19/01/2023
A question often asked by clients is “why must I have an independent trustee on my family trust?” In this article we unpack the reasons for this and how this works.”
A family trust is a trust where the trustees are beneficiaries of the trust and the beneficiaries are related to each other. It has become common practice to use such a family trust created during the life of the trust founders as a tool for asset protection and estate planning for the family.
That said, problems can arise when all the trustees of a family trust are related to one another and are also all beneficiaries of the trust. Such inadequate separation between the estate of the trust founder(s) who are also usually the trustees and beneficiaries, can result in the trust being seen as merely an extension of the estate of the trust founder(s).
Accordingly, and although not required by the Trust Property Control Act 57 of 1988 (“Trust Property Control Act”), the Chief Master of the High Court in a directive issued on 6 March 2017, made it a requirement for all Masters offices across South Africa to consider appointing an independent trustee on all family trusts.
This requirement by the Master relating to the appointment of an independent trustee in family trusts resulted from observations of the Supreme Court of Appeal in the case of Land and Agricultural Bank of South Africa v Parker and Others, where the court held that all family trusts were open to abuse in the sense that the control of the trust resides entirely with beneficiaries who, in their capacity as trustees, have little or no independent interest in ensuring that transactions are validly concluded and that their conduct is unlikely to be scrutinised by the beneficiaries. The court therefore suggested that the Master of the High Court should ensure separation of control over and enjoyment of the assets of a trust by insisting on the appointment of an independent trustee to ensure that the trust functions properly, that the trust deed is followed and that there is oversight over the conduct of trustees.
An independent trustee is not required to be a professional person, but should be a person who fully realises the responsibilities he/she is accepting when agreeing to act as a trustee. He/she must also be qualified in the view of the Master of the High Court to act as a trustee. The less an independent trustee is related to the other trustees, the more independent he/she is seen in the eyes of creditors and SARS. In addition, spouses in divorce proceedings, trust creditors and SARS may also attempt to attack the trust by labelling such as an alter ego trust. The appointment of an independent trustee can help mitigate this risk.
Accordingly, should you be considering a family trust, it is important to include a provision for nominating and electing an independent trustee in the trust deed itself, so that the founder has input in deciding on the person who will be exercising this oversight or how the decision by the other trustees will be made.
Be sure to discuss this with your commercial advisor, including options for the appointment of an experienced independent trustee to your trust that is capable of fulfilling the important role of independent trustee on your trust.
