Don’t stumble over your pebbles…
“Nobody trips over mountains. It is the small pebble that causes you to stumble.” – Anonymous
Now that you have your trust structure set up, you might think you have cleared your path of all obstacles on your road to become untouchable. Yes, setting up your trust structure is the first step in the right direction. There is, however, one imperative principle which most trustees overlook and stumble over.
Control versus ownership. These concepts are surely not foreign to you, but let’s have a closer look at the actual meaning and what these concepts must look like in practice.
We have been brought up in a society where we crave control since we believe it is the only way to hold on to and to build our wealth. Today I want to challenge you to lay down that way of thinking as I take you through a couple of critical points.
When an inter vivos or “living” Trust is created, the Founder is required to hand over control and ownership of property to the Trustees to control the assets for the benefit of the beneficiaries, in achievement of a specific objective.
There is an important principle coming into play, called substance over form. This principle does not prevent a Founder from acting as a co-Trustee of a Trust, but requires the Founder to hand over some control. It is all about the intention of the Founder. “Form” refers to what the management of the Trust appears at first glance or on paper, i.e. there is a resolution for every transaction, signed by all the Trustees. However, this does not mean all the Trustees participated in the decision making, thus jointly controlling the Trust assets. In order to prove a Trustee is there in “substance”, the Trustees need to discuss transactions and all Trustees need to partake in the decision making, thus the Independent Trustee must also apply its mind and be given the opportunity to voice its opinion as to whether or not it will be in the Beneficiaries’ best interest to enter into a transaction.
Let me illustrate this by way of example:
The Trust has one Trustee, who is also the Founder, and an Independent Trustee. The Founder/Trustee comes across a property. The asking price is way below market value and there are many other interested buyers. The agent urges him/her to make a quick decision not to miss out on this opportunity. He/she decides to make an offer then and there by signing an offer to purchase on behalf of the Trust.
This is a great example to prove there is no “substance” although there might be “form” (if the Trustees sign a resolution authorising this purchase). To apply substance, the Trustee/Founder should have contacted the Independent Trustee, advised them of the opportunity to invest, discuss if the Trust will be entering into any transactions at that point in time, how the Trust will be paying for the property and what the purpose of the property would be. If the Trustees both agree that, after taking the above into consideration, it will be in the best interest of the Beneficiaries, they resolve this decision by way of resolution and then authorise one Trustee to sign the offer to purchase on behalf of the Trust.
In the matter of Van Zyl v Van Zyl and Others 2014 JOL 31973 (GSJ) the Court held that the Trust assets should in fact be seen as the Founder’s personal assets for the purpose of a divorce action. The reason for this ruling was that the Trustees could not prove that they were all (Independent Trustee included) actively involved in the decision making.
In Niewoudt and another NNO v Vrystaat Mielies (Edms) Bpk 2004(3) SA486 (SCA) the Court stressed the importance that all decisions of substance should be reached unanimously by the Trustees since the Trustees are jointly in control of Trust assets.
The Trustees should be able to prove substance over form, no matter what the transaction looks like on paper. It is important to choose the right Independent Trustee who has the following qualities:
– Independent person who knows the fiduciary responsibility of trusteeship;
– Is preferably a professional and affiliated to the relevant professional body, i.e. FISA;
– Is not connected by blood or other to the trustees or beneficiaries of the founder;
– Has no financial interest in the trust;
– Has knowledge and experience in the trust administration field;
– Is competent to examine the conduct of the other trustees;
– Is not disqualified by the Trust Property Control Act from acting as Trustee.
Now that you have your structure in place and you have your professional Independent Trustee, make sure all the Trustees have regular contact to discuss the current status of Trust assets and investments and future opportunities to increase the asset portfolio – allow each Trustee to voice their opinion and then make proper unanimous decisions which are in the best interest of the Beneficiaries.
Don’t stumble over the fear of sharing control. Choose today to roll this pebble out of the way!
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