In this the second part of a series on Estate Planning, Rory McFarlane of Durban attorneys Shepstone and Wylie, outlines the duties of a trustee.
In this the second part of a series on Estate Planning, Rory McFarlane of Durban attorneys Shepstone and Wylie, outlines the duties of a trustee.
Have you ever been asked by a friend or family member to be a trustee in a trust they are forming? When you confess you know nothing about trusts they promise it won't be a burden "you won't have to do anything, it's just a formality to have an independent trustee appointed".
With the increasing use of trusts for estate and investment planning there is a possibility you may be asked to act as a trustee of a trust of which you are not a beneficiary and in which you don't have an interest.
It is common for people to call on friends and family to act as trustees. Usually the friend or family member will not get paid and will play, at most, a minor role in the trust's administration.
Consequently, most trustees, unless they are beneficiaries, are nonchalant about the office they hold. They will sign whatever is put before them and when asked, will have no idea about the trust's financial position. This can have serious consequences.
Think carefully before you agree to become a trustee. You will have responsibilities and may be exposed to risks which may not have crossed your mind.
What is a trust? A trust exists when a person (the founder or settlor) hands over to another (the trustee) the control of property which is to be administered by the trustee for the benefit of another (the beneficiary).
The administration of a trust revolves around the trustee and his relationship with the beneficiaries. It is governed by a trust deed that is registered with the Master of the High Court.
Usually between three and five trustees are appointed and their names and details are recorded with the Master.
Our law requires a trustee, in the performance of his duties, to act with a greater degree of care, diligence and skill than he might in handling even his own affairs.
The following are some of the duties imposed on you as a trustee.
* Observe the trust deed
The trustee's first duty is to acquaint himself with the contents of the trust deed. (Remember the trust deed may be a Will if the trust was established in terms of a Will).
The trust deed is the constitution of the trust and the trustee must adhere to its provisions insofar as they are lawful.
* Act in good faith and jointly
A trustee must act prudently and responsibly and must not expose the trust property to any business risks. He acts in a fiduciary capacity and must protect the assets for the enjoyment of the beneficiaries. The trustees must act jointly in transactions with third parties and contractual powers must be exercised by all the trustees acting together.
* Take possession of the trust property
A trustee should make a proper and full inventory of the trust property.
* Keep the trust property separate
The trust property should not be mixed with the trustee's personal property or with the property of other trusts.
* Remain impartial
A trustee's private interests should not conflict with his duties as a trustee. All beneficiaries should be treated impartially.
A trustee should also be cautious when agreeing to the variation of a trust deed as this could have the effect of prejudicing or discriminating against one or more of the beneficiaries.
* Preserve the trust property and make it more productive
The trustee has a duty to conserve the trust property, but depending on the powers contained in the trust deed, he may be entitled to sell the property and reinvest the proceeds or he may be authorised to let it to third persons. Hemust ensure a reasonable return on the trust capital.
Failure to exercise the degree of care, skill and diligence expected of him can result in the beneficiaries holding the trustee personally liable for any losses they may suffer as a result.
A trustee is protected to a certain extent in our law. Trust creditors must, in general, sue the trustee in his capacity as trustee and are confined to executing against the trust property.
However, if the trustee has been guilty of a personal default such as a breach of trust then the beneficiary may sue him in his personal capacity. It is important that where there has been a breach of trust by one or more of the trustees, all those persons who were trustees at the time are jointly and severally liable for it.
If, as a trustee, you think decisions are being taken without your being consulted, you should consider resigning. Ensure that the Master of the High Court and the beneficiaries are given notice of your intention to resign.
If you are aware of an irregularity you cannot simply turn a blind eye and resign. Your duty extends to taking action against the other trustees by reporting them to the Master.