Trusts: Notes from Transcript

Defining Trust

Section 1 of the Trust Property Control Act defines a trust as:
- An arrangement
- In which ownership of property of one person
- Is transferred/bequeathed via a trust instrument
  - To another person to administer according to the trust deed for the benefit of beneficiaries or the stated object (ordinary trust)
  - OR
  - To beneficiaries designated in the trust deed but under the control of another person to administer according to the trust deed for the benefit of the beneficiaries or the stated object (bewind trust)
Trust consists of cash or other assets administered and controlled by a person acting in a fiduciary capacity, appointed under a deed of trust, agreement, or will of the deceased.

Registration

The administration of trusts is governed by the Trust Property Control Act no 57/1988.
Inter-vivos trusts must be registered with the Master in whose jurisdiction the largest portion of trust assets is located.
If multiple Masters have jurisdiction, the one where the trust was first registered retains jurisdiction.
Documents required for registering an inter vivos trust and issuing letters of authority to the trustee(s):
- Original trust deed or notarial certified copy.
- Proof of payment of the applicable fee for new trust registration (fee details available on the Chief Master’s Directives page). No cost for amending existing trusts.
Updates to Trust registration fees:
- Administration of Estates Act: Regulations: Amendment (English/Afrikaans) GG 41224, GoN 1162, 3 Nov 2017
- Chief Master's Directive 2012-01 (Method of payment of fees charged by the Master) effective as from 12 March 2012.
Trust Property Control Act: Regulations: Amendment on Fees payable at lodgement of trust instrument & Fees payable at lodgement of trust instrument (English/Afrikaans), GG 41224, GoN 1162, 3 Nov 2017
Application form (J401)
Completed Acceptance of Trusteeship (J417) and Acceptance of Auditor Application (J405) forms.
Beneficiary Declaration (J450)
Trustee(s) Identification – Certified copies of ID / Passport / Organization Proof of Registration (CK1)
Trustee(s) Representative Identification – Certified copies of ID or Passport (Mandatory for Organization Trustee(s))
Beneficiaries Identification – Certified Copies of ID or Birth Certificates / Passport /Organization (CKI)
Bond of security by the trustees - form J344 (if required by the Master) or Proof of Exemption (If applicable)
Final Certified Court Order (if applicable)
For a testamentary trust only requirements 3 to 5 have to be lodged. There are no fees involved and the deceased's last will serves as the trust document.
1. Application form (J401)
2. Completed Acceptance of Trusteeship (J417) and Acceptance of Auditor Application (J405) forms.
For the testamentary trust the completed acceptance of trusteeship and the photo page of the trustees ID document by each trustee and all the requirements listed on form JM21 have to be lodged

Parties to a Business/Trading Trust

Founder/Settlor/Donor: Establishes the trust, appoints beneficiaries, places assets in trust, and nominates a trustee.
Trustee: Administers the trust after appointment and controls assets in their official capacity.
Beneficiary: A trust requires a beneficiary. If beneficiary identification is unclear, the court can declare the trust valid or void.
Court: Can appoint a trustee if none was appointed or if the appointed trustee declines.

Historical Evolution

The trust concept originated in English law during the Middle Ages through courts of equity.
These courts developed the concept of equitable interest in property.
This means a legal owner of property should acknowledge the rights of others, known as equitable interest.
These other interests might fall short of legal ownership but could include the rights of a mortgagee, a spouse in a matrimonial home, or a beneficiary in a trust.
South African courts have established that English trust law based on equity does not apply in South Africa.
South African trust law is based on contract law, not equity.
SA law takes a strict technical approach to trusts.
South African law permits actions potentially prejudicial to beneficiaries if they are in accordance with the trust deed.
For example, the settlor and trustees can cancel or amend the contract before a third party accepts the benefits.
Trust deeds can be amended by agreement between the donor and trustees.
Trustees in their fiduciary position should only agree to a revocation or amendment if it is in the best interest of beneficiaries or potential beneficiaries.

Types of Trusts

Trusts can be classified in several ways in South Africa:
- Ownership Trust: The founder/settlor transfers ownership of assets to a trustee(s) in a fiduciary capacity for the benefit of defined beneficiaries.
- Bewind Trust: The founder/settlor transfers ownership of assets to beneficiaries, but control over the assets is given to the trustee(s).
- Inter Vivos Trust: Created during a person's lifetime via an agreement (contract) between the founder and trustees for the benefit of beneficiaries.
- Testamentary Trust: Established through the Last Will and Testament of a person and takes effect after their death.
- Discretionary Trust: Trustee(s) have the right to allocate income, capital gains, assets, or retained amounts to beneficiaries according to the Trust Instrument.
- Hybrid Trust: Combines vested and contingent rights as provided in the Trust Instrument, blending elements of vesting and discretionary trusts.
Trusts may also be classified based on their application:
- Trading or business trusts
- Asset protection or realization trusts
- Charitable trusts
- Share incentive schemes trusts
- Collective Investments Schemes Trusts
- Special Trusts:
  - TYPE A: For the benefit of a person with a mental or physical disability.
  - TYPE B: Solely for the benefit of a relative(s) of the deceased who were alive on the date of death, including unborn children, where the youngest beneficiary is under 18 on the last day of the assessment year.

Requirements for Formation

Intention by the founder to create a trust that establishes an obligation.
The object of the trust must be lawful.
The object must be certain.
The trust property must be clearly defined.
The beneficiaries must be ascertained or ascertainable.
At least one beneficiary.
A trust deed in writing (for testamentary trusts).
At least one trustee.
Trusts are used in:
- Estate planning
- Asset protection
- Financial planning

Characteristics of Trusts

A trust separates legal ownership from beneficial ownership.
Legal or equitable title vests in a trustee to be applied for the benefit of a beneficiary.
The trustee must manage the trust property for the beneficiary's benefit.
Courts are more likely to pierce the veil of a trust than a company because a trust lacks separate legal personality.
Trust risk aversion can slow business growth.
A trust may not be wise for all types of businesses.
Trustees are liable for their conduct as trustees and can only be held accountable against the trust property.
A beneficiary can sue a trustee personally only if the trustee is guilty of a breach of trust.
The core principle is separating ownership from control or enjoyment of property.
A sole trustee cannot be a sole beneficiary to avoid a merger of interests that would prevent trust formation.

Duties of a Trustee

Act in accordance with the terms of the trust.
Preserve the trust property.
Not deal with trust property for their own benefit.
Avoid conflicts between personal interests and trustee duties.
Obligation to deal with trust property on behalf of beneficiaries.
SA courts suggest the Master of the High Court should require at least one independent trustee before registering a trust.

Advantages of Using Trusts for Business

Trusts can be used to run a business.
They can provide limited liability to trustees and can continue indefinitely.
Trusts can be sequestrated without creditors pursuing trustees, beneficiaries, or the founder.
Trusts may offer tax advantages.
- See The Thistle Trust v Commissioner for the South African Revenue Service [2024] ZACC 19
When used as a business vehicle, the trust must be able to take the normal risks that directors could take when they run a company.
Trustees are typically risk-averse because they must always act in the beneficiaries' best interests.
If the trust is not operated according to trust law, there's a risk of disregarding the separate trust.
- See Land and Agricultural Development Bank of SA v Parker and Others (186/2003) [2004] ZASCA 56; [2004] 4 All SA 261 (SCA); 2005 (2) SA 77 (SCA)
If the trust isn't properly operated, it may be viewed as a partnership, or its separate form may be disregarded, leading to the trustees being personally liable for the trust's debts.
The trust has no separate legal personality except for taxation purposes.
A business carried on by trustees enjoys limited liability, independently of the Companies Act.
Trust property is held separately from the private assets of the trustees.
Trust creditors and beneficiaries may sue.
A trust has limited liability; neither trustees nor beneficiaries are liable for obligations incurred by the trustees on behalf of the trust.
If income is distributed by the trust, it's considered income of the recipients.
Legislation applicable to companies does not apply to trusts.
A trust does not have to prepare financial statements or be audited.
There are no limitations on who can qualify as trustees.
There are no restrictions on decision-making, enlargement of capital, or amendments to the trust deed.
Although the trust deed must be lodged with the Master of the High Court, greater secrecy regarding the trust's interests and operation is possible.

Legal Personality

Other Criteria: Court order, statutory, charitable, etc.
A trust does not have legal personality.
Except when expressly granted by legislation, such as the Companies Act or Income Tax Act.
If legislation awards legal personality, it's applied only within the scope of that legislation, not generally.
The Trust Property Control Act requires trustees to lodge the trust deed and amendments with the Master of the High Court.
Trustees must obtain written authorization from the Master before acting in their capacity, providing security or exemption from doing so.
A court can vary trust provisions or terminate the trust to protect the founder's objectives, beneficiaries' interests, or public interests.
- See Peterson and another v Claassen and others.
Rules applicable to trusts are primarily determined by the trust deed.
There are no formal requirements for maintaining capital, solvency, or liquidity.
Trust income is taxed at a rate of $40%$ .
Income vesting in or awarded to beneficiaries within a tax year is taxed in their hands at their applicable rate, not in the trustees' hands.
A business can be run by trustees for the benefit of nominated beneficiaries through a trust.
The trust provides limited liability; neither the trustees nor beneficiaries are liable for its obligations.
A trading trust is an unincorporated business entity created by a deed.
Property is held and managed by trustees for the benefit and profit of beneficiaries named in the trust deed.
Trusts where the public is invited to become income beneficiaries are governed by the Collective Investment Schemes Control Act.
The trust does not have a separate legal personality other than for taxation purposes.
The trust cannot sue or be sued in its own name and isn't a corporation as defined in legislation.
Trustees acting on behalf of the trust can sue or be sued.
A trust can possess an estate and incur liabilities; it can owe debts or be a debtor under the Insolvency Act.
If a trustee commits an act of insolvency, the trust must be sequestrated as a debtor, not liquidated as a juristic person.
- See Magnum Financial Holdings v Summerly and Another 1984 (1) SA 107 (W).
Trading trusts previously offered tax advantages while preserving limited liability for trustees, but these advantages have been reduced by capital gains tax and changes to income tax rates.
A trading trust is not a separate juristic person distinct from trustees, but it may be treated as a separate person for income tax, VAT, and transfer duty purposes.
Previously, the number of trustees in a trading trust was limited to 20, but the new Companies Act allows an unlimited number.
Trustees require authorization from the Master of the High Court to act, and actions taken before authorization are void.
Trading trusts aren't widely used in South Africa today but remain popular for certain types of businesses, such as property development.

Consequences of Forming a Trust

After the trust is created:
- Trustees gain obligations, duties, and powers (found in the Trust Property Control Act and Trust Deed; requiring greater care than of their own)
- Beneficiaries acquire certain rights – vested or discretionary.
The trustee must deal with the property on behalf of the beneficiaries, not selfishly.
The terms of this obligation are detailed in the trust deed.
Courts emphasize that the essential notion of trust law is that enjoyment and control must be functionally separate.
The duty imposed on trustees and the standard of care exacted from them derive from this principle.
The independent outsider should not be a professional person such as attorney or accountant but someone who accepts the responsibilities of trusteeship to ensure the trust functions properly and its provisions are observed.
The outsider should not accept office without awareness that a failure to observe these duties may risk action for breach of trust.
Separation of control and benefit ensures independence of judgment by removing conflicts of interest and facilitates impartiality, achieved when trustees appreciate their duties and the required standard of care.
Academics argue that diligence isn't ensured by separation.
Whether a trustee is a beneficiary or not, diligence is secured by the knowledge that action would be brought following a lapse on their part, not only by a beneficiary but by any affected party.
One potential remedy would be for trustees to incur liability for fraud or misrepresentation if they knew or should have known they were acting without authority.
Other solutions include the Turquand rule, which safeguards outsiders by assuming that internal procedures have been complied with, preventing the organization from avoiding liability by claiming the transaction was unauthorized.
An inference can be made that trustees who concluded an allegedly unauthorized transaction were, in fact, authorized as agents of other trustees.
The trustees' conduct may create a situation where it would be reasonable to infer that the trust form was a mere cover and veneer that should be disregarded in the interests of creditors.
Trustees should be educated and encouraged to avoid introducing poor business ethics into a trust and warrant that they have educated themselves.
The Master should exempt them from providing security unless each trustee signs an acknowledgment that they are aware of their duties.