Issue: April/May 2007
Case for umbrella trusts
The debacle at Fidentia should not obscure some very real advantages of umbrella trusts, provided fund trustees are vigilant in the selection of their service provider. GISELLE GOULD, marketing director of Fairheads Umbrella Trust Company, explains how they work and emphasises what trustees must consider in the selection process.
When a retirement-fund member dies, leaving minor children as his or her beneficiaries, the fund trustees may decide to pay the death benefit into an umbrella or employee-benefit trust. Although the average benefit is only around R30 000 per beneficiary, careful investment and management of this amount through a trust can educate and sustain a child until he or she reaches majority age.
Such trusts are managed with the input of several parties:
Ideally, to avoid the possibility of interest conflicts, these three parties should be legally independent of each other. In practice, retirement-fund trustees choose an administrative service provider which manages the process between the three parties. Also in practice, so that advantage may be taken of specialist skills and knowledge, the administrative service provider often acts as a trustee. In line with retirement-fund industry standards, the service provider should ensure that at least 50 percent of the trustees are independent.
Shift of fiduciary responsibility
Once the trust has been established, the umbrella trust's trustees take over the fiduciary responsibility from the retirement fund's trustees.
The trust-fund administrator assumes the primary responsibility of ongoing communication with the guardian and/or beneficiaries.
Once an administrator has been appointed to manage a trust for beneficiaries, it is neither ideal nor easy to move existing trusts to another administrator. The consent of the umbrella trust's trustees is required for this to happen. As the umbrella trust's trustees have accepted a fiduciary duty for the full term of the trust, it is not something they can relinquish merely on the basis of notice from a retirement fund.
To motivate such a switch, the retirement fund's trustees would have to present a strong and provable case against the trust fund's trustees that the latter had not fulfilled their duties. This would require that the existing trust-fund trustees resign, via the Master of the High Court who regulates umbrella trusts, and then the monies in the trusts would have to be moved under jurisdiction of the new trustees.
The new trustees would have to decide afresh on a trust administrator and beneficiaries' trusts would have to be restarted on a new administration platform. This is a complex process, unlikely to serve the best interest of beneficiaries as it is administratively burdensome and costly. Retirement fund trustees should therefore follow a thorough selection process in the initial appointment of a service provider.
The buck stops with the umbrella trust trustees
If a trust administration company is acquired by a third party, the existing trust-fund trustees have the option to ensure that the new administration company can meet the administration criteria required by the trusts. If the new administration company cannot meet these criteria, the trust-fund trustees have the right to move the trust administration to an appropriate service provider. (Fidentia had acquired the Matco administration company through which the Living Hands trust fund was administered.)
Choosing a service provider
Compare the options:
Upfront checks, taking the form of selection criteria, should regularly be done on the service provider. They include these questions:
Possibly the single most important task for trustees is to monitor the service providers performance on an ongoing basis. At the minimum, insist on:
For your own peace of mind, monitor the number and nature of complaints made by guardians/beneficiaries to service providers:
If anything in your relationship with the service provider seems odd or lacking transparency, act promptly to get to the bottom of it.
For more information, you're invited to contact Giselle Gould, marketing director of Fairheads Umbrella Trust Company on (011) 883 9755 or firstname.lastname@example.org.
She'll be happy to attend to your queries.