Sweeping new changes at the Master’s Office

Some discussions and confusion following publication of new directive.
Johan Troskie / 24 May 2017 

The Chief Master announced new changes to the administration of trusts to be administered by the various Masters’ offices, by way of a directive number 2 of 2017, issued in March this year. Some discussions and confusion followed the publication of the new directive but the Masters’ offices seem intent on implementing the new directives. The most important of the changes relates to the appointment of independent trustees.

As a new rule the Master must now appoint an independent trustee where the trust is registered for the first time with the Master and the trust is a so-called “family business trust”. The reference to “business” is unfortunate in this case as there is no requirement of trading in the trust.

A “family business trust” is a trust that satisfies all three of the following characteristics:

1. The trustees have the power to contract with independent third parties, thereby creating trust creditors; and
2. The trustees are all beneficiaries; and
3. The beneficiaries are all related to one another.

In addition, an independent trustee is required to be a person with knowledge, integrity, skill and a professional approach. The following characteristics are advised:

1. An independent trustee must be an independent outsider with proper realisation of the responsibilities of trusteeship, and who accepts office in order to ensure that the trust functions properly and that the provisions of the trust deed are observed. Such independent outsider does not have to be a professional person such as an attorney or
2. May be a professional accountant, admitted attorney, an advocate who is affiliated to the relevant professional body or association, trust companies, boards of executors or fiduciary practitioners who are members of FISA and may even be chosen from the ranks of business associates;
3. Has no family relation or connection, blood or other, to any of the existing or proposed trustees, beneficiaries or founder of the trust;
4. Must be competent to scrutinise and check the conduct of the other appointed trustees who lack a sufficiently independent interest in the observance of substantive and procedural requirements arising from the trust
5. Has no reason for concluding or approving transactions that may prove to be invalid, because he or she would be knowledgeable about the law of trusts;
6. Would not have any interest in the trust property as a beneficiary;
7. Is not disqualified by the Trust Property Control Act, 1988 from acting as a trustee; and
8. Has knowledge and experience of the business field in which the trust operates.
9. Should be a person who will not accept office without being aware that failure to observe the duties of independent trustee may risk action for breach of trust.

The Master may in certain circumstances dispense with the appointment of an independent trustee and make use of one of the following alternatives:

1. Decide to forego the appointment of the independent trustee after receiving representations from the founder showing good cause to dispense with the appointment of an independent trustee;
2. Request security; or
3. Request that financial statements be audited annually and that the auditor be instructed to inform the Master when potential harm to creditors is likely.
   It is probably likely that where the Master is faced with a request to dispense with the need of an independent trustee he is going to insist on security by the trustees and require the financial statements of the trust to be audited.

Nomination of the independent trustee

Should the trust instrument not make provision for the appointment of an independent trustee, and the Master deems it necessary to appoint such trustee in terms of section 7(2) of the Trust Property Control Act, the following persons must be consulted to obtain nominations for an independent trustee:

1. The founder;
2. The existing trustees;
3. Beneficiaries with a vested right in the trust

The Master is not bound by the nomination and may appoint a suitable person other than those nominated. Masters are advised in the directive to do so only in exceptional circumstances.

Resignation of the Independent trustee

If the independent trustee was appointed in the trust deed and the trust deed makes provision for the replacement of such trustee, the provisions in the trust deed for such replacement should prevail, and the Master should authorise such replacement trustee provided such person meets the requirements of independence.

Where the independent trustee resigns after being appointed by the Master, he may, if he or she considers it desirable, replace the independent trustee. The replacement trustee should be identified in the same manner in which the independent trustee who is to be replaced was identified.

The independent trustee’s remuneration

An independent trustee is entitled to a fee as any other trustee in that trust. If the trust deed contains a prescription regarding fees, the trustee is entitled to that fee. If the trust deed does not specify the fee to which the trustee is entitled, and the parties cannot agree on a fee, the Master will have to use section 22 of the Trust Property Control Act, 1988 to determine a reasonable fee. In Griese v Bonkkorp Trust Bpk 1990 (2) SA 328 (0) the court provided guidance to the Master when determining the trustee’s fee.

Given the direction in which trust administration and the focus on trusts in SA are heading, it is advisable therefore for the settlor to consider appointing independent trustees from the start, a step which will seem to avoid an interference by the Master in the administration of the trust.

Johan Troskie is an international tax lawyer and Master Tax Practitioner at JMT & Associates.