Transition to professional trust era can be pain-free – BJM PCS

Wealthy families and entrepreneurs looking to ‘bullet-proof’ existing trust structures must adopt a totally new mindset. The good news is that given the right culture shift, the adjustment is relatively easy and pain-free, say trust practitioners at Barnard Jacobs Mellet Private Client Services (BJM PCS).

Trust administration is presently “moving into the professional era”, say the wealth company’s trust specialists.

The impetus comes from legal and regulatory trends that may render some family trusts liable to attack by the tax authorities or creditors. Wealth held within a trust might then be open to seizure to settle sometimes substantial claims.

“These issues have sharpened in recent months in view of recession, business failures and SARS quest for optimum tax receipts ahead of a possible budget shortfall,” says Tony Barrett, head of Wealth Management at BJM PCS.

The BJM Trust specialists within the Wealth Management Division face increasing enquiries from clients looking to ‘renovate’ existing trusts. Often, says Barrett, the request comes from “a husband-and-wife team and a lifelong friend who for years have served as trustees, sometimes on a surprisingly casual and unstructured basis”.

The need for urgent review has been underlined by a watershed judgement in the case of Land and Agricultural Bank of SA versus Parker.

The Supreme Court of Appeal found that a trust must ensure separation of ownership or control from the enjoyment of trust assets. If a donor transfers assets to a trust but continues to deal with those assets ‘as before’ there can be no separation of ownership. The trust then offers little protection from challenge.

Masters of the High Court have been told to ensure trusts are not controlled solely by family members who are beneficiaries. An independent outsider – often a specialist professional – should be appointed trustee of trusts in which all current trustees are beneficiaries or where all beneficiaries are related.

Barrett notes: “Clients who are founders, trustees and beneficiaries of family trusts frequently ask, ‘How difficult can it be to administer a trust?’

”In fact, quite detailed procedures are necessary for arm’s length management. You need more than independence; you also need to be able to prove it. Simultaneously, you must scan the legal and regulatory horizon for rulings and interpretations that may pave the way for future challenges.

“The good news for clients from the old casual era is that trusts remain beneficial when optimally structured and that a thorough revision of trust provisions and procedures is relatively quick and painless.”

Appointment of an independent trustee was merely the first step. Compliance with all applicable legislation was also necessary, including the Trust Property Control, Income Tax and Estate Duty acts and exchange controls.

Process rigour was crucial. Typically, this meant arranging proper annual general meetings, drafting trustee resolutions, record keeping and reviews of accounting and tax compliance. In the case of offshore trusts, regular liaison with offshore trustees was necessary to align tax treatment, exchange control and investment strategy.

“Comprehensive trust service is generally required for real peace of mind,” says Barrett. “Family trusts house long-term capital growth assets that may require faithful stewardship for generations. Clients looking for trust renovation therefore see the value of total professionalism.”