Regulatory Compliance For Trusts In South Africa

What is a Trust?

A trust is a legal arrangement whereby a person or entity (i.e. the trustee), holds and manages assets on behalf of another person (i.e. beneficiary) according to terms set out by the person who created the trust (i.e. the founder). There are various types of trusts such as inter vivos (living) trusts created during the founders lifetime; and testamentary trusts, established through a will to take effect after death. Within these, trusts are also classified as vesting trusts, whereby beneficiaries' rights are fixed, or discretionary trusts where trustees have the authority to distribute assets and income.

In South Africa, the governance of trusts falls under the Trust Property Control Act No. 57 of 1988, (hereinafter the "Act") along with additional applicable laws. Trusts serve multiple functions, including overseeing family estates, safeguarding assets from potential creditors, minimizing tax obligations, and facilitating the transfer of assets in line with designated wishes.

Regulatory Structure Governing Trusts in South Africa

The Actoutlines the procedures for establishing, managing, and dissolving trusts, while also mandating that trustees operate lawfully and prioritize the welfare of the beneficiaries. In South Africa, a trust deed is the foundational legal document that formally establishes a trust and governs its operation and is a written agreement that creates a trust and outlines how it should be managed. The trust deed must be carefully drafted to reflect the founder's intentions and meet all legal requirements under the Act. Trusts in South Africa are taxable entities and are subject to the Income Tax Act No. 58 of 1962, along with other relevant tax laws, much like individuals and companies. Trustees are responsible for ensuring that the trust's tax returns are submitted on time and that all tax obligations are fully met. Beneficiaries in a South African trust have the right to receive benefits as outlined in the trust deed, access certain trust information, be treated fairly, and hold trustees accountable if they fail to manage the trust properly.

Fidicuairy responsibilities of the Trustees

Trustees have fiduciary responsibilities governed by the Act, common law, and the trust deed itself. These responsibilities require trustees to act with care, diligence, and utmost good faith in managing the trust for the benefit of its beneficiaries. Trustees must always act in the best interests of the beneficiaries, not for personal gain with personal interests in conflict with trust duties. Trustees must act independently , not merely follow the directions of others, including co-trustees or the founder. Trustees must manage the trust's assets as prudent persons would, avoiding unnecessary risk. They must keep proper financial records and ensure the trust's finances are accurately maintained. All decisions and actions must align with the trust deed, which outlines the powers and duties of trustees. Trustees must act togetherunless the trust deed provides otherwise. Trustees must protect the confidential information of the trust and its beneficiaries. The interests of the beneficiaries must always come first. Trustees must account to beneficiaries (especially income beneficiaries) and possibly to the Master of the High Court. Trustees can be held personally liable for losses caused by breach of duty. Trustees are required to maintain a clear distinction between trust assets and their own personal property, ensuring that all trust assets are easily recognizable as belonging to the trust.

Removal of Trustees

In terms of the Act, trustees can only act once formally authorised by the Master of the High Court. A trustee may resign voluntarily by providing a written notice and resignation or be involuntarily removed by the Master as per section 20(1) of the Act due to reason of insolvency, mental incapacity, misconduct, no longer being suitable to act as trustee due to a conflict of interest or mismanagement or the inability to perform duties. Beneficiaries or co-trustees may approach the High Court to request the removal of a trustee on grounds such as a breach of fiduciary duties, a conflict of interest, the best interests of the trust or beneficiaries, a breakdown in trust or relationship between trustees/ beneficiaries affecting the administration of the trust or the mismanagement of trust affairs.

Gowar and Another v Gowar and Others (2016) – The issue in question was whether a trustee should be removed due to a breakdown in relationship and a breach of fiduciary duties. The court stressed that a trustee may only be removed under section 20(1) of the Trust Property Control Act if their actions jeopardize the effective management of the trust or threaten the interests of its beneficiaries. A mere disagreement or deterioration in the relationship between trustees, or between a trustee and the beneficiaries, does not in itself justify removal. The decisive factor is whether such discord jeopardizes the trust's assets or impairs its effective administration. A trustee may be removed if they neglect their duty to prioritize the trust's best interests or engage in behaviour that disrupts its proper functioning. The court determined that the trustee's actions had undermined the proper administration of the trust, warranting their removal. It emphasized that court intervention should be exercised with restraint and only when the trust's integrity or the interests of its beneficiaries face a real and substantial threat. This case is frequently referenced to illustrate the circumstances under which courts may remove trustees and to emphasize the critical role of fiduciary duty and governance in the management of trusts.

B-BBEE and Trust Structures: The Value of Independent Oversight

Trusts are commonly used as ownership vehicles to achieve Broad-Based Black Economic Empowerment (B-BBEE) objectives. Trusts are often established to benefit a group of Black individuals (such as employees, communities, or educational institutions) and can hold shares in companies to contribute towards B-BBEE Ownership points . To qualify under B-BBEE regulations, particularly for scoring under the Ownership element, a trust must meet specific criteria as set out by the B-BBEE Codes of Good Practice.

For a trust to be recognized under B-BBEE as a legitimate vehicle for Black ownership, it must:

• " Have defined and identifiable beneficiaries (or a clearly defined class of beneficiaries).
• " Ensure that economic benefits (e.g. dividends) flow to the beneficiaries.
• " Be independently managed in the best interests of the beneficiaries.
• " Maintain fiduciary accountability and transparency.

An independent trustee is crucial, especially in trusts for B-BBEE purposes, to ensure legitimacy, unbiased administration, and adherence to legislation and the trust deed. An independent trustee ensures that the trust operates with a level of objectivity and adherence to legal and governance standards, reducing the risk of conflict of interest. The presence of an independent trustee is a strong indicator that the trust is not a fronting arrangement. Independent trustees have a duty to act in the best interests of the beneficiaries and their independence helps to ensure that decisions are made for the benefit of the beneficiaries, rather than other stakeholders.

The Takeaway

Trusts remain a flexible and powerful financial and estate planning tool. Whether established for asset protection, business structuring, estate duty planning, or wealth preservation, trusts offer individuals, companies and families a legal structure to manage and transfer wealth efficiently. However, due to evolving tax laws and increasing regulatory scrutiny, it's essential to structure and administer trusts carefully and in compliance with the South African Revenue Service (SARS) and the Master of the High Court. Understanding the nuances of trust types and their regulatory frameworks is essential for founders, trustees, and beneficiaries alike. With proper guidance and management, trusts can continue to serve as an effective vehicle for long-term financial planning in South Africa's dynamic legal landscape.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.