An alter-ego trust can be described, in simple terms, as a trust which is treated as an extension of one of the trustees, and therefore the trust assets are treated as the assets of the trustee in his or her personal capacity. If a trust can be regarded as an alter-ego trust, it can have negative implications as it can cause courts to treat the assets of the trust as the personal assets of the trustee which can be claimed by creditors or even future ex-spouses during divorce proceedings. It is, therefore, very important that trustees avoid any type of indication that the trust could be an alter-ego trust.
- WAYS TO AVOID AN ALTER-EGO TRUST
In order to avoid an alter-ego trust, there are certain precautionary measures that should be taken, not only in the exercising of obligations and powers of trustees but also in the way the trust deed is drafted.
- AN INDEPENDENT TRUSTEE DEMONSTRATES THAT THE TRUST IS A GENUINE ONE
- An independent trustee should be appointed to ensure that the trust is run correctly and is administered properly and in terms of the trust deed. Such independent trustee should have professional expertise and skill that will assist the other trustees in decision-making and in administering the trust. Legal practitioners have valuable knowledge and experience to help avoid the risks and assist with managing the trust assets. The independent trustee cannot be the founder or a beneficiary of the trust or a family member of one of these persons.
- The independent trustee ensures that all beneficiaries of the trust are treated impartially and fairly.
- As indicated in Land and Agricultural Bank of South Africa v Parker, an independent trustee will help to ensure that there is a real separation of ownership or control of the trust assets from their enjoyment and use.
- METICULOUS AND SPECIFIC DRAFTING OF THE TRUST DEED
- It is important that the trust deed be drafted meticulously and specifically in line with the needs of the estate planner. However, any terms giving the founder or a trustee the power to amend the trust deed without consent of the other trustees or that vests other forms of control, such as veto powers, must be avoided at all costs. Where such terms are already present in the trust deed, the founder and/or trustee should avoid taking decisions in terms of such a clause, as this would be a clear sign of an alter-ego trust. The founder and trustees should also seriously consider amending the trust deed to remove these clauses.
- PERSONAL ASSETS ARE NOT ASSETS OF THE TRUST AND TRUST ASSETS ARE NOT PERSONAL ASSETS
- It is immensely important that a trustee avoids, as far as possible, transferring his or her personal assets to the trust and dealing with them in a fraudulent manner as if they are the assets of the trust. As in the case of Mills v Mills  2 All SA (SCA), it could be assumed and accepted by a court that the trustee acted in this way in order to avoid obligations to creditors or his or her soon-to-be ex-spouse, which will result in courts treating trust assets as the personal assets of the trustee.
- It is therefore important that, where assets are moved out of the estate of the founder or donor, the assets be moved out properly and for legitimate business reasons. A proper transfer enables trustees to avoid other parties trying to prove that there is no proper separation between the ownership of the assets and the enjoyment thereof.
- The trustees should always avoid treating trust assets like personal assets, by for instance using them without payment or including them in personal financial statements. Any transactions through which a trustee will benefit as beneficiary must always be properly recorded and substantiated with resolutions taken by all the trustees.
- Another manner to ensure that the trust is not regarded as the alter-ego trust is to ensure that the trust financials and asset registers are kept up to date, so that it is always clear what is regarded as trust assets and what is regarded as personal assets.
- ACT IN THE INTEREST OF AND FOR THE BENEFIT OF THE TRUST AND ITS BENEFICIARIES
- It is of utmost importance that a trustee always act impartially and in the best interest and for the benefit of the trust and the beneficiaries of the trust.
In conclusion, the general obligations to be followed in order to avoid an alter-ego trust are as follows:
- A trustee should not mix trust assets with his or her personal assets and the trustees must keep separate checking accounts and investments;
- A trustee should never use trust assets for his or her own benefit unless it is authorised by the trust and substantiated with proper trust resolutions;
- All beneficiaries of the trust should be treated the same and trustees should therefore never favour one beneficiary over another (unless authorised by the trust);
- Trust assets must be invested in a prudent (conservative) manner, in a way that will result in reasonable growth with minimum risk (unless otherwise provided in the trust deed);
- Trustees must keep accurate records, file tax returns and report to the beneficiaries as required by the trust deed;
- The trust deed must be meticulously drafted and must exclude clauses enabling unilateral decisions by trustees or the founder of the trust; and
- An independent trustee must be appointed.
As a starting point in establishing whether your trust can be considered to be an alter-ego trust we invite you to make use of our Smart Questionnaire as part of our firm’s Tech Enabled Law by –
- Click on the link – https://sstlaw.n-abler.biz/Home/Selection; or
- Visit the Tech Enabled Law page on our website at sstlaw.co.za
Should you further be uncertain about your estate planning, please feel free to contact our office to consult with one of our experienced fiduciary specialists.
LLB; LLM (Estate Planning)
Fiduciary and Commercial Department
Phone: 012 361 9823