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Developments in Estate Planning Duties of and taboos for trustees

Developments in Estate Planning Duties of and taboos for trustees. Louis van Vuren. AGENDA. Recent changes 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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Developments in Estate Planning Duties of and taboos for trustees

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  1. Developments in Estate PlanningDuties of and taboos for trustees Louis van Vuren

  2. AGENDA • Recent changes • 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 • 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 • Tax cases about loan accounts • Trusts • Fiduciary Duty • Duties of and taboos for trustees

  3. Recent changes • Abolishment of sec 3(3)(a)bis and insertion of sec 3(2)(i) • 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.

  4. Recent changes • Insertion of Sec 9(4) of the EDA • 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 • 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

  5. Changes proposed in 2009 budget • Timing and recovery of additional assessments • Five year rule applies at present – proposed to be changed to three years • Proposal to finalise assessments upon closure of deceased estate • Portable R3.5 million deduction between spouses • 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 • 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.

  6. Why does Treasury still worry about estate duty? Only contributes R700m out of a revenue estimate of R642bn Just more than 0.1% !!?

  7. One wonders whether Treasury is hitting the right spot …

  8. 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? • Watch this space – strong arguments that ABC judgement was incorrect

  9. 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). • 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.

  10. 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.”

  11. 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.

  12. A trustee may not • 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.

  13. When is the trustee authorised to act. Simplex (Pty) Ltd v van der Merwe and Others 1996 (1) SA 111 (W) • 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)) • …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.

  14. Keep accurate records and act in good faith. Doyle v Board of Executors1999 (2) SA 809 (C). • 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.

  15. 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))

  16. To act in the interests of all beneficiaries of the trust • Jowell v Bramwell-Jones and Others 1998 (1) SA 836 (W). • 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.

  17. To act in the best interests of the trust • Tijmstra v Blunt-MacKenzie NO and Others 2002 (1) SA 459 (T) • 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..

  18. To act in the best interests of the trust • Tijmstra v Blunt-MacKenzie NO and Others 2002 (1) SA 459 (T) (continued). • 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.

  19. 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 • 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.

  20. 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.

  21. All trustees to act independently and must exercise their mind. Hoosen and Others NNO v Deedat and Others 1999 (4) SA 425 (SCA) C • 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 non-trustee. • A trustee must act as principle and cannot delegate his authority.

  22. 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). • 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.

  23. When trustees go wrong. • Stander and Others v Schwulst and Others 2008 (1) SA 81 (C) • 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.

  24. One can get too focussed …

  25. QUESTIONS ??? Trustee Duties slides based on presentation by David Knott, Head of Product of BoE Trust Ltd

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