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Fees: A potential pitfall of using a Trust
A Trust can be a very valuable tool to help simplify the complex fields of tax and estate planning and used correctly it can do just that. However the one major downside to a trust is the perceived costs in administering such a structure. In the past the trustees would normally have been just the husband and wife who administered the trust for the benefit of themselves and their descendants with the result that the costs of administering the trust were kept to a minimum. However, after the judgment handed down in the Land and Agricultural Bank of South Africa v Parker the Master of the High Court now has to insist on the appointment of an ‘independent trustee’. The Master must do so in situations where all the beneficiaries are related and some or all of them are also the only trustees.
The appointment of a professional trustee is not necessarily a bad thing and they can play an invaluable role in administering the trust. Their input and knowledge can add significant value to the trust and they can also ensure that the trust complies with all its statutory requirements and obligations. Just make sure that the correct professional trustee is appointed as there is a general tendency to appoint an ‘independent’ trustee who has no involvement in the trust! This type of passive, independent trustee could have disastrous consequences from a legal perspective.
Professional trustees determine their fees according to two factors, namely risk and time. The greater the risk of the assets owned by the trust or the more time the professional trustee spends on the trust the higher the fee. Their fee, though, should be within reason. The flip side of the coin is that a trustee who charges a fee that is too low is probably not going to be actively involved in the trust. As mentioned above, there is no space in trust law for passive trustees.
Some professional trustees charge a fixed annual fee, however the majority of the larger trust companies charge a percentage based fee and it is this percentage based fee that concerns me. My concern with a percentage based fee is that it can result in fees being levied that are not commensurate to the risk and time spent by the professional trustee. This is best explained by means of an example.
To facilitate his estate planning requirements Mr Jones decides to establishes a family trust. Because he is familiar with their name he approaches Trust company A to request that they act as the ‘independent, professional’ trustee. Trust company A informs Mr Jones that it levies the following tariffs to act as the professional trustee:
a) A 1% + VAT acceptance fee,
b) Annual trustees fees of 1.4% + VAT of capital,
c) A 2% + VAT capital distribution fee.
Mr Jones establishes the trust and the trustees are Mr Jones, his spouse and trust company A. Mr Jones now transfers ten million rand into the trust and these funds are invested into various asset classes ranging from equities to cash. According to its fee schedule trust company A now levies its first fee and charges the client R114,000 acceptance fee. My question is – for what? There is no immediate risk to trust company A and the amount of administration required for the trust to receive the funds does not justify that kind of fee.
After the R114,000 has been taken in fees the balance of the funds are invested. Let’s assume that between the various asset classes the trust generates a 10% return on its investment (for interest purposes the opportunity cost on the R114,000 is R11,400 in lost revenue (10% x R114,000) and this lost opportunity cost will continue to be compounded over time). 5%, or R494,300, is income in nature and 5%, or R494,300, is capital growth resulting in a value at the end of the year of 10,874,000. The trustees now levy their annual trustee fee of 1.4% + VAT which amounts to R173,549 (R10,874,600 x 1.4% + VAT). The problem with this equation is that whilst the annual fee only appears to be 1.4% plus VAT when compared to the return generated (R988,600) it amounts to 17.55%. When compared to the actual income produced (R494,300) it is at an astounding rate of 35%. Is it fair and reasonable that 35% of the income generated is used to cover the trustees’ fees?
To compound matters even more, Mr Jones requests that a capital amount of R100,000 is distributed to his one child in order to assist with the payment of his grandchildren’s school fees. This distribution of R100,000 will now attract additional fees of R2,000.
My example has made use of a family trust but the sad fact is that the majority of the trusts that are subjected to these types of fees are the testamentary trusts. These are trusts formed in terms of an individual’s will to ‘protect’ assets for certain beneficiaries. With these testamentary trusts the principal planner is no longer alive to oversee matters and the beneficiaries are usually minor children or people who are not financially astute. In essence, the value of their inheritance is being eroded through fees.
My recommendation is that anyone looking to appoint an independent, professional trustee to assist with the administration of their trust should ensure that a fixed fee is agreed upon and that percentage based fees should be rejected.
Gordon Stuart is the Chief Operating Officer at Sentinel: He has a Bachelor of Commerce Degree in Law from the University of South Africa, a Certificate in Advanced Trust Law from the University of Pretoria, an Honours Degree in Tax Law from the University of South Africa and a Masters Degree in Finance and Estate planning from the University of the Free State. Gordon is a full member of the International Society of Trust and Estate Practitioners (TEP). He is also currently completing a Magister Legum (LLM) degree in Taxation. After graduating, he was appointed as group accountant for investment, I.T. and asset financing companies. He joined a trust company in Cape Town and later started Genesis Consulting (Pty) Ltd.