Transcript Document

Developments in Estate Planning
Duties of and taboos for trustees
Louis van Vuren
Authorised financial services provider. BoE Private Clients offers banking services through Nedbank Limited.
A member of the Nedbank and Old Mutual Groups. Registered Credit Provider NCRCP16/NCRCP59.
AGENDA
 Recent changes
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Abolition of sec 3(3)(a)bis and insertion of sec 3(2)(i) in the Estate Duty Act, 45 of
1955 (EDA)
Insertion of sec 9(4) in the EDA
Changes proposed in 2009 budget
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Timing and recovery of additional assessments
Personal liability for tax of the executor largely abolished
Portable R3.5 million deduction between spouses
One-year usufructuary interest schemes
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Tax cases about loan accounts
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Trusts
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Fiduciary Duty
Duties of and taboos for trustees
Recent changes
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Abolishment of sec 3(3)(a)bis and insertion of sec 3(2)(i)
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3(3)(a) included lump sums from retirement funds in “deemed property” for estate duty
Now abolished – and to prevent any argument that those lump sums could be “property”,
sec 3(2)(i) was inserted:
“3. What constitutes an estate.— (1) …
(2) “Property” means any right in or to property, movable or immovable, corporeal or
incorporeal, and includes—
(a) …
(b) …
but does not include— (a) – (h) …
(i) so much of any benefit which is due and payable by, or in consequence of membership
or past membership of, any pension fund, pension preservation fund, provident fund,
provident preservation fund or retirement annuity fund as defined in the Income Tax Act,
1962 (Act No. 58 of 1962), on or as a result of the death of the deceased.
Recent changes
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Insertion of Sec 9(4) of the EDA
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Brought in the so-called “five year rule” for assets discovered after the estate was finalised
If discovered less than five years after finalisation of the estate, new assessment taking
into consideration assets previously assessed and estate duty previously paid - (9(4)(b)
If discovered more than five years later, regarded as the only assets of the deceased –
9(4)(c)
Not very practical and subject of proposed change in 2009 budget
Change to sec 12 and abolition of sec 19 of the EDA
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Executor will now only be jointly and severally liable for unpaid taxes if fraud was involved
Sec 19 abolished – executor no longer personally liable for unpaid taxes
Changes proposed in 2009 budget
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Timing and recovery of additional assessments
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Portable R3.5 million deduction between spouses
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Five year rule applies at present – proposed to be changed to three years
Proposal to finalise assessments upon closure of deceased estate
Proposal to “double-up” the standard sec 4A abatement (R3.5m)
Motive seems to be to allow for the “splitting” of the 4A and 4(q) to the benefit of the
surviving spouse without having to use trusts, deemed costly and complex
Treasury listened – draft bill does not require all assets must go to spouse.
Trust should never have been used just to save estate duty – other very good reasons
One-year usufructuary interest schemes
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The so-called “One Year Wonder” where a lifelong usufruct in favour of the surviving
spouse is followed by a one year usufruct in favour of a child or charity
Blunt statement that it will be “closed” – no idea how as it will be difficult to distinguish the
abuse cases from legitimate uses of term usufructs. Draft bill does not include it because
Treasury realised there will be unintended consequences.
Why does Treasury still worry about estate
duty?
Only contributes
R700m
out of a revenue estimate of
R642bn
Just more than 0.1%
!!?
One wonders whether Treasury is hitting the
right spot …
Bequest of loan account to trust
• ABC Trust case and par 12(5) of the Eighth Schedule
(5) (a) Subject to paragraph 67, this subparagraph applies where a debt owed by a person to a creditor
has been reduced or discharged by that creditor—
(i) for no consideration; or
(ii) for a consideration which is less than the amount by which the face value of the debt has been so
reduced or discharged,
but does not apply where— …
• XXX Trust case and how it did (or didn’t ?) change the
situation
• How to avoid the situation:
Bequeath loan account to another person
 Bequeath cash equal or similar to loan amount to
trust
 Conditional bequest?
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Watch this space – strong arguments that ABC
judgement was incorrect
Fiduciary Duty
Trust Property Control Act, 57 of 1988
9.
Care, diligence and skill required of trustee.
(1) A trustee shall in the performance of his duties and the exercise of
his powers act with the care, diligence and skill which can reasonably
be expected of a person who manages the affairs of another.
(2) Any provision contained in a trust instrument shall be void in so far
as it would have the effect of exempting a trustee from or
indemnifying him against liability for breach of trust where he fails to
show the degree of care, diligence and skill as required in subsection
(1).
20. Removal of a trustee
(1) A trustee may, on application by the Master or any other person
having an interest in the trust property, at any time be removed from
his office by the court if the court is satisfied that such removal will
be in the interests of the trust and its beneficiaries.
Fiduciary Duty
COWAN AND OTHERS v SCARGILL AND OTHERS
[1984] 2 All ER (Ch. D)
Sir Robert Megarry V-C
At p 760
“The starting point is the duty of trustees to exercise their
powers in the best interests of the present and future
beneficiaries of the trust, holding the scales impartially
between different classes of beneficiaries. This duty of the
trustees towards their beneficiaries is paramount. They
must, of course, obey the law, but subject to that, they must
put the interests of their beneficiaries first.”
Obligations of trustees
• The duty to:
 Know and understand the contents of the trust instrument
 Have in-depth knowledge of all relevant fundamental law governing trustees which
includes but not limited to The Trust Property Act 57 of 1988, Immovable Property Act
94 of 1965, Income Tax Act 58 of 1962, Estate Duty Act 45 of 1955, Matrimonial
Property Act 66 of 1984, Marriage Act 25 of 1961, Civil Union Act 17 of 2006,
Customary Marriages Act 120 of 1998, Divorce Act 70 of 1979,
 Have a working knowledge of the law of contract, property, domicile etc.
 Be familiar with prudent investment vehicles.
 Have knowledge of Foreign Exchange Control Regulations.
 Have knowledge of the Financial Services Board and it’s reporting requirements.
 Be aware of the Domestic Partnerships Bill. Gazetted 14-01-2008.
 Keep accurate minutes of meetings, proper resolutions and comprehensive records.
 Act with care and diligence.
 Act only in the interests of the trust.
 Act impartially and independently.
A trustee may not
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Act contrary to the trust deed.
Act without Letters of Authority from the Master of the High Court.
Act otherwise than strictly in the best interests of the trust and its beneficiaries.
Disregard the rights of any beneficiary.
Fail to ascertain the rights and obligations his office entails
Endanger or expose to risk trust assets.
Intermingle trust assets with personal estate.
Treat trust property as his own.
Fail to maintain comprehensive records.
Withhold decisions taken from the other trustees and beneficiaries.
Rely on or be subservient to any dominant co-trustee.
Receive any secret benefit from the trust.
Observe anything other than utmost good faith and integrity.
Act without the necessary agreement of co-trustees.
When is the trustee authorised to act.
Simplex (Pty) Ltd v van der Merwe and Others 1996 (1) SA 111 (W)
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A trust was prepared to facilitate a transaction.
Documentation signed in haste before the trust was registered.
Trust Property Control Act 57 of 1988 (sec 6(1))
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…any person whose appointment as trustee in terms of a trust instrument . . . shall act in
that capacity only if authorized thereto in writing by the Master' The words 'shall . . . only'
are clearly of a peremptory nature, indicating an unambiguous prohibition on acting as
trustee until authorized thereto in writing by the Master
The Court cannot validate acts which are expressly prohibited by statute: to do so would
be to arrogate to the Court the power to override valid legislative Acts. The Court
accordingly does not have the power to validate a contract concluded by a trustee in
conflict with s 6(1) of the Act.
It follows that a trustee may only act once he is in possession of Letters of Authority.
Keep accurate records and act in good faith.
Doyle v Board of Executors1999 (2) SA 809 (C).
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Trust created in 1949 with Mrs D as the income beneficiary.
Her son was to become the capital beneficiary on her death.
Mrs D died in 1994 whereupon the son demanded a full and complete accounting
from the date that BoE was appointed as trustee, ie 1951.
BoE argued that it was only the income beneficiary, Mrs D, who had been entitled
to this accounting, the son only becoming entitled to the accounting as at date of
Mrs D’s death.
The Court disagreed and found that the son was entitled to have knowledge every
step of the way as to how the trust capital had been invested and re-invested.
The trustee was required in good faith to account fully to the capital beneficiary,
with supporting vouchers, for all transactions of the trust, going back to 1951.
It follows that accurate accounting records, minutes of meetings and resolutions
of decisions are vital.
It follows further that a trustee must be fully transparent at all times.
To act with due care and diligence
Sackville West v Nourse and Another 1925 AD 516
• The trustees invested portion of the trust capital in an investment which failed.
• The Court had to decide if there was negligence on the part of the trustees –
falling short of degree of care required of someone who manages the affairs of
another.
• The Court found that trustee must avoid investments which are attended by risk.
• Trustees had acted in good faith, but the Court found them negligent for not
anticipating the risks and not providing for sufficient cover against risk.
• The trustees had to make good the loss.
• Court could find no dishonesty on the part of the trustees and refused to remove
the trustees.
• In 1999 the Supreme Court of Appeal pointed out that some risk is unavoidable to
maintain a proper balance between stability and growth. (Administrators, Estate
Richards v Nichol 1999 (1) SA 551 (SCA))
To act in the interests of all beneficiaries of
the trust
 Jowell v Bramwell-Jones and Others 1998 (1) SA 836 (W).
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A will provided for the revenue of a trust to be paid to the surviving spouse
with the children of the deceased being the ultimate capital beneficiaries.
Surviving spouse appointed sole trustee.
The trustee, after consultation with advisors, entered into a scheme
whereby the revenue was maximised to the detriment of the capital
beneficiaries.
Conflict of interest between personal interest to maximise revenue and
duty as trustee to preserve and grow capital.
The trustee not given power to realise the share holding held by the trust.
The trustee accordingly acted only in the interests of one class of
beneficiary, ie the income and disregarded the capital beneficiaries.
To act in the best interests of the trust
 Tijmstra v Blunt-MacKenzie NO and Others 2002 (1) SA 459 (T)
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Mrs T settled a farm upon trust. She, her son and four grandchildren were appointed
trustees
Her son farmed the property before moving to Scotland.
The grandson thereafter took over the farming activities. The three granddaughters took no
active role.
The son, acting in concert with his children, conspired to sell the farm without consulting
with Mrs T. Mrs T found out and that’s when the fun started.
The son then fell out with his son, the farmer grandson.
The son was then found to have moved trust monies abroad and had invested these funds
together with other funds in a joint account ino himself & his wife.
The grandson was found to have substantially improved the main house ie trust property,
without the authority of the co-trustees.
The grandson was also found to have collected rentals and sold timber without accounting
to the trust for the proceeds.
The granddaughters took no active role but merely supported their father in all argument.
Mrs T condoned her grandson’s activities which she regarded as insignificant..
To act in the best interests of the trust
 Tijmstra v Blunt-MacKenzie NO and Others 2002 (1) SA 459 (T) (continued).
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The Court found :~
The son not fit to be a trustee because he had abused his position by not consulting
all trustees regarding the sale of a substantial trust asset; by moving funds from a trust
account and intermingling the funds with those of himself and his wife; and dominated
his daughters as trustees;
The granddaughters not fit to be a trustee as they allowed themselves to be
subservient to the domination of their father and therefore did not act impartially.
The grandson not fit to be a trustee as he had used trust funds without authority to
enhance the house he lived in and had failed to account for all monies due to the trust.
Mrs T also not fit to be a trustee as she failed to control the grandson’s squandering
and when the misappropriation of monies was brought to her attention, she regarded
this maladministration as irrelevant.
The trust suddenly had no trustees.
Trustees to act after consultation, but
mindful of legislation.
 Trustees to always ensure that the required numbers of trustees are in office
and that decisions are properly taken and documented.
 Thorpe v Trittenwein (2006) SCA 30 RSA
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Thorpe entered into a deed of sale to purchase as fixed property as trustee on
behalf of a trust on 8-12-2000.
The trust was already in existence and Letters of Authority issued.
The purchase was subject to the seller obtaining certain township rights.
After numerous delays these were eventually granted.
For various reasons, the seller now reneged and the trust sought to force
performance by the seller.
The trust deed provided for three trustees at all time.
Trustees to act after consultation, but
mindful of legislation.
 The Alienation of Land Act 68 of 1981
 Section 2(1) of the Act reads –
 ‘No alienation of land after the commencement of this section shall, subject to the
provisions of section 28, be of any force or effect unless it is contained in a deed of
alienation signed by the parties thereto or by their agents acting on their written authority.’
 Thorpe signed the offer as trustee on 8-12-2000. In Court he confirmed that the other
trustees had verbally approved his signing of the offer.
 His action was confirmed by a minute of a meeting held by the trustees on 3-10-2003
 The Court found that Thorpe had exceeded his powers as whilst the co-trustees may
have been in agreement to the purchase, their approval had not been granted in
writing, consequently no contract.
All trustees to act independently and must
exercise their mind.
Hoosen and Others NNO v Deedat and Others 1999 (4) SA 425 (SCA) C
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The trust deed provided for the trustees to act collectively in exercising their
functions.
One trustee became incapacitated and granted a power of attorney to his
daughter.
The Court found that the power of attorney entitled the daughter to exercise an
independent judgment and form her own view in relation to matters arising at the
meetings. She was not legally obliged to ascertain A's wishes or to give effect to
his directions, whatever she may have considered her moral obligations to be in
that regard.
Where voting at a meeting called for the exercise of a discretion it fell to her to
exercise such a discretion, thereby supplanting A's function in that respect. This
rendered her position akin to that of a duly elected trustee, which she was not. It
constituted at least a temporary abdication of A's functions in favour of a nontrustee.
A trustee must act as principle and cannot delegate his authority.
All trustees to act independently
 PPWAWU National Provident Fund v Chemical, Energy, Paper,
Printing, Wood and Allied Workers’ Union (CEPPWAWU) 2008 (2)
SA 351 (W).
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The trade union adopted a resolution seeking to impose certain obligations
and restrictions upon trustees of benefit funds.
The trade union sought disciplinary action against the trustees who voted
and acted contrary to the resolution.
The Court found that the entire resolution was unlawful, unenforceable and
that the trade union was not permitted to take any disciplinary steps.
A trustee must act in the best interests of the trust and exercises his
fiduciary obligations without direction from external sources.
When trustees go wrong.
 Stander and Others v Schwulst and Others 2008 (1) SA 81 (C)
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The trustees were being sued for breach of trust and their removal from office.
Serious allegations including dishonesty and lack of good faith were made by the
beneficiaries.
Allegations included forgery of documents, lack of transparency, bullying, lack of
proper decision making.
The trustees sought an indemnity for their legal costs to be met from the trust.
The Court found that the removal order was sought against the trustees
personally and not in a representative capacity.
If a trustee fails to act properly, he cannot expect the trust to fund his defence.
The trustees were not in Court defending the trust but defending their personal
misconduct.
Costs were therefore awarded personally against the trustees before their
removal.
One can get too focussed …
QUESTIONS
???
Trustee Duties slides based on presentation by David Knott, Head of Product of BoE Trust Ltd
Authorised financial services provider. BoE Private Clients offers banking services through Nedbank Limited.
A member of the Nedbank and Old Mutual Groups. Registered Credit Provider NCRCP16/NCRCP59.