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The Importance Of Having an Independent Trustee for your Trust


The Chief Masters Directive 2 of 2017 (the "CMD") was published in 2017 which set out the requirement that family business trusts should have an independent trustee appointed as a trustee of the trust, following the decision in the Supreme Court of Appeal case, Land and Agricultural Bank of South Africa vs Parker & others 2005 (SCA) where it was stated that the Master of the High Court "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.


The purpose of a trust is usually to safeguard trust assets for the benefit of beneficiaries, in accordance with the objectives of the trust and in accordance with the trust deed. However, it had become common practice for individuals to donate assets to a trust in order to avoid estate duty tax on death, but then the said individuals would also be the trustee as well as the beneficiary, in which case, the trust potentially became the "alter ego" of the individual.


What does "independent" mean?

For all new trust registrations, it is a requirement that an independent trustee be appointed. It requires the person so appointed to exercise independence in making decisions in respect of a trust. Per the CMD, an independent trustee is one who has a proper realisation and grasp of what is required of an independent trustee, must be capable and competent of "scrutinising the conduct of other trustees who lack an independent interest" to ensure that decisions are carried out in a procedurally and substantively correct manner in accordance with the trust objects.


An independent trustee cannot be one who has a family relation or connection (through blood or otherwise) and should be able to exercise independence. If there is any aspect of the relationship which could put the independence into question (for example, the trustee is not able or feels pressured to vote in a certain way) then this is indicative of such relationship not being independent. An independent trustee also cannot have any beneficial interest in the trust. For example, the independent trustee, when accepting office, is required to state on oath in an affidavit that he/she:


-has no family relation or connection, blood or other, to any of the existing or proposed Trustees, beneficiaries or founder of the trust

-is 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

-has no reason to conclude or approve transactions that may prove to be invalid, because he/she is knowledgeable in the law of trusts

-does not have any interest in the Trust as a beneficiary.


What are the consequences if I don't have an independent trustee, or if the independence of my "independent trustee" is questioned?

The Master of the High Court may in exceptional circumstances permit that a trust not appoint an independent trustee. However, in most cases an independent trustee for family business trusts is required. Failure to have one could result in the trust being found to be the "alter ego" of the individual, with adverse tax consequences being imposed. For example, on death, if the trust is regarded as the alter ego of the deceased, the trust assets could be deemed to be the assets of the deceased and included in the dutiable estate of the deceased, and estate duty imposed on such assets.


Conclusion

It is essential to obtain legal advice regarding the status of your trust, and to ensure that your trust is compliant with the Trust Property Control Act, the common law and that it is being administered in accordance with the trust deed. Spence Attorneys serves as an independent trustee for a number of family trusts, and can offer a wide range of trust services, such as registration of trusts and foreign trusts, appointment of trustees, trust deed variations, advice on tax implications of trusts and more.


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This article is for information purposes only and should not be regarded as legal advice. Also seek advice from your attorney and tax advisor. Spence Attorneys will not be held liable for any person acting on any information contained herein.

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