Some Topical Issues relating to Trusts

1

Some Topical Issues relating to Trusts

Presented by

Professor Walter GeachCA (SA) BA LLB (Cape Town) MCOM FCIS

Professor in the Department of Accounting, University of the Western Cape

2

Interesting New Cases and IssuesInteresting New Cases and Issues Amending a trust deed: When invalid Importance of a trust deed: Cannot ignore contents Abuse of trust form: Piercing the trust form Resignation of trustees Importance of the common law Sleeping trustees Rights of beneficiaries with contingent rights

3

Interesting New Cases and IssuesInteresting New Cases and Issues Importance of trustees’ resolutions Essential for trustees to act together Powers of the Master and discretion of the Master Trustee must have the prior written authority of the Master

to act Substance over form

4

Substance over Form

5

Formation of the trust: initial donation/contribution Loans and loan agreements Partnership or trust or ? Alter ego trust (i.e. no trust)? Sale agreements Lease agreements ‘Letter of wishes’

Substance over Form: Compare with the Provisions of

the Companies Act 2008

6

‘effect will be given to unexpressed agreements and tacit understandings’

Substance

7

A TRUST

B TRUST

RESPONDENTS: BENEFICIARIES WITH THEIR CHILDREN

FNB v Britz and Others (20 July 2011)

RESPONDENTS: TRUSTEES


Owned property

8

The trustees claim that they have leased the property from the B Trust

They have however • failed to produce any lease agreement

• failed to furnish the relevant details of such lease agreement

• failed to justify their tenancy on the property of the trust


9


Conclusion 1: There is no such lease agreement

Conclusion 2: The Respondents use the property ostensibly

owned by the trust, as their own personal property

Conclusion 3: The Respondents do not regard the immovable property as the separate property of the trust

10

Conclusion 4: by failing to make sure that there is in existence a lease agreement between the trust and the respondents

the trustees have neglected their duties to safeguard the property, for the benefit, and interests of the beneficiaries


11

Substance:The Importance of

the Trust Deed

12

Section 19 If a trustee fails to perform any duty imposed by the trust instrument,

• the Master or

• any person having an interest in trust property can apply to court for an order directing the trustee to perform such duty

The Importance of the Trust Deed

13

Section 19

vs

Compliance Notice issued by Commission

14

Section 20 (4) Section 20 (4) Shareholders Directors A trade union representing employees

• may take proceedings to restrain the company from doing anything inconsistent with the Act

This for example gives employees rights to participate in the

governance of companies

Companies Act:Enlightened Shareholder Approach

15

A trust deed is a trust’s “constitutive charter”A trust deed is a trust’s “constitutive charter” Outside the provisions of a trust deed, the trust cannot Outside the provisions of a trust deed, the trust cannot

be bound be bound

Section 20 (6)

Each shareholder has a claim for damages against any person who

intentionally, fraudulently or due to gross negligence

causes the company to do anything inconsistent with—

................................(b) a MOI limitation, restriction or qualification

unless that action has been ratified by the shareholders

16

Company

16

17

Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)

It was argued that the preamble amounts to no more than ‘a vague and loose statement’

It was argued that this vague statement was without any meaning and was never intended to form part of the document

It was argued that it unintentionally found its way into the draft

18

Trusts and Other Entities

19

Planning and Choices1. Different types of company: New Companies Act

2. Close corporations

3. Trusts

4. Combinations: For example trusts owning shares or members’ interests

5. Tax issues

20

1. Trustees hold an office: Powers and duties

2. Beneficiaries get rights

3. There is a separation of control/ownership from benefits: a person has divested himself of property

4. Certain laws apply depending where the trust is (a) formed (b) administered (c) managed

5. The trust deed applies

6. The Master has powers

When there is a Trust there are certain

Inescapable Consequences

21

Why a Trust?

22

Why a Trust? Asset protection Separation of benefit from control Under the radar Estate planning: Estate duty and CGT Trading Ownership of shares and members’interests Children protection: Future Co-habitation trusts Tax reasons: Offshore trusts

23

Consider costs Existing ownership of assets: Recoupments, CGT, transfer

duty Acquisition of new assets

Why a Trust?

24

TrustsFundamental Issues:

Different Types of Trusts

25

Definition of a TrustAnd Ownership

‘Ordinary’ trust ‘Bewind’ trust

26

Ordinary Trust

an arrangement an arrangement

ownership in property ownership in property

is by virtue of a trust instrument is by virtue of a trust instrument

made overmade over or or bequeathedbequeathed

to a trustee /sto a trustee /s

to be administered or disposed ofto be administered or disposed of in terms of the trust instrumentin terms of the trust instrument

for the benefit of the beneficiary or beneficiaries orfor the benefit of the beneficiary or beneficiaries or for the achievement of the object stated in the trust instrumentfor the achievement of the object stated in the trust instrument

28

Bewind

29

Definition of a Trust: And Ownership

What is the position What is the position

when there is only one beneficiary?when there is only one beneficiary?

30

Rights of Beneficiaries and Types of Trusts

31

Terminology Bewind Vested right

32

With a bewind the beneficiary has ownership of the asset/s A vested beneficiary does not own the assets Such beneficiaries have personal rights against the

trustees

for the proper administration of the trust property

33

Vesting Vesting confers a right Different from a real right Different from a discretionary right

34

DiscretionDiscretion regarding Income and/or capital Whether to distribute To whom to distribute How much to distribute When to distribute

35

Stander and Others v Schwulst and Others

2008 (1) SA 81 (C)

It was alleged that one of the trustees failed over a protracted period to participate in the important discretionary decisions confronting the trustees, and has thus abdicated his responsibilities

36

Rights of Beneficiaries

Discretionary

All beneficiaries have rights including discretionary beneficiaries

37

Potgieter v Potgieter NO and Others

2012 (1) SA 637 (SCA) (30 September 2011) Our law affords a contingent beneficiary the right to

protect his or her interest against mal-administration by

the trustee

38

Doyle v Board of Executors 1999 2 SA 805 (C)

“it appears to me unquestionable that a trustee occupies a fiduciary office.

By virtue of that alone he owes the utmost good faith towards all beneficiaries, whether actual or potential.”

Beneficiaries Rights

39


2008 (1) SA 81 (C)

The discretionary beneficiariess’ allegations are that the trustees are not being guided in their administration of the Trust by any rational or legitimate objective.

They are preserving the capital at all costs as an end in itself, without regard to the interests of the beneficiaries.

40

Trust Law: Where is it Found?

41


Trust law = The Trust Property Control Act The trust deed The common law

42


The trust deed: the trustees could amend the trust deed The common law: the beneficiaries must agree to

changes if they had accepted the benefits given to them in terms of the deed

43

Trustees + beneficiaries = amendments


44

How does a Trust Operate?

45

A trust functions through its appointed trustees The legal personality of a trust requires that all trustees

act together for and on behalf of the trust

Steyn and Others NNO v Blockpave (Pty) Ltd

2011 (FB)

46

Resolutions

There is only one legally regular and permissible way in which a trust communicates with the world, and that is through its resolutions


2011

47

A trust operates in two different spheres: Internally and Externally


2011

48

A trust operates in two different spheres: Internally, trustees may disagree A matter on the agenda may be debated If the trustees are not unanimous, a matter must be put to

a vote


2011

49


2011

A trust operates in two different spheres: Externally: the majority vote then prevails as the decision

of the trustees:

50

The minority is obliged to act jointly with the other trustees

in executing the resolution

adopted by the majority

Van der Merwe NO and Others v Bosman and Others

2010

51

The Sleeping Trustee

52

Slip KnotInvestment 777 (Pty) Ltd v Du Toit

2011 (4) SA 72 (SCA) (28 March 2011)

Annexures included Resolution of trustees authorising loan agreement Cession of loan accounts in the trust Personal suretyships

53

Slip KnotInvestment 777 (Pty) Ltd v Du Toit

2011 (4) SA 72 (SCA) (28 March 2011)

The creditor did not negotiate directly with him at all Therefore no misrepresentation by the creditor Held to be jointly and severally liable for the debt

54

Section 9 (1)

A trustee shall in the performance of his duties and the exercise of his powers act with the care act with diligence . . . and act with skill

which can reasonably be expected of a person who manages the affairs of another (objective test)

The Sleeping Trustee

55

The Sleeping TrusteeSection 9 (2)Any provisions contained in a trust instrument shall be void in so far as it would have the effect of exempting a trustee from ; or indemnifying him against

liability for breach of trust where he fails to show the degree of care, diligence and skill as required

56

Legal Nature of a TrustIs a Trust a Person?

57

A Trust is not a Person

unless

a Statute defines it as such

58

Section 12

Trust property shall not form part of the personal estate of the trustee except in so far as he as trust beneficiary is entitled tothe trust property.

Trust Property Control Act

59

Section 11 Trust Property Control Act: A trustee must indicate clearly in the trust’s bookkeeping

the property which he holds in his or her capacity as trustee

Trust as a Person: Property to be Identified

60

Statutes that define a Trust as a Person

The Companies Act of 2008 The Income Tax Act and VAT Act Transfer Duty Act National Credit Act Deeds Registries Act The Financial Intelligence Centre Act 38 of 2001 (FICA) Close Corporations Act

http://butterworths.ukzn.ac.za.ezproxy.ukzn.ac.za:2048/nxt/gateway.dll/jilc/kilc/26qg/r8qg/s8qg

61

The Parties to a Trust

62

The Parties to a Trust

1. Founder/donor/settlor

2. Planner (client)

3. Trustees

4. Beneficiaries

5. Master

6. The Protector

63

Founder

64

The founder is either

1. A contracting party (inter vivos)

or

2. A deceased (testamentary)

65

Trustees

66

Trustees

Trustees hold an office Responsibilities to client? Terms of the trust deed Letter of wishes?

67

Trustees: Authority1. Section 6: A trustee must be authorised by the Master to

act; and

2. Common law: Any one trustee who purports to act on behalf of a trust must also be authorised by the other trustees to act on their behalf

3. Other laws: Alienation of Land Act

68


20112011

Until such time as the substitute is authorised to occupy such office, the minimum complement essential for the lawful operation of the trust will remain lacking.

It is therefore temporarily dysfunctional, and was so at the time the replying affidavit was delivered.

69

Lupacchini NO and Another v Minister of Safety and Security

2010 (6) SA 457 (SCA)

The acts of a trustee who lacks authorisation are invalid There is no criminal sanction for acting in that way

70

Trustees as Co-owners:Nieuwoudt NO and another v Vrystaat Mielies (Edms) Bpk

[2004] 1 All SA 396 (SCA)

A third party would not be entitled to assume, merely from the fact that one trustee can be authorised to exercise the powers of all of them, that such authorisation has in fact been given

71

Trust requirements: Unauthorized trustees

Steps to be taken by outsiders are unclear: Doctrine of constructive notice?

Contracting on behalf of a trust or with a trust: Checklist

72

Be mindful of joint action rule of authority of trustees of powers of trustees of capacity of trustees of trust objectives

Contracting by and with a trust

Steps to be taken by 3rd parties

73

The Turquand rule will not help where a trustee is required by statute to be authorised in writing by the other trustees to conclude any agreement on behalf of a trust in respect of the alienation of immovable property

Turquand Rule Vd Merwe NO and Others v Hydraberg Hydraulics CC

and others

17 June 2010

74

TrusteesDuties

75

Trustees: Comply with all LawsSection 17A trustee must not without the written consent of the Master destroy any document which serves as proof of the 1. Investment2. Safe custody3. Control4. Administration5. Alienation or 6. Distribution of trust property

before the expiry of a period of

5 years from the termination of a trust

76

Trustees: Comply with all LawsSection 10Trustees have a duty to open a separate trust account at a

banking institution

77

Removal of a Trustee

78

Removal of a TrusteeSection 20(1) A trustee may, on the application of the Master or any person having an interest in the trust property,

be removed by the court If the court is satisfied that such removal will be in the interests of the trust and its beneficiaries

79

Removal of a TrusteeRAS and Others NNO v Van der Meulen and Another

2011 (4) SA 17 (SCA) A person can apply for the removal of a trustee of a trust

only if he or she is a beneficiary of the trust

No other person has an interest in trust property

80


2008 (1) SA 81 (C) 2008 (1) SA p81

The grounds for removal might include unreasonable conduct negligence or breach of trust Opposition to removal on those grounds, if such grounds are

established, would be improper

Removal of a Trustee

81

TrusteesResignation

82


2010

‘At common law, in the absence of provision in the trust instrument, a trustee was not entitled to resign office except for good reason with the consent of the court.’

83

Section 21 of the Trust Property Control Act

A trustee may resign by notice in writing

To the Master and

To the ascertained beneficiaries

Must also comply with any provisions of the trust deed, for example, by notice to co-trustees

Trustees: Resignation

84

The Master

85

The Master: The Trust Property Control Act

S16: Master may call upon trustee to account and may cause an investigation to be carried out

S20: Removal of trustee by the Master

86

The discretion to call for such an investigation in terms of section 16 vests solely in the Master

it is not competent for a court to direct him to carry out an investigation

Ras and Others NNO v Van der Meulen and Another

2011 (SCA)

87

The MasterSection 19 If a trustee fails to comply with the Master’s request under s.16 If a trustee fails to perform any duty imposed upon him by any

trust deed If a trustee fails to perform any duty imposed upon him by any

law

The Master or

any person having an interest in the trust property

may apply to Court

directing the trustee to comply with the request or perform the duty

Section 20 (2)

A trustee may at any time be removed from his office by the Master-

(c) if his estate is sequestrated or liquidated or placed under judicial management; or

(e) if he fails to perform satisfactorily any duty imposed upon him by or under the Act or to comply with any lawful request of the Master

89

The Protector

90

Must approve any suggested amendments to the trust deed

Can veto decisions of trustees Can appoint/remove trustees

The Protector

91

Piercing the Trust Form

92

Piercing the Veil Section 20 of the Companies Act Section 65 of the Close Corporations Act Trusts: common law

93

“The core idea of the trust is debased when the trust form is not employed to separate beneficial interest from control, but rather to permit everything to remain ‘as before’ . . .”

Land and Agricultural Bank of SA v Parker

2005 2 SA 77 (SCA)

94

They treat the property as their own, and invoke the existence of the trust only when it suits them


2010

95

The trustees of the trust had conducted the affairs of the trust with complete disregard for the principles of trust law, including the need for the trustees to act jointly in making decisions


2010

VAN DER MERWE NO AND OTHERS v BOSMAN AND VAN DER MERWE NO AND OTHERS v BOSMAN AND OTHERS 2010OTHERS 2010

'Where trustees of a family trust, 'Where trustees of a family trust,

including the founder,including the founder,

act in breach of the duties imposed by the trust deed,act in breach of the duties imposed by the trust deed,

and purport and purport on their sole authority on their sole authority to enter into contracts to enter into contracts binding the trust, binding the trust,

that may provide evidence that the trust form that may provide evidence that the trust form is a veneer is a veneer that in justice should be pierced in the interests of creditorsthat in justice should be pierced in the interests of creditors

96

VAN DER MERWE NO AND OTHERS v BOSMAN AND VAN DER MERWE NO AND OTHERS v BOSMAN AND OTHERS 2010OTHERS 2010

§ I am not able to ignore the trust's existence as a formally I am not able to ignore the trust's existence as a formally constituted legal concept when it comes to compliance constituted legal concept when it comes to compliance with the peremptory requirements of applicable with the peremptory requirements of applicable legislation. legislation.

§ WhenWhen law law and and equityequity cannot concur, it is the law that cannot concur, it is the law that must prevaimust prevail

97

98

No trustees’ meetings or minutes No consultation with other trustees No record of decisions taken Loans made to the planner without formality

Jordaan v Jordaan

2001 (3) SA 288 (K) de facto control

99

Unwise Clauses showing there is de facto Control by the Planner

Appointment of “puppet trustees. Reserving in the trust deed the right to appoint or remove

trustees unilaterally.

100

A TRUST

B TRUST

RESPONDENTS: BENEFICIARIES WITH THEIR CHILDREN




101

The Respondents are therefore entitled to transfer ownership of the assets of both trusts to themselves as and

when they please


102

Formation of a Trust: Requirements

103

1. Trust deed

2. Must be an intention to create a trust: obligation must be imposed on trustees

3. Beneficiaries must be clearly identified

4. Trust object must be clearly stated. Law of contract (inter vivos) and law of testation (testamentary)

5. The object must be lawful

6. Property must be clearly identified

7. Trustees to be authorized and to have capacity

8. Comply with all laws, especially Trust Property Control Act

Trust Requirements

104

Termination of a Trust

105

In terms of the trust deed: arbitrary dates? Why terminate? No more assets No beneficiary

Termination of a Trust

106

The amendment of trust deeds

107

The Amendment of Trust Deeds Trust Property Control Act Courts and the common law Power of other parties

108

The Amendment of Trust Deeds If no beneficiary has accepted any benefits from a trust,

then the founder and the trustees may amend the terms of the trust deed

They can make any changes • They can remove a beneficiary

• They can amend the clause providing for amendment

109

The Amendment of Trust Deeds

If a beneficiary has accepted benefits from a trust, then such a beneficiary must be a party to the amendment

This is so even if the trust deed provides that the trustees can amend the trust deed: the common law rules apply in addition to what the trust deed provides

110

The Amendment of Trust Deeds Acceptance of benefits: Need not be formal acceptance,

but acceptance by conduct The fact that a beneficiary of a trust is staying on trust

property may constitute the acceptance of trust benefits A beneficiary can accept even contingent rights

111


Founder and the trustees agreed to an amendment Was this valid ? No

112


Clause 2 specifically provided: “the trustees may amend the capital beneficiaries of the trust”

But not after the death of the founder And only with the founder’s consent during his lifetime

113

Potgieter v Potgieter NO and Others Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)

The name of the trust was changed Capital beneficiaries were increased to include new wife

and her 2 children The vesting clauses were removed and all beneficiaries

were now only potential capital beneficiaries: discretionary The income beneficiaries were also changed as above:

All discretionary

114


The changes were made without the consent or the knowledge of the original beneficiaries

It was now argued that their consent was necessary and therefore the amendments were invalid

115


The argument: As a matter of fact the benefits conferred upon them by the original trust deed had been accepted on their behalf by the deceased as their father and natural guardian as set out in the preamble to the trust deed

116


The court that first heard the case said that it had the authority to avoid the founder’s INTENTION not being achieved

The court therefore said it could give effect to the founder’s real intention

It came to an ëquitable solution”: • 1/5th to each beneficiary

117


SCA: The law regarding amendments is clear An inter vivos trust is a contract (stipulatio alteri) The founder and the trustees can amend the contract

BEFORE any benefits have been accepted by another Once benefits ARE accepted: no changes without consent

118


‘Whereas the founder desires to create the trust .............. for and on behalf of the named capital beneficiaries ..... and whereas the beneficiaries have indicated (‘aangedui’) their acceptance of the benefits conferred upon them in terms hereof ........;

And whereas the trustees agreed to accept their appointments as such and to administer the trust created herein’ ............................

119


SCA: • the fact that the deceased had initialled every page of the

document that was to be notarially executed,

• gave rise to the presumption of fact that he intended to confirm the pronouncement embodied in that document

120


SCA: • As a matter of law, their father and natural guardian had

authority to accept these benefits on their behalf and that is plainly what he intended to confirm

121


SCA:

whether the right thus created is • Enforceable

• conditional or

• contingent

makes no difference• The only relevant consideration is whether the right is worthy of

protection

Potgieter v Potgieter NO and Others 2012 (1)

SA 637 (SCA) (30 September 2011)

Acceptance of the notion that judges can refuse to enforce a contractual provision

merely because it offends their personal sense of fairness and equity

will give rise to legal and commercial uncertainty

Some Topical Issues relating to Trusts

Documents

Transcript of Some Topical Issues relating to Trusts