Unit 1 E Trusts

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 Defining Trust
Section 1 of the Trust Property Control Act describes a trust as:

- An arrangement
- In which ownership in property of one person
- Is made over/bequethed by a trust instrument
- To another person to administer according to the trust deed in favour of the
beneficiaries or the stated object(ordinary trust) OR
- To the beneficiaries designated in the trust deed but under the control of another
person to administer according to the trust deed in favour of the beneficiaries or
the stated object(bewind trust)
 Defining Trust
• Trust consists of cash or other assets which
are administered & controlled by a person
acting in a fiduciary capacity, where such
person is appointed under a deed of trust or
agreement or will of the deceased person.
Parties to a business trust/trading trust
• Founder, settlor or donor- chooses how to establish a trust
• Appoints beneficiaries, place assets in trust & nominate a trustee
• Trustee- one who administer trust after his appointment & controls
assets in his official capacity
• Beneficiary- no trust can be established without a beneficiary, in
case of discrepancy regarding identification of beneficiary court
can declare trust valid or void.
• Court can appoint trustee where none was appointed or declined
Historical evolution of the law that governs trust

• The concept of trust was developed by English law in the

middle ages through courts of equity.
• The courts developed the concept of equitable interest in
property.
• It means a legal owner of property such as land should
acknowledge the rights of others in that property known as
equitable interest
Evolution of the law that governs trusts
• These other interest in that property might fall short
of the legal right of ownership.
• They may consist of the right of a mortgage, spouse
in matrimonial home or a beneficiary in a trust.
• Our courts have long held that the English Law of
trusts based on law of equity does not apply in
South Africa
Evolution of the law that governs trusts
• South African Law of Trusts is based on the law of
contract and not law of equity.
• SA law takes a strict technical approach to trusts.
• Our law have allowed actions that are potentially
prejudicial to beneficiaries as long as they are
taken in accordance with the trust deed.
 Evolution of the law that governs trusts
• For example, the settlor and the trustees can cancel or amend
the contract entered between them before the third party has
accepted the benefits conferred under the settlement.
• Trust deeds can be amended by agreement between the donor
and trustees.
• It is not up to trustees in their fiduciary position to agree to a
revocation or amendment of the trust agreement only if they
considered it to be in the interest of beneficiaries or potential
beneficiaries.
 TYPES OF TRUSTS
• Broadly speaking there are various ways in which
trusts can be classified in South Africa including the
following classifications:
• An ownership trust , the founder or settlor transfers
ownership of assets or property to a trustee(s) in a
fiduciary capacity to be held for the benefit of
defined or determinable beneficiaries of the trust.
 TYPES OF TRUSTS
• A bewind trust, the founder or settlor transfers
ownership of assets or property to beneficiaries of the
Trust, but control over the assets or property is given
to the trustee(s).
• An Inter vivos Trust, is created during the lifetime of a
person by way of an agreement (contract) between
the founder and the trustees for the benefit of
beneficiaries.
 TYPES OF TRUSTS
• A testamentary Trust, is set up in terms of the
Last Will and Testament of a person and comes
into effect after such a person’s death.
• A discretionary Trust, is a trust whereby
trustee(s) in terms of the Trust Instrument has
the right to vast income, capital gains, assets or
retained amounts in that trust to its beneficiaries.
 TYPES OF TRUSTS
• Hybrid Trust, the majority of trusts in South
African will have vested and contingent
rights provided for in the Trust Instrument
which is a combination of the vesting Trust
and the discretionary trust mentioned
above.
 TYPES OF TRUSTS
• TRUST may also be classified based on the
application of a trust eg
(a) Trading or business trusts
(b) Asset protection or realisation trusts
(c) Charitable trusts
(d) Share inventive Schemes Trusts
 TYPES OF TRUSTS
(e) Collective Investments Schemes Trusts
(f) Special Trusts (TYPE A) which is a trust created
for the benefit of a person with mental or physical
disability
TYPE B, trust created sorely for the benefit of a
person(s) who is a relative of the person who died
and who is alive on the date of the death of that
 TYPES OF TRUSTS
deceased person including those conceived but
not yet born and the youngest of the beneficiaries
is younger than 18 years on the last day of the
year of assessment.
 Requirements for formation of a trust
• Intention by founder to create a trust in a way
that creates an obligation
• The object must be lawful
• The object must be certain
• The trust property must be defined with certainty
• The beneficiaries must be ascertained or
ascertainable
Requirements for formation of a trust
• At least one beneficiary Trust deed in writing
(testamentary trust) At least one trustee
• a Trust is used in;
(a) Estate planning, (b) Asset protection ©
Financial planning and (d)
 Characteristics of trusts
• A trust is a device that allows legal ownership to
be separated from beneficiary ownership.
• Legal or equitable title to property vests in a
trustee for the purpose of being applied for
benefit of another known as beneficiary.
• The trustee must deal with the trust property for
the benefit of the beneficiary.
 Characteristics of Trusts
• A court maybe likely to piece the veil of trust
than a company as a trust does not have
separate legal personality.
• Trust risk aversion can therefore, slow the
growth of the business.
• A trust structure may not be a wise option for
some types of business.
 Characteristics of Trusts
The trustee in respect of their conduct as trustees and
may only execute against the trust property.
• A beneficiary may sue a trustee in their personal
capacity only if the trustee has been found guilty of
default such as breach of trust.
• The core idea of trusts is that ownership of property
is separate from control or enjoyment of property
 Characteristics of Trusts
• Although a trustee can also be one of several
beneficiaries, the central notion is that a person
who controls the property exercise it on behalf of
and in the interest of another.
• For this reason, a sole trustee cannot be a sole
beneficiary. This means it would combine
interest such that no trust is formed.
 Duties of a trustee
• Act in accordance with the terms of the trust.
• Preserve the trust property.
• Not dealing with the trust property for their own
benefit.
• Ensuring that the trustees personal interest do
not come into any conflict with the trustees duty.
 Duties of a trustee
• A trustee has an obligation to deal with
trust property on behalf of beneficiaries.
• SA courts have suggested that the Master
of the Hight Court should insist on at least
one independent trustee before registering
a trust
 Advantages of using trusts for business
• It is possible to use a trust to run a business.
• The advantages are that it can provide limited
liability to trustees and can also continue forever
or in perpetuity.
• Trust can be sequestrated in their own right
without creditors looking for payment by trustees,
beneficiaries and founder of a trust
 Advantages of using trusts for business
• Trusts may provide tax advantages.
• When trusts are used as a business vehicle, it
must be able to take the normal risk that
directors could take when they run a company.
• Trustees normally want to avoid risk or are risk
averse because they must always act in the best
interest of the beneficiaries.
 Advantages of using trusts for business
• If the trust is not operated in accordance with the
trust law, the trustees run the risk of having the
trust disregarded.
• It can then be viewed as partnership or the veil
of separate form maybe pieced.
• In both instances, the trustees maybe personally
liable for the debts of the trust.
 Advantages of using trusts for business
• The trust has no separate legal personality except for
taxation purposes.
• A business carried on by trustees therefore enjoys a
form of limited liability, independently of the provisions of
the Companies Act.
• Trust property is held separately from the private assets
of the trustees.
• The trust creditors and the beneficiaries may sue
 Advantages of using trusts for business
• A trust has limited liability neither trustees or the
beneficiaries are liable for obligations incurred
by the trustees on behalf of the trust.
• If income is distributed by trust, income is
considered to be income of the recipients.
• The legislation applicable to companies does not
apply to trusts.
 Advantages of using trusts for business
• A trust does not have to prepare financial statements or be
audited.
• There is no limitations on persons who can qualify as trusts.
• There is no restriction on the way in which decisions can be
take or in respect of the enlargement of the trust capital or as
to what maybe provided in the trust deed of amendments of
the trust deed. Although a trust deed has to be lodged with the
Master of the High Court, a greater secrecy as to the interests
and operations of the trust is possible.
 Legal Personality
• OTHER CRITERIA
• Court order, statutory, charitable etc
• A trust does not have legal personality
• Except where expressly bestowed with by legislation:
Companies Act, Income Tax Act
• If legislation awards legal personality, it is applied in so
far as the legislation is concerned – not in general
 Legal Personality
• The Trust Property Control Act which governs the formation
and operation of trusts provides that trustees must lodge
the trust deed and any amendments with the Master of the
High Court .
• They must obtains written authorisation from Master before
they are permitted to act in the capacity of trustees.
• To get the authorisation, they must provide security or
exempted from doing so.
 Legal Personality
• A court has the discretion to vary the provisions of a trust or
even to order the termination of the trust to protect the
achievement of the founders objects, the interests of
beneficiaries or the public interests.
• See Peterson and another v Claassen and others.
• Rules applicable to trusts are largely determined by the
contents of the trust deed.
• There is no provision for formal maintenance of capital,
solvency or liquidity requirements.
 Legal Personality
• Trust income is taxed at a rate of 40%.
• Income vesting in or awarded to beneficiaries within a tax
year is not taxed in the hands of the trustees but taxed in
the hands of the beneficiaries at their applicable rate.
• Through a trust a business can on by trustees for the
benefit of nominated beneficiaries.
• The trust provides limited liability in that neither the trustees
or the beneficiaries are liable for the obligations of the trust.
 Legal Personality
• A trading trust is a form of unincorporated business entity
created by a deed.
• Property is held and managed by trustees for the benefit
and profit of beneficiaries designated in the trust deed.
• Trust where members of the public are invited to become
income beneficiaries are governed by the Collective
Investment Schemes Control Act.
• The trust does not have a separate legal personality
 Legal Personality
• Other than for the purpose of taxation.
• Which means a trust cannot sue or be sued in its own
name and it is not a corporation as defined in legislation.
• Rather it is the trustees acting on behalf of that trust that
are ones who can sue or be sued.
• A trust is able to possess an estate and incur liabilities. It
can owe debts or be a debtor in the Insolvency Act.
 Legal Personality
• This means if a trustee commits an act of insolvency it
must be sequestrated as a debtor and not liquidated as
a juristic person.
• See Magnum Financial Holdings v Summerly and
Another 1984 (1) SA (10 153 (W).
• A trading tax previously provided certain tax
advantages while still preserving the limited liability of
the trustees.
 Legal Personality
• The introduction of capital tax gains and changes
to income tax rates has reduced these advantages.
• A trading trust is not a separate juristic person
distinct from trustees.
• However, for income tax, VAT and transfer duty
purposes, a trading trust maybe treated as a
sperate person.
 Legal Personality
• The number of trustees of trading trust was previously limited
to 20 persons but under the new Companies Act it is unlimited.
• Trustees require the authorisation of the Master of the High
Court to act as trustees and action by trustees prior to issue of
authorisation is void.
• Trading trust are not widely used in South Africa today but may
still be popular for certain type of business such as property
development.
 Consequences of forming a
trust
• After trust is created:

• Trustees gets certain obligations, duties and powers (found in

Trust Property Control Act and Trust Deed; greater care than his
own)

• Beneficiaries gets certain rights – vested or discretionary

 Consequences of forming a
trust
• The trustee has an obligation to deal with
the property on behalf of the beneficiaries
and not selfishly.
• The terms of the obligation are set out in
the trust deed.
 Consequences of forming a
trust
• Our courts have emphasised that the essential notion of trust law is that enjoyment
and control must be functionally separate.
• The duty imposed on trustees and standard of care exacted in them derive from
this principle.
• The court have maintained that the independent outsider should not be a
professional person such as attorney or accountant.
• Rather it should be someone who with proper realisation of the responsibilities of
trusteeship accepts office in order to ensure that the trust functions properly and
the provisions of trust deed are observed.
 Consequences of forming a
trust
• The outsider should not accept office without being aware that a
failure to observe these duties may risk action for breach of
trust.
• Separation of control and benefit would tend to ensure
independence of judgment as it removes conflicts of interest
and facilitates impartiality. This is also achieved by trustees
when they appreciate their duties and standard of care required.
 Consequences of forming a
trust
• Academics have argued that its not separation which ensures
diligence.
• This means whether a trustees is a beneficiary or not, diligence
is secured by the knowledge that action would be brought
following a lapse on their part.
• The action could be brought not only by a beneficiary but by
any affected party.
 Consequences of forming a
trust
• One potential remedy would be for trustees to incur liability
for fraud or misrepresentation if they knew or ought to have
known that they were acting without authority. Other solutions
included the Turquand rule which safeguard outsiders. This
rule assumes that internal procedures have been complied
with and so an organisation cannot later try to avoid liability
by claiming that the transaction way unauthorised.
 Consequences of forming a
trust
• An inference can be made that trustees who concluded an
allegedly auauthorised transaction were in fact authorised as
agent 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 pieced in the interests of creditors.
 Consequences of forming a
trust
• Trustees should be educated and encouraged to
avoid introducing poor business ethics into a trust.
• Trustees should warrant that they have educated
themselves and the Master should exempt them from
providing security unless each trustee signs an
acknowledgement that they are aware of their duties.