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Umbrella Trusts can be a saving grace

02 July 2007

In the event of your death, an umbrella trust, created to protect your children's benefits, which is either linked to a pension, provident or preservation fund, a retirement annuity or a group life insurance scheme (hereafter referred to as "fund") can be a saving grace if it is correctly administered within a safe and secure environment.

Recent incidents where widows and orphans have been left penniless following the mismanagement of funds in an umbrella trust have come under light.

This begs the question: How does one avoid such a disaster, or ensure a safe and protected scenario within an umbrella trust?

Berrie Botha, Chief Executive of Sanlam Trust, explains:

What is an umbrella trust?
According to the Pension Funds Act, when a member of a fund dies, the trustees of that fund must ensure that the benefits are "fairly and equitably" allocated to the beneficiaries. In the event of those benefits being allocated to minors, the trustees are expected to take their (the minors') best interests into account when making a decision on:

* Whether the benefits should be paid to the guardian?
* How the benefits should be paid e.g. in monthly instalments by the fund?
* Whether it is best for the benefits be paid into a trust and managed on behalf of the minor until he/she reaches an independent age?

Unlike other trusts where a trust deed needs to be set up for each child, an umbrella trust can save you money because the fund usually sets up one trust deed for all the beneficiaries of the entire fund. Individual trust accounts are, however, opened for each child.

How does it work?
The trustees of the fund will notify a trust company in writing of their decision to create an umbrella trust.  The trust company will then draw up a trust deed and present it to the trustees for approval and signing, which is then registered with the Master of the High Court. 

After a member of a fund dies the trustees have to decide if the benefits allocated to minors must be paid into a trust.  If so, they would need to complete a trust information form, which should clearly illustrate how the benefits need to be paid out and managed.  This form, along with details of the benefits, then has to be passed on to the trust company. The trustees of the fund also need to instruct the administrators of the fund to pay the money into the newly established trust.  

What are the benefits of an umbrella trust?
* If managed by a reliable trust company, an umbrella trust can be used to protect your loved ones' allocated benefits.  For example, what happens if the parent who is left behind to take care of the children is suddenly unable to carry out his/her necessary duties?  What if the person he/she remarries does not form a much-needed bond with the children?  In this instance, an umbrella trust is particularly geared and expected to keep the children's money safe and to protect their benefits.

* You can save on the cost of registering individual trusts for each beneficiary.

* If planned carefully, umbrella trusts can offer several tax savings.

* Both members and dependents enjoy peace of mind that all benefits managed and invested by a reliable trust company will be used exclusively in the best interests of the dependants.

* According to the needs of each individual, monthly maintenance can be paid to the surviving parent or guardian for taking care of the minor dependants.

* Financial provision can also be made for the education, medical care and general well being of dependants.

* Any ad hoc requests such as payments to schools or doctors that are submitted in writing and accompanied by the necessary proof are paid directly to the service provider to prevent fraud.

* Once the trust is terminated (in accordance with the trust deed), the balance of the capital, together with any accumulated income, should be paid into the beneficiary's account.

What to look out for to ensure that your umbrella trust is in good hands?

Trust deed:
This document must be carefully studied and should provide a clear understanding of what the trustees' duties/powers entail.  You should seek the advice of a legal expert to help you with this. The trust deed should also include details of:

* The application of income and capital
* Audits
* Security
* Remuneration of the trustees
* Indemnification of the trustees
* Termination of the trust etc.

(Fund trustees must always ensure that they fully understand and are comfortable with all the necessary stipulations of the trust deed).

Service-level agreement:
This document provides clarity on the responsibilities of the administrator's services, their procedures, delivery times, conditions of termination, confidentiality and indemnity.  It is also advisable to ensure that the trust deed or service-level agreement does not include a lock-in clause, which stipulates, that at the termination of the agreement, trust assets cannot be transferred to another trust or administrator.

Details of directors:
The directors of the trust company should not be the trustees of the trust. 

Profile of the trust company:
Investigate how long the company has been operating.  For example, do they have the back-up of a holding company?

Regular audits:
By law, a trust company should always undergo regular internal and external audits. Ascertain whether the company has sufficient internal quality and control procedures in place. 

It is important to bear in mind that trusts are not obliged to submit financial statements to the authorities and it is therefore extremely necessary to check that regular audits are being done.

Financial statements:
Request the details of the trust company's financial statements for the past five years and seek the advice of a qualified financial auditor to assist you with understanding the company's financial position. 

Investments:
Make sure that your trust company makes use of different investment service providers with a sound investment strategy and policy in place.  For example, does the trust company invest all the money of an umbrella trust into its own investment solutions?  No trust is bound to use one specific investment service provider.  In other words, trust companies or trustees should only invest in the best available options that are in the best interests of the dependents.

Trustees:
Umbrella trusts are managed by trustees.  It is the responsibility of trustees to always act in the best interests of the beneficiaries.  Under no circumstances may trustees make secret profits or speculate with trust assets.  It is the trustees' responsibility to ensure that they have the necessary expertise to fulfil their roles and are legally bound to execute the conditions of the trust deed. 

In conclusion, although a trust offers solutions for many situations, it does not necessarily mean that it is a solution for all problems. The implementation of a trust must be fully understood by the fund trustees.  It is particularly important for trustees to seek advice from a reputable and experienced trust company to assist them with decision-making.

By Berrie Botha: chief executive of Sanlam Trust

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