1. 1 Some Topical Issues relating to Trusts Presented by Professor Walter Geach CA (SA) BA LLB (Cape Town) MCOM FCIS Professor in the Department of Accounting, University of the Western Cape

2. 2 Interesting 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. 3 Interesting 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. 4 Substance over Form

5. 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. 6 ‘effect will be given to unexpressed agreements and tacit understandings’ Substance

7. 7 A TRUST B TRUST RESPONDENTS: BENEFICIARIES WITH THEIR CHILDREN FNB v Britz and Others (20 July 2011) RESPONDENTS: TRUSTEES RESPONDENTS: TRUSTEES Owned property

8. 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 FNB v Britz and Others (20 July 2011)

9. 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. 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 FNB v Britz and Others (20 July 2011)

11. 11 Substance: The Importance of the Trust Deed

12. 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. 13  Section 19 vs  Compliance Notice issued by Commission

14. 14 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. 15  A trust deed is a trust’s “constitutive charter”  Outside the provisions of a trust deed, the trust cannot be bound

16. 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. 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. 18 Trusts and Other Entities

19. 19 Planning and Choices 1.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. 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. 21 Why a Trust?

22. 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. 23 Consider costs  Existing ownership of assets: Recoupments, CGT, transfer duty  Acquisition of new assets Why a Trust?

24. 24 Trusts Fundamental Issues: Different Types of Trusts

25. 25 Definition of a Trust And Ownership  ‘Ordinary’ trust  ‘Bewind’ trust

26. 26 Ordinary Trust

27. 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 over or bequeathed made over or bequeathed to a trustee /s to a trustee /s to be administered or disposed of to be administered or disposed of in terms of the trust instrument in terms of the trust instrument for the benefit of the beneficiary or beneficiaries or for the benefit of the beneficiary or beneficiaries or for the achievement of the object stated in the trust instrument for the achievement of the object stated in the trust instrument

28. 28 Bewind

29. 29 Definition of a Trust: And Ownership What is the position when there is only one beneficiary?

30. 30 Rights of Beneficiaries and Types of Trusts

31. 31 Terminology  Bewind  Vested right

32. 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. 33 Vesting  Vesting confers a right  Different from a real right  Different from a discretionary right

34. 34 Discretion Discretion regarding  Income and/or capital  Whether to distribute  To whom to distribute  How much to distribute  When to distribute

35. 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. 36 Rights of Beneficiaries Discretionary  All beneficiaries have rights including discretionary beneficiaries

37. 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. 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. 39 Stander and Others v Schwulst and Others 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. 40 Trust Law: Where is it Found?

41. 41 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011) Trust law =  The Trust Property Control Act  The trust deed  The common law

42. 42 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)  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. 43 Trustees + beneficiaries = amendments Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)

44. 44 How does a Trust Operate?

45. 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. 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 Steyn and Others NNO v Blockpave (Pty) Ltd 2011

47. 47 A trust operates in two different spheres:  Internally and  Externally Steyn and Others NNO v Blockpave (Pty) Ltd 2011

48. 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 Steyn and Others NNO v Blockpave (Pty) Ltd 2011

49. 49 Steyn and Others NNO v Blockpave (Pty) Ltd 2011 A trust operates in two different spheres:  Externally: the majority vote then prevails as the decision of the trustees:

50. 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. 51 The Sleeping Trustee

52. 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. 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. 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. 55 The Sleeping Trustee Section 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. 56 Legal Nature of a Trust Is a Trust a Person?

57. 57 A Trust is not a Person unless a Statute defines it as such

58. 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 to the trust property. Trust Property Control Act

59. 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. 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)38 of 2001  Close Corporations Act

61. 61 The Parties to a Trust

62. 62 The Parties to a Trust 1.Founder/donor/settlor 2.Planner (client) 3.Trustees 4.Beneficiaries 5.Master 6.The Protector

63. 63 Founder

64. 64 The founder is either 1. A contracting party (inter vivos) or 2. A deceased (testamentary)

65. 65 Trustees

66. 66 Trustees Trustees hold an office  Responsibilities to client?  Terms of the trust deed  Letter of wishes?

67. 67 Trustees: Authority 1.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. 68 2011 Steyn and Others NNO v Blockpave (Pty) Ltd 2011  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. 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. 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. 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. 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 3 rd parties

73. 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. 74 Trustees Duties

75. 75 Trustees: Comply with all Laws Section 17 A trustee must not without the written consent of the Master destroy any document which serves as proof of the 1.Investment 2.Safe custody 3.Control 4.Administration 5.Alienation or 6.Distribution of trust property before the expiry of a period of 5 years from the termination of a trust

76. 76 Trustees: Comply with all Laws Section 10 Trustees have a duty to open a separate trust account at a banking institution

77. 77 Removal of a Trustee

78. 78 Removal of a Trustee Section 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. 79 Removal of a Trustee RAS 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. 80 Stander and Others v Schwulst and Others 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. 81 Trustees Resignation

82. 82 Van der Merwe NO and Others v Bosman and Others 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. 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. 84 The Master

85. 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. 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. 87 The Master Section 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

88. 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. 89 The Protector

90. 90  Must approve any suggested amendments to the trust deed  Can veto decisions of trustees  Can appoint/remove trustees The Protector

91. 91 Piercing the Trust Form

92. 92 Piercing the Veil  Section 20 of the Companies Act  Section 65 of the Close Corporations Act  Trusts: common law

93. 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. 94  They treat the property as their own, and invoke the existence of the trust only when it suits them Van der Merwe NO and Others v Bosman and Others 2010

95. 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 Van der Merwe NO and Others v Bosman and Others 2010

96. VAN DER MERWE NO AND OTHERS v BOSMAN AND OTHERS 2010  'Where trustees of a family trust,  including the founder,  act in breach of the duties imposed by the trust deed,  and purport on their sole authority to enter into contracts binding the trust,  that may provide evidence that the trust form is a veneer that in justice should be pierced in the interests of creditors 96

97. VAN DER MERWE NO AND OTHERS v BOSMAN AND OTHERS 2010 §I am not able to ignore the trust's existence as a formally constituted legal concept when it comes to compliance with the peremptory requirements of applicable legislation. §When law and equity cannot concur, it is the law that must prevai §When law and equity cannot concur, it is the law that must prevail 97

98. 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. 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. 100 A TRUST B TRUST RESPONDENTS: BENEFICIARIES WITH THEIR CHILDREN FNB v Britz and Others (20 July 2011) RESPONDENTS: TRUSTEES RESPONDENTS: TRUSTEES

101. 101  The Respondents are therefore entitled to transfer ownership of the assets of both trusts to themselves as and when they please FNB v Britz and Others (20 July 2011)

102. 102 Formation of a Trust: Requirements

103. 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. 104 Termination of a Trust

105. 105  In terms of the trust deed: arbitrary dates?  Why terminate?  No more assets  No beneficiary Termination of a Trust

106. 106 The amendment of trust deeds

107. 107 The Amendment of Trust Deeds  Trust Property Control Act  Courts and the common law  Power of other parties

108. 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. 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. 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. 111 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)  Founder and the trustees agreed to an amendment  Was this valid ?  No

112. 112 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)  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. 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. 114 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)  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. 115 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)  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. 116 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)  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”: 1/5 th to each beneficiary

117. 117 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)  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. 118 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)  ‘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. 119 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)  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. 120 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)  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. 121 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)  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

122. 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