Attack fears drive trend to trust renovation – BJM PCS

Rising fears of regulatory attack on some family trusts are contributing to a trend toward trust ‘renovation’, according to specialists in the field at Barnard Jacobs Mellet Private Client Services (BJM PCS).

“Trusts remain beneficial and are useful for generational planning,” says Tony Barrett, head of Wealth Management at BJMPCS. “However, some outdated structures require professional review and perhaps ‘renovation’ in view of increased scrutiny and recent court judgments.”

The Wealth Management Division of BJM PCS launched its specialist BJM Trust service in April and since then has noted an increase in enquiries from clients who do not require trust formation, but a review of existing provisions.

The BJM Trust team has identified three areas of client concern:

1. Unease over a general regulatory attack in view of stricter court scrutiny of functional separation within a trust

2. Worries over increasing rigour at SARS as tax collections decline during the recession, creating growing pressure to tighten the tax net

3. Fears that a potentially vulnerable structure might be challenged at a future date by creditors that allege wealth within a trust has, in effect, remained under the control of the individual they are pursuing for debt

The potential for attack may exist when all trustees are family members and are also beneficiaries.

Barrett says an alert was sounded in the case of Land and Agricultural Bank of SA versus Parker and others at the Supreme Court of Appeal.

He explains: “The judge noted that lack of formality in creating and operating a trust can undermine functional separation between control, that is the powers of management vested in trustees, and the enjoyment of trust income and capital when the same people are both trustees and beneficiaries.

”The various Masters of the High Court were told they should ensure trusts are not controlled solely by family members who are beneficiaries and that an independent outsider should be appointed trustee of trusts in which all current trustees are beneficiaries or in cases where all beneficiaries are related.”

The appointment of an independent trustee, often a professional, is not the only requirement.

“In addition, it is important to develop an overall sense of independence through independent record-keeping and adherence to formal procedures,” says Barrett.

“This means it is often advisable to appoint a professional trustee with the knowledge and expertise to make both the structure and processes as bullet-proof as possible.”

A trust generally houses long-term capital growth assets that may require faithful stewardship over several generations.

Families with concerns about existing structures usually take the view that it would be inappropriate to place such assets at risk by not appointing a professional, arm’s length trustee.

“A specialist such as BJM Trust offers a comprehensive trust service capable of addressing all points of concern,” adds Barrett. “But there is no definitive checklist. Independence is key, but the trust must still function properly and provisions of the trust deed need to be meticulously applied.

“To give maximum protection to wealth accumulated within a structure, a comprehensive, totally professional approach has to be taken.”