What to know when nominating your trustees

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If you plan on setting up a trust keep in mind that the primary function of your trustees is to administer the trust assets for the benefit of your nominated beneficiaries. As custodians of the trust’s assets, your trustees have a responsibility to manage those assets in compliance with Trust Property Control Act, common law, and the trust instrument and, given the enormity of the task, it is important to think carefully before nominating your trustees. Here’s what to know about the job of your trustees.

They have a fiduciary duty

Trustees have a fiduciary duty in relation to the trust beneficiaries which is an onerous legal duty to act at all times in the best interest of the beneficiaries. The Act makes it clear that trustees must act ‘with the care, diligence, and skill which can reasonably be expected of a person who manages the affairs of another’ which in fact means that trustees are held to a higher standard than is required when managing their own affairs. This means that when making investment decisions, the trustees are required to be more careful and cautious than when making their own investment decisions and, as such, finding a balance between protecting the trust assets from investment risk while ensuring that the assets achieve adequate investment growth. Remember, the fiduciary duty of your trustees is paramount and your trust instrument cannot indemnify a trustee from this duty of care.

They have to take control of the assets

As the trust founder, you will be required to relinquish control of the assets so that your trustees can take control of them. In the case of a bewind trust, the assets must be registered in the names of the beneficiaries and placed under the control of the trustees, whereas, in the case of immoveable property, the trustees will need to ensure that the title deeds of property are amended and registered accordingly. Keep in mind that all assets are required to come under the direct including shares in private companies, bank accounts, and moveable property such as art and/or jewellery, at the same time making sure that such valuables are safely secured and adequately insured. Once all trust assets have been identified and located, the trustees are required to make an inventory of the trust assets and open a bank account in the name of the trust. Keep in mind that your trustees are bound by the contents of the trust deed and must not be susceptible to external influence or interference, especially by the trust founder or the beneficiaries.

They are responsible for managing the trust assets

Once transferred to the trust, the assets no longer belong to the trust founder and the trustees must ensure that they manage the assets to achieve best outcomes for the beneficiaries. In the case of investable assets, this will require that the trustees have a good understanding of investments and the associated risks in order to ensure the optimal growth of the trust assets. To safeguard the trust assets against the effects of inflation, it will be necessary for the trustees to assume some investment risk, and it is important that the trustees have a sound understanding of how investments work in order to get the balance right. Remember, your trustees can be held liable for any losses suffered by beneficiaries if it is found that the trustees did not act with the necessary degree of care and skill in the administration of the trust assets. In managing the trust’s assets, the trustees have the power to transact and contract on behalf of the trust and, as such, can bind the trust when it comes to debt. Trustees are required to determine capital and income distributions to beneficiaries, contract professionals such as lawyers, accountants and auditors, and operate bank accounts. They may negotiate and enter business contracts on behalf of the trust, make investment decisions, and buy or sell assets for the trust as they deem appropriate. In performing such functions, they are also required to ensure that the trust complies with all relevant tax legislation while fulfilling the trust’s objectives in respect of succession planning. In accordance with the Trust Property Control Act, the trustees are required to ensure that the trust assets are kept completely separate from the assets held in a trustee’s personal estate. In doing so, the assets of the trust are protected against the insolvency of the trustee.

The job is financially and administratively intensive

The role of a trustee can be financially and administratively intensive as it necessitates adherence to several statutory deadlines including timeous tax submissions to SARS, the submission of VAT and PAYE returns, scheduling meetings, and meeting deadlines issued by the Master’s Office, bearing in mind that tardiness and/late submissions can result in fines or financial penalties for the trust. When it comes to the trust’s finances, your trustees will be accountable to the Master of the High Court and to the trust’s beneficiaries. While there is no legal requirement that a trust must be audited, trustees are required to create financial accounts for the entity, including a balance sheet, income statement, and cash flow statement, and must make them available to the Master and the beneficiaries when requested to do so.

Further, your trustees are required to keep records of the administration and disposal of trust property, keep accurate records and accounts, and ensure that all accounting records are securely stored. The trustees must be able to explain and justify all transactions and ensure that the records fairly reflect the trust’s financial state of affairs. Remember, while your trustees can outsource some of these functions to other professionals, they cannot abdicate their powers and remain responsible for the management of the trust assets. Over and above the financial obligations, your trustees are responsible for the secretarial functions of the trust including scheduling meetings, keeping attendance registers, recording minutes, drafting resolutions, and filing documentation. If requested by the Master’s Office, your trustees will need to account for the administration and disposal of trust property, submit any records to the Master, and respond to any other requirements from his office timeously.

They can be held personally liable

A trust is a creature of document and your trustees must be able to fully appreciate their duties and powers as set out by the trust deed. A trustee cannot claim ignorance of the contents of the trust deeds as a defence, so be sure to appoint someone you can trust to read and understand the trust instrument. Remember also that trustees cannot infer powers into a trust deed or assume certain powers in circumstances where the trust deed is silent. If a trust deed does not bestow a clear power on the trustees, then it must be assumed that no such power exists. Where a trustee acts beyond the powers granted to him in the trust deed, his actions may be deemed null and void. If a trustee is found guilty of negligence or wrongdoing, he/she can be held personally liable for any pecuniary loss suffered by the trust as a result of his actions. In administering the affairs of the trust, trustees are required to keep the trust assets separate from their own, ensure that trust assets are not used for their own benefit, and that conflicts of interests are avoided. Keep in mind that, while a company director can be personally indemnified, a trustee cannot be indemnified against personal liability – and any such clause in the trust deed will be considered null and void.

They should have strong interpersonal skills

Your trustees will need to be able to work effectively with each other, the trust beneficiaries, the staff at SARS and the Master’s Office, as well as their outsourced partners and it is therefore important that they possess appropriate interpersonal and communication skills. Remember, in the case of a testamentary trust, your trustees will be required to make decisions on behalf of your minor or disabled children, and it is important to give thought to the ability of your trustees to listen, communicate and be compassionate. If you intend to appoint multiple trustees, keep in mind that they will be required to negotiate, debate, and reach decisions with each other, so be sure that your nominated trustees have the requisite skills.

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