- Read the trust instrument carefully and, if in doubt, obtain legal advice. If the settlor requests changes, check the effect of these with legal advisors.
- Take particular care if the settlor wants the trust to hold risky a business. What is the level of risk? Who is going to manage the business? The trustee is unlikely to have the expertise to do so. Think carefully about the trustee’s duties to monitor the investment by obtaining information so as to be in a position to intervene where necessary to protect the trust.
- Draw the settlor’s attention to any provision in the trust instrument that confers benefits on the trustees such as remuneration and exoneration provisions.
- Ensure that the settlor is independently advised when the trust is created and assets are transferred into it. Costs or other practical difficulties should not be allowed to prevail and you should ask for details of the individual who gave the advice. As a minimum, the settlor should have obtained advice confirming that he or she has capacity to create a trust and understand the fiscal consequences of doing so.
- Understand the settlor’s reasons and purpose for creating the trust. Clearly, this will be relevant to the exercise of the trustee’s discretions and powers, but it might also flush out risks or potential disputes that would not otherwise be brought to your attention. If there are ‘good’ reasons for creating the trust and transferring assets into it, such as tax or estate planning, then the risk of a trust dispute will be lessened. Record these reasons for posterity.
- Ensure that the settlor is given a proper explanation of the trust concept so he or she is under no misapprehension as to what he or she is doing and that the trustees become the owners of the trust property, become accountable to the beneficiaries and not the settlor and gain control over this property.
- Be aware of dealing with the settlor’s representatives. Check they have the settlor’s authority – is there a Power of Attorney? Ensure you deal directly with the settlor over the letter of wishes.
- Appoint a reputable trustee.
Administering the Trust
- Make and keep clear records of decision making.
- Settlors should never attempt or risk appearing to instruct trustees. They should merely ask them to consider a request. It is often a matter of the way in which notes are prepared and the language that is used in them. This also applies to any parties such as the beneficiaries who wish to make a request of trustees. Ensuring that a settlor behaves in the correct manner may not be as difficult as it can first appear, provided the boundaries and proper procedures are established at an early stage. Before acceding to a request, trustees should always ensure they have sufficient power, that they have complied with any mandatory preconditions such as consent or consultation with parties and that the proposal amounts to a fiduciary exercise of their power.
- There should be regular meetings of trustees and detailed consideration should be given to all relevant matters. Minutes should be prepared of these meetings and decisions that are taken. Resolutions should be prepared.
- The trustees should ensure that they have all the relevant information needed to enable them to make a decision and should obtain further advice and information where necessary.
- Trustees should maintain proper accounts.
- Where the trustee, in his or her capacity as a trustee, is a party to a transaction, he or she must be involved in the negotiating process, directly instruct advisers and agents, and advisers and agents should always seek instructions from the trustee rather than from the settlor or beneficiaries.
- Where the trustee has a substantial interest in a trading or holding company, then the trustee should have board representation and ensure that proper oversight is maintained, if necessary intervening in order to prevent trust assets being placed at risk.
- Trustees should ensure that all delegated activities are reviewed and that proper contractual arrangements are entered with delegates.
- Trustees must consider the rights of any beneficiaries when making decisions regarding the trust fund and obtain the consent of those from whom they are obliged to do so.
DR MERVIN MESSIAS
JD (Juris Doctor) / BA, LLB (Wits) / TEP (Trust & Estate Practitioner) / MTP (Master Tax Practitioner – S.A)