Dominique Brinkmann
22 Jun 2023
This document is intended to outline the responsibilities bestowed on a trustee when they accept their trusteeship and to enable them to remain compliant.
Information presented in this document was adapted from Wills and Trusts by RP Pace and WM Van Der Westhuizen, Lexis Nexis
Introduction
Recent changes in the Trust Property Control Act (“The Act”) and the Financial Intelligence Centre Act (“FICA”), as a result of the FATF placing South Africa on their grey list, have caused several trustees of trusts to “panic” in light of these amendments. The purpose of this document is to highlight a trustee’s duties and obligations, both those that are existing and those that are new due to the recent changes.
Overview
The Act defines a trustee as any person who acts as a trustee by virtue of an authorisation from the Master of the High Court. All Trusts, be it an inter vivos trust or a testamentary trust will have at least one trustee, therefore if you are a beneficiary of a trust or have conducted business with a trust, you have dealt with a trustee.
A trustee is in a position of trust and is responsible for the proper functioning and management of the trust. A trust is established to preserve certain property and to ensure that the purpose of the trust, as set out in the trust deed, is fulfilled. A trust is ordinarily established for the benefit of certain individuals and sometimes for the benefit of organisations. Therefore, a trustee’s main function is to ensure that the trust fund is preserved and used in such a way which would most benefit the beneficiaries within the powers so conferred upon them by the trust deed. From this there are various duties and obligations which a trustee has which are determined by the trust deed, statute, or common law.
A trustee’s duties and obligations are in essence fiduciary in nature due to the relationship between the trustees, the trust property, and the trust beneficiaries.
The fullest exposition in our law which details the founding principles of a trustee’s duties and obligations established from their position of trust was stated by Innes CJ in case before the then Appellate Division and has remained unchallenged for over 80 years and reads as follows (paraphrased):
“Where one man stands to another in a position of confidence involving a duty to protect the interests of that other, he is not allowed to make a secret profit at the other’s expense or place himself in a position where his interests conflict with his duty. The principle underlies an extensive field of legal relationship. A guardian to his ward, a solicitor to his client and an agent to his principal, afford examples of persons occupying such a position. This doctrine prevents an agent [trustee] from properly entering into any transaction which would cause his interests and his duty to clash. There is only one way by which such a transaction can be validated, and that is by free consent of the principal following from a full disclosure by the agent.”
Trustees are therefore, as the name suggests, in a position of trust where their most fundamental duty is that they act in the best interests of the trust. This document is intended to outline the obligations and duties which a trustee has which will ensure that this fundamental obligation is fulfilled.
Practical implications
From the below it is clear that there are several important duties which the trustees ought to perform, and the new regulations as indicated with an asterisk are simply adding to a list of requirements which trustees already have to comply with. In the past trustees could have been found liable if they were found negligent in their duties or if their negligence resulted in harm. However, the recent amendments have introduced penalties for non-compliance with the new rules. In particular the trustees may be liable to a fine not exceeding R10 million or imprisonment not exceeding 5 years or both if found negligent in not maintaining a record of the beneficial owners of the trust or the accountable institutions which the trust transacts with (see point 9 and 12 for details). As much as trustees have always had the duty to ensure that records are up to date, the amendments have taken this one step further and have now required further administrative action to take place. Therefore, it is essential that a trustee must acquaint themselves with the duties and obligations which are outlined herein.
Duties and obligations of trustees
1.Always act in good faith
A trustee is obliged, when dealing with the trust fund, to observe due care and diligence, and not to expose it to undue risk. Trustees have to always act in the interest of the beneficiaries which manifests the trustees’ duty on the one side and the beneficiaries’ rights on the other side. A trustee’s actions are therefore governed by the contractual relationship created by the trust deed and the personal relationship formed by the obligation to act in good faith towards the beneficiaries of the trust.
2. Always act jointly and disclose capacity in which they act.
The common law rule is that trustees must always act jointly in transactions with third parties and contractual powers must be exercised by all the trustees acting together unless the trust deed states otherwise. This highlights the importance of trustee meetings and resolutions confirming decisions of the trustees.
Trustees must disclose to third parties that they are transacting with them as a trustee and not in their personal capacity. *This as a duty was always a common law requirement of a trustee. However, a new section in the Act has made it a statutory obligation for a trustee to disclose that they are acting as a trustee and not in their personal capacity*.
3.Keep the trust property separate.
The trustees cannot blend trust property with their own or regard the trust’s property as their own. This duty is important in ensuring that the trust is not regarded as an alter ego of the trustees or the beneficiaries. If the trust were to be regarded to be an alter ego of any person connected to the trust this would have potentially severe repercussions including that the assets and income of the trust would be seen as those of the person in question by the South African Revenue Services (“SARS”).
This duty emphasises the importance of keeping proper books of account for the trust as well as ensuring that the correct tax return is filed for the trust amongst other things.
4.Always be impartial and independent.
A trustee must always be impartial and act independently in the administration of the trust. Where possible the trustee must avoid conflicts of interest, and this is particularly important where the trustee is both a trustee and a beneficiary. This obligation is one of the reasons why it is important, and necessary in the instance of an inter vivos family trust, to have an independent trustee.
It is important to highlight here the parameters of a trustee’s discretion when exercising their duties:
i. Always to be impartial and not to favour one beneficiary over another;
ii. To transfer income and capital to beneficiaries (within the limits stated in the trust deed);
iii. Always observe the trust deed and to pay particular attention to the different degrees of discretion with regard to the benefit to which the beneficiaries may be entitled.
5.Always comply with the duty of active supervision and inquiry
A trustee must not passively await information as to the state of the trust property or the need for an investment and the opportunities for securing a good return on capital but must take active steps to become acquainted with the situation. It is important to remember that you are negligent in your duty if you do not know what you ought to know. It is therefore important to ensure that as a trustee you are active in ensuring the trust is being administered correctly and according to the trust deed.
6. Preserve the trust property.
The trustees are obliged here to strike a balance between growth of the assets of the trust and prudent preservation. That is to say that the intention is not to have the capital of the trust stored under a mattress to be protected but rather to ensure it is invested so that it can continue to meet the needs of the beneficiaries and that it is preserved for future generations if this is the purpose of the trust as detailed in the trust deed. This may be done by selling and buying assets or investing and reinvesting capital but ultimately to preserve and grow the trust property where it is reasonable and sustainable to do so.
7. Account to beneficiaries
Trustees have an obligation to keep records of the trust property and a beneficiary, or a trustee has a right to request information about the trust. Trustees have a further obligation to complete financial statements of the trust annually and to submit annual tax returns to SARS.
8.Transfer capital and income to the beneficiaries
This duty is determined by the trust deed and the trustees have an obligation to ensure that the rights which beneficiaries have to trust assets are realised within their discretion as conferred. Trustees need only transfer trust assets as they are empowered to do by the trust deed.
9. Lodge the following information with the Master of the High Court:
i. The trust deed and any amendments;
ii. *Records of the ‘beneficial owners’ of the trust which in terms of the new regulations includes the donor, the trustees, all beneficiaries named in the Deed of Trust and any person who exercises effective control over the trust. These records must be kept up to date. *
In conjunction with this the trustees must provide information to SARS in terms of form IT3(t). This information is the same as that information which ought to be provided to the Master as referenced above, save for the trust deed.
10. Act with care, diligence, and skill in the affairs of the trust
This is to say that a trustee is expected to act with care, diligence, and skill which can reasonably be expected of a person who manages the affairs of another person or entity.
11. Open a bank account
This will assist in ensuring that the assets of the trust are separate from that of the trustees or beneficiaries.
12. *Keep a register of accountable institutions with which the trust conducts business*
A record of the accountable institutions which provide a service or ongoing services to the trustees particularly accountable institutions which provide trustee services to the trust, must be kept.
13. Keep safe custody and control of documents of the trust
This would include the Letters of Authority, copy of the trust deed, resolutions, and financial statements of the trust as well as any other records as indicated in this document.
Trustees are entitled to task the updating of the master’s records to other individuals. This can be done by giving those individuals power of attorney to enable them to complete the necessary tasks.
IOTA have drafted the necessary power of attorney and resolution needed to empower us to update the registers on the master’s Portal as well as compiled a form to be completed by the trustees to provide the details necessary for us to complete the register. Please enquire from us as to the process for assisting trustees to comply with the amended regulations and other duties.
*This rule is effective from 01 April 2023