Many believe that the recent greylisting measures introduced compliance requirements for trusts. Picture: Supplied.
Many believe that the recent greylisting measures introduced compliance requirements for trusts for the first time. To quote an accountant who has served as independent trustee and accountant on hundreds of trusts for the past 20 years: “Luckily, in the past, we were not really required to do anything. It is only now that we have to start doing something. So I will start now, going forward.”
Resolutions, specifically, were traditionally neglected, and if they were prepared, they were typically prepared by the accountant in retrospect after they completed the financial statements to support the transactions in the financial statements, on average, seven years later.
When trustees are confronted, they may experience difficulty in explaining to the South African Revenue Service (Sars) and creditors that they have actively been managing the trust. What happens if a trustee resigns or dies during the year before all the resolutions are signed (ratified) by all trustees? You may be caught off guard by Sars, which may result in additional taxes being paid. You may even lose the trust assets to creditors or be held personally liable for your actions or lack thereof.
Which transactions require resolutions?
According to the courts, a resolution is technically required for each transaction, as they have held that a trust operates on the resolutions of its trustees (“Joint Action Rule”), and it is important that they are recorded. This legal basis underscores the necessity for trustees to adhere to this requirement.
Smaller, recurring type transactions, such as bank charges, interest, trustee fees, etc, can be combined into a single resolution to reduce the number of resolutions. While trustees are allowed to authorise one or more of them to act on their behalf, it is a question of fact in terms of whether they have done so – ie, was the necessary resolution done and duly signed by all trustees? (Costa v Arvum Exports case of 2017).
Specifically for property transactions, if one or more trustee(s) is (are) going to sign an agreement of sale and/or the conveyancing documents required to give effect to the transfer of the property, they must be authorised to do so by a resolution that has been signed by all of the other trustees (Thorpe v Trittenwein case of 2007).
Section 2(1) of the Alienation of Land Act 68 of 1981 provides that no alienation of land shall be of any force or effect unless it is contained in a deed of alienation signed by the parties thereto, or their agents acting on their written authority. Where a trust has more than one trustee, any deed of alienation entered into by that trust would require the signature of all the trustees, as trustees as regarded as “agents” in terms of the Alienation of Land Act. A resolution duly signed may authorise one or more trustees to sign on the trustees’ behalf.
When is a resolution valid?
Trustees must always adhere to the requirements of the trust deed. It is interesting that many trustees have never seen the trust deed. Administrative procedures, such as calling and conducting trustees’ meetings, voting rights, decision-making and dispute resolution procedures, and any veto rights, may be provided for in the trust deed. Failure to achieve this may indicate an ‘alter ego trust’ (an extension of oneself).
Often, the heading of a so-called resolution is a ‘give-away’ when it states that it was taken “at a trustee meeting”, when it is blatantly clear that no actual meeting was held, such as when one of the trustees was overseas, in hospital, on holiday, etc. Such ‘copying and pasting’ of standard wording may get trustees in trouble. Rather state that it is a round-robin resolution, obviously only if the trust deed allows for such a method of decision-making.
All trustees must act together when making decisions that affect the trust, not simply the majority of the trustees. Even though a trust deed may allow decisions by majority vote, all trustees have to sign resolutions. It is not the majority vote but the resolution (signed by the entire complement of trustees) that binds a trust. A trust operates on resolutions and not on votes.
In the Steyn v Blockpave case of 2011, it was decided that when dealing with third parties, even if the trust instrument states that a decision may be made by the majority of trustees, all the trustees must be involved in the decision. All the trustees must be informed of all decisions to be taken. If a trustee is deliberately excluded from the decision-making process, they are entitled to claim that the transaction authorised by the other trustees is void on the basis that there was no notification of a decision to be taken or involvement by them in the decision-making process. The court emphasised that a trust functions through its appointed trustees and that its lack of legal personality requires all trustees to act together for and on behalf of the trust.
This requirement was taken to a new level with the Shepstone & Wylie attorneys and the trustees of the Penvaan Property Trust case of 2023, where the Supreme Court of Appeal held that “in the case of trusts, joint and unanimous conduct in the alienation, handling and management of trust assets was a prerequisite”. That is a dangerous statement, as the minority trustee/s can basically use this mechanism to veto decisions of trustees, basically similar to a ‘casting vote’. Sadly, as it stands, the legal precedent of this case applies, and trustees have to ensure resolutions are signed by all trustees for them to be valid.
Can trustees ratify transactions?
Ratification is an ordinary principle of the law of agency. It happens retrospectively when authority is given to an agent who lacked such authority when a transaction was concluded (Meijer v Firstrand Bank Limited case of 2013). The Court held in the Hyde Construction CC v Deuchar Family Trust case of 2015 that the principle that the trustees must ‘act jointly’ is satisfied by the ratifying conduct of the full body of trustees.
The board of trustees can, however, only ratify a transaction if:
A dominant trustee who behaves in such a way that other trustees are excluded from participating in decisions (and acts as such on an ongoing basis), and who requires the other ‘puppet’ trustees to sign a pack of resolutions that have already been implemented by such dominant trustee, may be indicative of an ‘alter ego trust’, which exposes trust assets.
Take care
Be careful about trustees’ obligation to record their interactions with “accountable institutions” on a real-time basis. Even though transactions may be ratified later, trustees may overlook the requirement to keep a record of their interactions with “accountable institutions” in real-time. Failing to do so may result in a fine of R10 million and/or five years imprisonment.
Be careful about Sars’ requirements. From the 2023 tax year onwards, trustees must submit all resolutions supporting the trust’s transactions together with the trust tax return. Sars made it clear that they will employ artificial intelligence to determine the actual date of preparation of a resolution. Trustees and tax practitioners assisting their clients are warned not to create these resolutions retrospectively and ‘backdate’ them. It will get themselves and their clients in trouble.
Consequences of a lack of resolutions
Transactions without valid resolutions may be disregarded by the court and Sars. It may also be indicative of an alter-ego trust, which means that one or more trustees are treating the trust assets as if they belong to themselves. This may result in the courts disregarding the trust form, which exposes the trust assets to a soon-to-be-ex spouse, creditors, banks, etc. In the First National Bank v Britz case of 2011, the Court held that the trustees neglected their duties by allowing the beneficiaries to occupy trust property without a resolution approving that.
Conclusion
It is important to demonstrate that the trust is managed as a separate entity from the founder and its beneficiaries. The ‘cost’ of a lack of proper ongoing trust administration may be significantly higher than the effort required to administer the trust on an ongoing basis. Trustees should constantly engage one another, record their decisions and employ the assistance of a professional trust service provider who employs proper systems to demonstrate compliance to protect the trust and its beneficiaries.
* Van der Spuy is a chartered accountant with a Master’s degree in tax and a registered fiduciary practitioner of South Africa®, a Chartered Tax Adviser, a trust and estate practitioner and the founder of Trusteeze®, the provider of a digital trust solution.
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