The question can rightly be asked whether the so-called “independent” trustee or in some cases a third trustee is really necessary, or is it merely window dressing. Some advisors and even financial institutions or even SARS, do appear to be adamant about the appointment of a so-called “independent” trustee as if it is the ultimate cure for any subjective abuse of the trust by trustees. But is it really a cure and working and what are the practical and legal implications? 

One of the fundamental duties of any trustee is to always act independent and impartial when administering a trust (and exercising a discretion in terms of the trust deed). The perception often is that the mischief of not being independent comes from the family member trustees but unfortunately there are an abundance of examples where the so-called professional persons who hold themselves out and even market themselves as the “independent” trustee are equally as non-independent and simultaneously failing on impartiality also with sometimes serious conflicts of interest between their personal interests and the interests of the trust and its beneficiaries. These examples are to be found across the full spectrum of the fiduciary related professions ranging from attorneys acting as lawyer on behalf of the trust of which they are also a trustee, accountants auditing and doing the financial statements of trusts of which they are trustees and companies and their investment brokers marketing only their own product range to the trustees of the trust where they are co-trustees, to mention a few. 

The biggest impetus for the so-called “independent outsider” trustee came in 2005 when the Supreme Court of Appeal in the Parker case outlined certain requirements and qualities which are expected from trustees in order to also protect the interest of persons and institutions dealing with trusts. The court made it clear that the independent outsider does not have to be a professional person but it will be someone who with a proper realisation of the responsibilities of trusteeship accepts office to (1) ensure the trust functions properly (2) the trust deed is observed and (3) the conduct of the other trustees be scrutinised and checked. The court also emphasised that such a person will remember that failure to observe these duties can be a breach of trust which can cause personal liability. These guidelines were in essence important to separate control from enjoyment and in the process also to protect persons dealing with trusts and trustees.

However, despite the Court’s idealistic objectives with the “independent outsider” as trustee, and the efforts of the offices of the Master of the High Court for some time in the past to impose it as a requirement with the appointment of trustees, in a number of instances in practice the debility of the human being with all its weaknesses has become very evident.  With alarming regularity from the case law and court judgments since 2005 it has become clear that the “outsider” trustee who is supposed to “police” the “insider” trustee/s is no guarantee for independence or to discourage or prevent the “insiders’  to resort to the abuse of  their powers and failing of their duties. The independent outsiders involved in these cases come from the full spectrum of trustees, ranging from individuals to professional persons and /or trust companies.

The abuse is usually in the form of one of the trustees blatantly ignoring the existence of the “independent outsider” and then exercising excessive control over the trust assets to the extent of the trust becoming the erring trustee’s alter ego. The test for this kind of abuse is twofold namely firstly, the analysing of the stipulations of the trust deed and the structure of the parties, especially the trustees to the trust (the so-called juridical test) but then secondly the important further stage of analysing the actual facts  of how the particular trustee and the other co-trustees acted with and treated the trust assets in real life (the so-called factual test). The first part of the test can easily accommodate the “window dressing” where on the face value everything may seem to be perfect with the right stipulations in the deed and the right number of “independent outsider” trustees in place. However, when the facts are analysed and the proverbial can of worms is opened, then the real and determining test for independence finds its way. Thus, also from the case law it is quite clear that the the stipulations of the trust deed itself and the fact that there may be an abundance of “independent” outsider professional trustees were not good enough to prevent one of the trustees to ignore the trust stipulations and to abuse his powers. From the case law it also appears that in extreme circumstances the trust figure has been abused to the extent that it became a sham. The trust will be a sham where it does not comply with all the requirements of a valid trust for example it has the jacket and perhaps the trousers on of a trust but when the clothing on the surface is stripped some other entity such as a partnership is uncovered or just a small  heap  of an invalid nothing.

The number of trustees as such does not play a role in determining the independence of the trustees. As indicated, the proper use by the trustees of their powers and the adhering to their duties is really the point of departure. For these purposes the qualities of independence and impartiality are of utmost importance for all trustees, whether it is two spouses acting as the only trustees of their family trust or the children joining or succeeding them or whether it is the professional trustee alone or the professional with family members. In other words, for independence there is no requirement of a magical number such as three trustees. However, from a consumer protection point of view the number of trustees does play a role. When the trustees wish to borrow money from a financial institution and provided the trustees are prepared to forfeit the protection of the National Credit Act, the number of trustees can be two or less. However most if not all financial institutions apparently prefer to go the route of requiring three or more trustees when they consider a loan application by a trust. In this way the application of the National Credit Act to the loan transaction of the trust is circumvented because with three or more trustees the trust then qualify as a juristic person for purposes of the Act which fall outside the compliance (and protection for the trust) of the National Credit Act.

In conclusion, to present an answer to the question put at the beginning: For all trustees the qualities of independence and impartiality are a necessity and non-negotiable, however it appears as if the “office” or appointment of the so-called “independent trustee” is somewhat overrated and can easily amount to window dressing. Therefore for a trustee to only possess the qualities of independence and impartiality will not be enough but the ability to apply it (and to be seen that it is applied) will be required to keep the fallible human being trustee within the parameters of good trusteeship. In this way then, outsiders dealing with trusts are provided with the peace of mind that good trusteeship is exercised. However, if the fallible independent trustee is not capable to achieve this as seen from a number of recent cases, how is this to be done? Most probably in the same manner that persons dealing with companies can rely on it that directors of the company will comply with all its internal rules. In this sense it is somewhat strange that in the case of a company director who is also the only shareholder, the same separation of enjoyment and control is not required, and there is also no fuss about “independent directors”. This (and some other duties of trustees) is however a topic for another day. In the interim trustees are recommended to conduct the administration of their trusts in an independent and impartial manner, always avoiding conflicts of interests between their personal affairs and that of the trust and its beneficiaries. For more info contact the author.

*Prof Willie van der Westhuizen (willie@millers.co.za) is a director at Millers Inc and also an Extraordinary Professor at Free State University where he will present a seminar on “Where to with trusts (and its grey areas) after the Davis Tax Committee” on 12 November 2015.