Family Trusts : Independent Trustees
South African legislation does not specifically require the appointment of independent trustees. There is however, a duty on trustees to act in the best interests of the beneficiaries.
The Supreme Court of Appeal, in Land and Agricultural Bank of South Africa v Parker and others 2005 (2 )SA 77 (SCA) found that ‘…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…”
The Chief Master’s Directive 2 of 2017 was subsequently issued providing direction for the appointment of independent trustees for family business trusts.
What is a Business Family Trust?
A “family business trust” can be identified by the following:
- The trustees are all also beneficiaries of the trust;
- The beneficiaries are all related to each other; and
- The trustees have the power to contract with independent third parties thereby creating trust creditors.
The use of the term “family business trust” may be misleading. If your trust meets the above requirements, regardless of whether it is carrying on business formally or not, it will be considered to be a family business trust.
What is an Independent Trustee?
An independent trustee:
- Must not be related/connected to any of the trustees, beneficiaries or founder of the trust, thus ensuring his/her independence.
- Must not be a beneficiary of the trust. This ensures the independent trustee makes objective decisions and ensures proper procedure is followed in terms of the trust deed.
- Must have knowledge and experience in the trust’s field of business in order to avoid dealing in invalid transactions.
- May be, but does not have to be, a professional accountant, admitted attorney, advocate, trust company board of executors or a fiduciary practitioner (FISA member) or business associate with the necessary business knowledge.
- Must not be disqualified from acting as a trustee by the Trust Property Control Act, 1988.
- Must understand the responsibilities and risk for breach of trust.
If the trust deed itself does not make provision for the appointment of an independent trustee, the Master may appoint one. In this event the Master will consult with the founder, existing trustees and beneficiaries with a vested right. The Master is not bound by their recommendations and may appoint a suitable person other than those nominated (this is only done in exceptional circumstances).
The Master has the discretion to allow a family business trust to be registered without appointing an independent trustee in the following circumstances:
- The founder makes representations showing good cause not to appoint an independent trustee;
- The Master has requested that security be provided; or
- An annual audit is conducted and the Master is informed of the results.
What happens when your Independent Trustee resigns?
When an independent trustee resigns, another independent trustee must be appointed, either by nomination in terms of the trust deed, or by appointment by the trustees or by the Master consulting with the parties.
Is an Independent Trustee remunerated?
An independent trustee is entitled, as is any other trustee, to be paid a fee as prescribed in the trust deed or by negotiation among the trustees if the trust deed does not prescribe a fee. The Master will determine a reasonable fee for the instances where the trustees are unable to agree on a fee, as provided for in Griesel v Bankkorp Trust Bpk 1990 (2) SA 328 (O).
What are the risks of non-compliance?
As this is a recent requirement there are numerous family business trusts that do not have independent trustees. The possible effect of this is that the trust may be deemed to be an “alter ego” of the founder/trustees and therefore invalid. This could lead to additional taxation and will negatively affect the beneficiaries.
In order to avoid complications and expenses down the line, it is prudent for all family business trusts to check their Trust Deed and Letters of Authority and to ensure that an independent trustee has been appointed.
For professional advice and assistance with your trust please contact Stuart Fourie or Vicky Stott.