. Her siblings were of the view that it was not fraud perpetrated against the trust, but rather her own issue. She approached the court to have the trustees removed as she was of the view that they, as trustees and beneficiaries of the trust, were conflicted. She requested the appointment of new trustees, for them to decide whether to pursue the matter against the trustees or the brother, whom she believed acted negligently to pay her share to an incorrect account.

The following issues were addressed in the application proceedings:

Termination of the trust and the resultant lack of beneficiaries
The one issue that was addressed was whether the trust terminated upon the death of the mother. In this instance the will was clear in terms of the termination date – i.e. it had to terminate upon the death of the mother. It was not the intention for the trustees to hold the assets for the benefit of the children, only for the benefit of the mother. After the mother’s death, no further beneficiaries could be appointed as the trust had effectively terminated. The sister was therefore not successful to allege that the trustees were conflicted due to them being beneficiaries of the trust as well. Even though people may refer to one another as beneficiaries in communication, it does not make them beneficiaries, if they are not
beneficiaries as indicated in the trust instrument (will). The lesson is that a testator/testatrix should carefully consider his/her wishes when drafting a will, as no rights, which beneficiaries normally have, such as a right to information, will be available to such legatees. A will should also clearly stipulate when the trust ought to terminate as well as the instructions upon termination, if termination is so directed.

Removal of trustees
Another issue that was addressed was the removal of trustees. The removal of trustees, especially for a testamentary trust, where the testator/testatrix handpicked the trustees, will always be a delicate matter. The judge quoted the Volkwyn N.O. v Clarke and Damant case of 1946, which stated that it “is a matter not only of delicacy…but of seriousness to interfere with the management of the estate of a deceased person by removing from the control thereof persons who, in reliance upon their ability and character, the deceased has deliberately selected to carry out his wishes. Even if the…administrator has acted incorrectly in his duties, and has not observed the strict requirements of the law, something more is required before his removal is warranted. Both the statute and the case cited indicates that the sufficiency of the cause for removal is to be tested by a consideration of the interests of the estate”.

The judge also referred to the Gowar v Gowar case of 2016, where the court was mindful of the fact that disharmony may exist in the administration of a trust and that this is in itself not sufficient for the removal of a trustee. The Court held that the “overriding question is always whether or not the conduct of the trustee imperils the trust property or its proper administration. Consequently, mere friction or enmity between the trustee and the beneficiaries will not in itself be adequate reason for the removal of the trustee from office…
Nor, in my view, would mere conflict amongst trustees themselves be a sufficient reason for the removal of a trustee at the suit of another”. That case established a couple of important principles:

  • The Court’s power to remove a trustee must be exercised with caution – it should consider whether the trustee’s conduct endangered the trust property or its proper administration. Conflict between the trustees and/or beneficiaries are therefore not sufficient reason for a court to remove a trustee. The overriding factor is the welfare of the beneficiaries and the proper administration of the trust and the trust property. A trustee’s removal will be ordered only if the trustee’s continuance in office will prevent the trust from being properly administered, or will be detrimental to the welfare of the beneficiaries.
  • Neither dishonesty or even misconduct is required for the removal of a trustee – the only requirement is that such removal must be in the interests of the trust and its beneficiaries.

In this case the trust terminated (as discussed above) and the role of the trustees terminated with it, thus the judge correctly stated that the removal of the trustees would be redundant.

The following is clear from this case:
· Trustees of a trust need to read through and completely understand the trust instrument.

  • The terms of a will creating a testamentary trust have to be unequivocally clear. This includes the wishes of the testator/testatrix, including whether he/she desires heirs to be nominated beneficiaries of the testamentary trust or just residual heirs of the estate, as in this case. The decision may have tax and other consequences.
  • Trustees need to verify banking details before making payments from the trust’s bank account.
  • When a trust terminates, there are no beneficiaries left and the roles of the trustees terminate with the trust.

~ Written by Phia van der Spuy ~

 

Landmark ‘parental rights’ case in the offing

Landmark ‘parental rights’ case in the offing

A lesbian couple have launched an application in the Gauteng High Court (Johannesburg) intended to block an artificial insemination sperm donor from claiming parental rights to their child. A notice filed by lawyers for the couple indicated that the couple, in a permanent life partnership, were litigating against the sperm donor. The application challenged the constitutionality of a section of the Children’s Act, amended in 2005, that created room for the sperm donor to claim parental rights.

The couple decided to launch what promises to be a landmark application after the sperm donor, known to them before the artificial fertilisation, sought parental rights after their child was born. A standing agreement between the three was that he would not seek recognition as a father or be involved in the child’s life in any way. The man went against the agreement after birth and now intends to oppose the application.