A family trust is a popular and effective estate planning tool, enabling individuals to protect their assets, provide for their families, and ensure smooth succession planning. However, trustees who manage the trust’s affairs bear significant responsibilities. Properly executing these duties requires not only a deep understanding of the trust deed but also compliance with relevant legislation and sound decision-making skills.

This article provides practical guidelines for trustees of family trusts to help them fulfil their obligations effectively.

1. Understand the Role and Responsibilities of Trustees:

Before accepting the role, potential trustees must clearly understand their duties and responsibilities. A trustee holds a fiduciary position, meaning they must act in the best interest of the beneficiaries at all times, avoiding conflicts of interest. Their main duties include managing the assets of the trust, making decisions according to the terms of the trust deed, and ensuring compliance with legal and tax requirements.

Key fiduciary duties include:

• Duty of care: Trustees must act with reasonable care, skill, and diligence.
• Duty of loyalty: Trustees must always prioritise the beneficiaries’ interests over their own.
• Duty to avoid conflicts of interest: Trustees should not place themselves in a position where their personal interests conflict with their duties as a trustee.

A thorough understanding of the trust deed is crucial, as it outlines the trustees’ powers, obligations, and limitations. If trustees are uncertain about their responsibilities, it is advisable to seek professional advice.

2. Know the Legal Framework

In South Africa, family trusts are governed primarily by the Trust Property Control Act 57 of 1988. The trustees must familiarise themselves with this Act, which outlines essential requirements for administering a trust. In addition, they must comply with various other laws, for example:

• The Income Tax Act, as trusts are taxed entities;
• The Estate Duty Act, which can impact succession planning;
• The Companies Act (where applicable), if the trust holds shares in companies;

3. Ensure Proper Trust Registration and Record-Keeping

One of the first tasks for trustees is ensuring the proper registration of the trust. This involves:

• Registration with the Master of the High Court: Upon the establishment of the trust, the trustees must ensure that the trust is registered with the Master’s office. The trust will receive a registration number, which will be used for all future correspondence. It is advisable that the Trustees delegate this task to an expert because the wording of the Trust deed is of utmost importance in future. The Trustees may only start their operations after the letter of authority is issued.

• Opening a bank account: All funds belonging to the trust must be kept in a separate bank account. Trustees must not intermingle trust assets with personal funds or the funds of other entities.

• Maintaining accurate financial records: Trustees are required to keep detailed financial records of all transactions conducted on behalf of the trust. This includes annual financial statements, tax returns, and records of distributions to beneficiaries.

4. Exercise Prudence in Managing Trust Assets

Trustees must manage the trust’s assets carefully, acting prudently and in the best interest of the beneficiaries. Asset management should be guided by both the provisions of the trust deed and sound investment principles.

Key considerations include:

• Diversification of investments: Trustees should aim to diversify the trust’s portfolio to minimise risks and optimise returns.

• Regular review of investments: Trustees should periodically review the trust’s investments to ensure they are still appropriate given market conditions and the needs of the beneficiaries.

• Avoid speculative investments: Trustees should avoid making high-risk or speculative investments unless expressly authorised by the trust deed and after thorough consultation with professionals.

5. Hold Regular Trustee Meetings

To ensure transparency and accountability, trustees must hold regular meetings to discuss the trust’s affairs and make collective decisions. These meetings should be documented with proper minutes that reflect the decisions taken. It is essential that:

• All trustees are informed of and invited to each meeting.
• Trustees ensure that decisions are made jointly, according to the guidelines as specified in the trust deed.
• All discussions and decisions are recorded in writing.

This practice ensures that the trust administration process is well-documented and provides a clear record in the event of disputes or challenges.

6. Avoid Conflicts of Interest

As fiduciaries, trustees must avoid conflicts of interest. This means that trustees should not participate in any decisions where they might have a personal interest that conflicts with their duty to the trust. If such a situation arises, the trustee must disclose the potential conflict and recuse themselves from the decision-making process. Some trust deeds may contain specific provisions regarding how to handle conflicts, which trustees must follow.

Trustees who breach their fiduciary duty by acting in their own interest or that of third parties could face personal liability for any resulting losses to the trust.

7. Distribute Income and Capital Prudently

The trust deed will usually outline the terms under which the trustees may distribute income or capital to the beneficiaries. Trustees must follow these instructions carefully and ensure that any distributions are made in a fair and equitable manner.

Trustees must consider the following:

• The needs of the beneficiaries: Trustees must assess the current and future needs of the beneficiaries when making distributions.

• Long-term sustainability: Trustees should ensure that distributions do not deplete the trust’s assets to the detriment of future beneficiaries.

• Tax implications: Distributions may have tax consequences for both the trust and the beneficiaries. Trustees should consult with tax professionals to ensure compliance with applicable tax laws and to optimise the tax position of both the trust and the beneficiaries.

8. Tax Compliance

Family trusts are separate legal entities for tax purposes and must comply with all relevant tax laws. Trustees are responsible for ensuring that the trust files annual tax returns and that taxes on trust income are paid on time. South African trusts are taxed at a rate of 45% on retained income, so trustees must be mindful of this when managing the trust’s finances.

The Income Tax Act includes provisions that govern the tax treatment of trusts, including the attribution rules and the conduit principle. Trustees should seek expert advice to navigate these complex rules effectively and ensure compliance.

9. Seek Professional Advice When Necessary

Managing a family trust involves complex legal, financial, and tax considerations. Trustees are not expected to have all the expertise required to handle every aspect of trust administration. When necessary, trustees should seek professional assistance from accountants, attorneys, and financial advisors. Doing so ensures that trustees fulfil their duties correctly and minimises the risk of errors or legal challenges.

10. Conclude the Trust Properly

Trustees must also know how to wind up a trust once it has fulfilled its purpose. This involves ensuring all liabilities are settled, assets are distributed to beneficiaries, and proper accounts are prepared and lodged with the Master of the High Court. Trustees should follow the procedures outlined in the trust deed for winding up the trust and consult legal professionals to ensure compliance.

Conclusion

Serving as a trustee for a family trust is a role that carries significant responsibility. Trustees must act in the best interest of the beneficiaries, manage trust assets prudently, and comply with all legal and tax requirements. By following the guidelines outlined above, trustees can ensure that they carry out their duties effectively and minimise the risks associated with trust administration. In cases of uncertainty, seeking professional advice is key to successfully managing a family trust.