Why trusts need to appoint an independent trustee
When there isn’t one, the whole structure can be declared invalid or void.
An independent trustee gives validity to the trust and ensures that laws are not being breached by other trustees, Talaria's Hendrik van der Walt says. Picture: Shutterstock
Several trusts have still not appointed an independent trustee despite a directive to that effect issued by the Chief Master in March this year.
The directive states that the Master must consider appointing an independent trustee where the trust is registered for the first time and it emerges that it is a family business trust.
Cheryl Howard, MD of Talaria Wealth, says when a trust does not have an independent trustee the Master’s Office can declare the whole structure to be invalid or void.
In that case the assets of the trust can be deemed to form part of the founder’s estate, whether there is a third party claim or in the event of death.
The main benefit of setting up a trust is for income protection and limited liability.
“People put assets in the trust for the benefit of protection against creditors, estate planning, and limited liability. However, they manage it as if the assets were still their own, and not for the benefit of the trust’s beneficiaries.”
The role of the independent trustee is to ensure that the founder or the person who puts the assets in the trust is not using it as if it is his own.
In the case Badenhorst v Badenhorst, the wife claimed that their family trust was controlled by her husband and was in effect his “alter ego”.
In their divorce agreement, she claimed that she was entitled to a percentage of the assets’ value in the trust.
She claimed that if there was no trust, all the assets would have formed part of his estate and she would have been entitled to half of it.
The judge agreed that the husband dealt with the trust assets as if they were his own, and ordered him to pay a percentage of the net asset values of both parties’ estate and that of the trust.
In that case the husband’s brother was the co-trustee. Howard says that earlier it was permissible to have a trust between a husband, wife and another family member.
The March directive now clearly stipulates that the independent trustee may not have a family relation or connection, blood or other, to any of the existing or proposed trustees or beneficiaries or founder of the trust.
Hendrik van der Walt, partner at Talaria, says an independent trustee does not have to be an attorney or accountant.
Independent trustees normally have quite a good knowledge of the laws governing trusts and their inner workings.
“An independent trustee gives validity to the trust and ensures that laws are not being breached by other trustees, or enter into contracts which are invalid or should not have been entered into, because the necessary approvals were not obtained from other trustees,” he says.
The Master may – in certain circumstance – do away with the appointment of an independent trustee. If the founder shows good cause why it is not necessary to appoint one, the Master may forego the appointment of an independent trustee.
The Master may also request that the financial statements be audited annually and that the auditor has to inform the Master when potential harm to creditors is likely.
Van der Walt says in the final report of the Davis Tax Committee on estate duty, the committee stated that there were 333 465 registered trusts in October 2015.
However, only 100 000 of those trusts had submitted tax returns for that tax year. The independent trustee must ensure that the trust is compliant, even with tax laws, says Van der Walt.
The cost associated with the appointment of an independent trustee is client- and company-specific. Howard says it depends on the complexity of the trust, the risks involved, and the nature of the assets that are being managed.
Many asset managers provide a trustee service which is included in their asset management fee. The fee of an independent trustee is anything from R20 000 per annum upwards.
