The independent trustee: Why the big fuss?

Carien Strauss, fiduciary and tax specialist at Sanlam Private Wealth.

In recent months, the Master of the High Court (the Master) has often refused to register newly created family trusts if an independent trustee has not been appointed. Although it isn’t a legal requirement, the Master often applies it as such. The Master adopted this practice following the judgement in the well-known Parker case where Appellate Judge Cameron stated that the Master should ensure that adequate separation of control from enjoyment is maintained in every trust by insisting on the appointment of an independent outsider as trustee.

“South African legislation demands the highest possible ethical standards from trustees,” says Carien Strauss, fiduciary and tax specialist at Sanlam Private Wealth. “Although legislation does not specifically require an independent trustee, it does impose a general duty on trustees to avoid a conflict of interest.”

An independent trustee is a person who is not a beneficiary of the trust and is not related to the beneficiaries of the trust. He/she doesn’t have to be a professional person, such as an attorney or an accountant, but it must be someone who fully grasps the significance and responsibilities of accepting trusteeship.

“Given the serious nature of these duties, it is strongly advised that the independent trustee is a professional person with the required legal background and experience such as a professional trustee. By using a professional trustee, continuity is also ensured,” Strauss says.

It is common practice to nominate a family trust’s accountant as the independent trustee. “The Master, however, often views such an appointment as not being independent in the true sense of the word because of a potential conflict of interest. The Master has in recent months often questioned the registration of new trusts with the accountant as the independent trustee.”

Preference may also be given to appoint the financial adviser or asset manager of the trust as the independent trustee. This may also lead to a potential conflict of interest since the advisor, in fear of losing fees, might be swayed not to go against any decisions of the founder or co-trustees.

One should however be mindful not to appoint a person who is an independent trustee in name only. In the recent Morrel case, Judge Gautschi declared that the trustee was an ‘independent trustee’ in name only and that there was no real evidence of any interaction between him and the co-trustee (incidentally also the founder). The learned judge also held that given the evidence, the probable inference was that the independent trustee allowed the founder to treat the trust assets as his personal property. Consequently the court deemed the trusts’ assets to be that of the founder for all purposes. As such, SARS may rely on this judgement to regard the trusts’ assets as the property of the founder for capital gains tax and estate duty purposes.

“The recent increased scrutiny of local trusts means it has become very important to ensure that the trust administration is up to date and that an independent trustee is in office. Having properly dated and signed trust resolutions on file serve as proof that trustees acted together in making decisions concerning trust assets,” concludes Strauss.