Source: Mervin Messias: www.messiasattorneys.co.za
Have you been asked to be a trustee of a trust? If so, have you carefully considered the ramifications of accepting such an appointment, or have you merely accepted in order to be accommodating, particularly if the person making the request is a client whom you do not wish to disappoint? If you have decided to accept, I urge you to re-examine your decision before proceeding with the appointment.
Consider the standard to which a trustee is required to measure up to in South Africa. In terms of the Trust Property Control Act 57 of 1988 a trustee is required to act “with care, diligence and skill which can be expected of a person, who manages the affairs of another”.
Trustees have many obligations
A trustee’s duties include the obligations to:
“always act in good faith and jointly” – a trustee’s duty to act in good faith is the consequence of his fiduciary position and trustees must act jointly when dealing with third parties.
“give security to the Master of the High Court unless exempted from doing so” – in terms of the Trust Property Control Act a trustee must furnish security to the satisfaction of the Master for the due and faithful performance of his duties as a trustee before the Master will authorise him or her to act as trustee. If, in the opinion of the Master, there are sound reasons, the Master may dispense with security by a trustee.
“comply with the terms of the trust deed” – the trust deed is the constitution of the trust and the trustee should acquaint himself with its terms and comply with them.
“take possession of the trust property” – the trustee is in charge of the trust property and must take possession of it so that it comes under his control. He should also make a full inventory.
“make the trust property more productive” – a trustee manages the trust property and must ensure that a reasonable return is obtained on the trust capital.
“keep the trust property separate” – the Trust Property Control Act places a general duty on trustees to separate their personal property from the trust property. It should always be identifiable as the trust property. A trustee must indicate clearly in the bookkeeping the property that is held in trust, register trust property in a way that makes it clear from the registration that it is trust property, make any account or investment at a financial institution identifiable as a trust account or trust investment and in all other cases identify trust property as trust property in the best possible manner.
“always be impartial” – a trustee must endeavour to avoid his private interests conflicting with his duty to act as a trustee. A trustee must also not favour one beneficiary against others but must deal with them on an impartial basis.
“deal with the trust fund and transfer income and capital to beneficiaries” – a trustee must pay the income and capital of the trust to the person entitled to it.
“preserve the trust property” – a trustee is required to conserve the trust property, but may be entitled or obliged to sell and reinvest or exchange, let or deal with the property in some other manner, depending on the provisions of the trust deed.
“account to beneficiaries” – a trustee is required to keep an accurate account of the fund administered and information about the state of investment and other dealings with the trust property and details of the beneficiaries’ share of it.
“lodge the trust instrument with the Master, including any amendments to the trust deed” – the Trust Property Control Act provides that before a trustee takes control of trust property, he must lodge a notarially certified copy of the trust deed and any variation of it.
“furnish his or her address to the Master” – the Trust Property Control Act requires a trustee to furnish the Master with an address for the service of notices and process and in the event of any change of address, to notify the Master within fourteen days.
“obtain authority to act from the Master” – a trustee may not act until he has obtained authority from the Master.
“open a bank account” – a trustee who receives money as a trustee must deposit it into a separate trust account at a banking or other financial institution.
The role of the “super agent”
The trust arrangement involves three parties namely, a trust creator, trust beneficiaries and the person who manages the trust: the trustee. A trustee because of his fiduciary capacity, is like a “super agent”.
Trustees must act in a fiduciary capacity. In that capacity trustees have the ultimate duty imposed by law to relationships between people. A degree of excellence is required in terms of fiduciary obligations. If trustees make mistakes and the mistakes are proven, the trustees are liable to the beneficiaries. Many trustees have no appreciation of the fiduciary duties they assume when they accept appointment or do not acquaint themselves with the trust deed when they assume appointment.
We should consider what developments are taking place in other parts of the world with regard to the standards to which trustees are required to comply lest these should influence our law. As an example, in the United States trustees’ actions and liability for their actions have been measured by a reasonable person rule, that is “would a similar, reasonably prudent person acting in the same capacity, in the same or similar circumstances, have made the same judgement?” If not, the trustees would be liable for their actions.
The reasonable test rule is one thing, but what is of concern is that this rule has now evolved into “the prudent investor” rule. This is a much tougher standard to measure a trustee’s conduct. This rule requires trustees to minimise the risk at any given level of return on trust assets. In reality this rule requires trustees to act as experts. The prudent investor rule may be called the prudent expert rule – on this basis there is little room for mistakes. Furthermore, not only does the expert rule exist, but it is being expanded.
Whilst acting as experts in carrying out their duties trustees must ensure that they carry out the terms of the trust deed for the benefit of the beneficiaries. As experts they must preserve the trust property, the growth of income and capital and its availability to beneficiaries.
Look before you leap
Before accepting an appointment as a trustee one should ascertain what the role and the possible consequences could be. One should not simply accommodate a family member, friend, or client by accepting an appointment without first becoming familiar with what a trustee is and is required to do. If due consideration is given to the implications, it is likely that many potential candidates would decline the invitation to be appointed.
Although trustees have a mandate to follow in terms of the trust deed, they also have a responsibility to “read between the lines” and exercise their discretion when there is no clear cut choice. If the decision is too difficult, they can apply to court for a ruling.
Many people are under the mistaken impression that trustees’ decisions are only financial. Although they do make financial decisions, they also have to make “people decisions”. This can be particularly difficult, as it is often a sensitive issue when trying to balance the demands and interests of beneficiaries.
Trustees may be required to work very hard and they are always accountable for their actions.
Trustees should have knowledge of the trust creator’s family affairs, investments and their performance.
The problem is that a trustee’s knowledge in this regard is often insufficient. Trustees should endeavour to obtain this information and keep themselves informed of changes.
Little room for speculation
In dealing with the assets of the trust, there is little room for speculation with the capital or the income by the trustees. If they do, they could be liable for losses. Assets can be sold or traded and invested in immovable property, shares, bonds and so on. However, trustees should invest in proven investment areas on a conservative basis. Their approach should always be cautious and relatively risk free.
Trustees always have to be on their guard as to what they may or may not do. An interesting case is Sackville West v Nourse & Another 1925 AD 516. The Appellate Division held that, when dealing with trust money, a trustee is under a duty “to observe due care and diligence and not to expose it in any way to business risks”.
This has been regarded to mean that a trustee is not entitled to expose trust capital to risk by making investments which might decline in value such as the stock exchange. Unless the trust deed stated otherwise, the trustee was confined to investing in government or municipal stocks, fixed deposits, loans secured by mortgage bonds and immovable property. If trustees were unaware of this case and were investing trust funds in the stock exchange they could have exposed themselves to claims in respect of losses.
However in Administrators, Estate Richards v Nichol and Another 1991 (1) SA 551 (SCA), the Supreme Court of Appeal held that there was no justification for a hard and fast rule precluding the investment of trust funds in quoted shares or unit trusts.
Such investments would not infringe the Trust Property Control Act, which requires the trustee to act with care, diligence and skill which can be reasonably expected of a person who manages the affairs of another. Nevertheless, a trustee should have due regard to the risk of investing in shares and unit trusts and should spread the investments to obtain a balance of stability and growth.
Although there is little room for speculation in the trustee’s portfolio, the converse is also applicable – trustees have frequently been known to be too conservative in their investment strategies. The investment of funds at a below market yield, in terms of both income and capital appreciation, can result in trustees being liable for lost opportunities. A safe investment may not be a prudent investment. Whatever the trustee decides in regard to investments, there are no guarantees that there will be a good overall result or that the beneficiaries will be satisfied.
It often happens that a beneficiary of a trust becomes ill. This would impose additional duties on the trustee. In such circumstances the trustee should oversee care of the ill person by making sure the person receives quality care in a supportive environment; and that the hospital or nursing home, doctors and staff are qualified. He must also ensure that the medical aid has been notified, offer to notify this person’s employer, friends and relatives and ensure that any disability benefits are applied for.
Far reaching powers
In addition to their duties, trustees have powers. The powers of trustees are derived from the trust deed and generally deeds are drafted to give the widest powers to trustees to administer the trust. These powers are to be exercised on behalf of the beneficiaries. They usually include the power, inter alia:
- To open and operate accounts with financial institutions.
- To draw and issue and receive financial instruments.
- To invest in property of any nature, movable or immovable, corporeal or incorporeal.
- To acquire assets for the purposes of investment.
- To let or hire assets.
- To invest in shares, stocks, debentures, debenture stocks, units, and negotiable instruments.
- To invest any monies forming part of the trust fund and to realize or vary any investment.
- To borrow monies with or without security.
- To mortgage, pledge, cede in security, hypothecate or otherwise encumber assets of the trust.
- To lend any monies, with or without interest and with or without security.
- To sell, exchange, or donate any of the assets of the trust.
- To improve, alter, maintain and repair any immovable or movable property belonging to the trust.
- To apply any of the monies or assets held by them, in terms of this trust deed in making payment of any income or other tax or duty.
- To enter into indemnities, guarantees and suretyships in person, and to encumber any assets.
- To perform any act and execute any document or deed required to be executed in any public office.
- To register the transfer of any property.
- To institute and defend legal proceedings by or against the trust.
- To attend all meetings of creditors or any person indebted to the trust.
- To exercise the voting and other rights attaching to any shares.
- To engage the services of professional practitioners.
- To ay out all debts incurred on behalf of the trust.
- To accept on behalf of the trust all or any donations or inheritances.
- To acquire and/or hold any asset in co-ownership or partnership with another or others.
- To effect, acquire or dispose of insurance.
- To determine whether any monies or assets held by them from time to time in respect of the trust are to be treated as capital or income.
In reality trustees have such extraordinary accountability, liability and powers that they could be regarded as “super agents”.
Whenever you are invited to be a trustee, give due consideration to these issues, think twice … then think again, before accepting the appointment.
Mervin Messias Attorneys
BA. LLB(WITS). JD (USA). TEP (ENGLAND & WALES). MTP (SA). SOLICITOR (ENGLAND, AUSTRALIA & NEW ZEALAND). ATTORNEY (LESOTHO AND SOUTH AFRICA).
Member of the Trust and Estates Committee of the LSSA
Chairman of the Society of Trust and Estate Practitioners (Johannesburg)