Trustees Beware: Changing financial regulation can leave you exposed

29 Apr 2016

Jan Dawid Luttig, Fiduciary Specialist at Citadel Investment Services

In an ever-evolving family trust landscape, complacency and inertia could spell disaster for the best-laid investment and estate planning strategy.

Revelations in the latest global scandal unearthed in the Panama Papers has all manner of people – from the rich and famous to the powerful and questionable – scrambling to either cover their tracks or ensure they have acted within the law.

As has been pointed out in subsequent media reports, the act of setting up offshore trusts or accounts is not illegal per se, although such instruments are open to subversion for dubious purposes.

Given the heightened stigma now associated with offshore accounts and trusts, it is not surprising that these instruments are subject to closer scrutiny and even suspicion. Even the best-prepared trustees could therefore suddenly find themselves caught in the spotlight due to minor infractions or oversight that places them outside the bounds of the law.

Remaining within these “bounds of law” is increasingly complex, especially for South African trusts that may not have kept up with a rapidly changing legal landscape. The pace of change has accelerated over the past year as South Africa joined as a signatory to the Organisation for Economic Co-operation and Development (OECD)-led Common Reporting Standard, which aims to increase cross-border financial transparency. Added to this, the Davis Tax Committee has released draft proposals that will significantly limit tax avoidance through trusts, while Finance Minister Pravin Gordhan also announced measures earlier this year to further curb trusts’ financial advantages.

Trustees are therefore under greater pressure than ever to ensure that they are exercising their fiduciary duty to preserve and grow the assets contained in a trust. Such obligations include the responsibility to ensure that the trust structure, asset management and rules keep pace with legislative changes.

We are often called upon by clients to act as an independent trustee, given our wealth management expertise. That role can, however, only be assumed if the structure and rules of the trust meet the basic laws that govern these instruments. Our departure point is therefore to always conduct a legal audit to ensure that they are acting within the legislative frameworks. And it is not uncommon for us to raise issues that help trustees to exercise their duties to the trust more effectively.

As an example, we often find that trusts established prior to the introduction of Capital Gains Tax in 2001 have not been amended to empower trustees to minimise the impact of this levy by distributing the capital gain to beneficiaries, who are currently taxed at a lower rate.

Should the proposals by the Davis Tax Committee come into effect, this practice may soon be halted, which in itself calls for clear understanding of how these changes will impact trusts and beneficiaries in the near future.

Inasmuch as we conduct a legal audit for new clients, it is equally a service we perform on a regular basis with existing clients to verify that trustees can confidently state that they comply with existing legislation and are prepared for impending changes.

And change is the one constant that trustees and beneficiaries can always be assured of, which is best mitigated against by always being on top of a trust’s legal and fiduciary obligations.

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