When can the provisions of a trust deed be set aside? When you don’t stick to the rules.
Far too many people pay their accountant or attorney a visit, draw up a boilerplate trust deed, sign on the dotted line, and think that this piece of paper will take away all their tax and estate duty problems.
No, it won’t.
In fact, setting up a trust for the wrong reasons, or not understanding the legal implications of what a trust entails could end up costing you a great deal of money for very little benefit. It could even cause you to lose money.
In a 2004 court case heard by the Supreme Court of Appeal, namely Land and Agricultural Bank of South Africa v Parker SA 186 / 2003, Cameron JA outlined some important legal principles concerning the status of trusts and those who are involved with trusts.
A trust is bound by its constitution
Except in cases where statute provides otherwise, a trust is not a legal person. It is an accumulation of assets and liabilities which constitutes the trust estate, which is a separate entity.
However, the accumulation of rights and obligations comprising the trust estate does not have legal personality. These rights and obligations vest in, and must be administered by, the trustees. It is only through the trustees, specified as in the trust instrument, that the trust can act.
Who the trustees are, their number, how they are appointed, and under what circumstances they have power to bind the trust estate are matters defined in the trust deed, which is the trust’s constitutive charter.
Failure to act within those bounds does not necessarily invalidate the trust
It follows that a provision requiring that a specified minimum number of trustees must hold office is a capacity-defining condition. It lays down a prerequisite that must be fulfilled before the trust estate can be bound.
When fewer trustees than the number specified are in office, the trust suffers from an incapacity that precludes action on its behalf.
This is not to say that the trust ceases to exist, nor does the trust obligation fall away. The administration of a trust proceeds even when not all the trustees can be appointed in the precise manner envisaged in the trust deed.
If there are no interested persons in a position to appoint a trustee, the court or the Master will (where necessary) appoint a trustee to perform the trust.
Acts of trustees outside their authority can, however, be considered invalid
However, an insufficient number of trustees, compared to the number specified in the trust deed, cannot bind a trust.
The fact that such trustees may act jointly in signing the contracts does not change this, because the trust’s incapacity during this period does not arise from the joint action requirement, but from the trust’s incapacity while a sub-minimum of trustees held office.
However, although the trustees could not bind the trust whilst insufficient in number, this did not mean that their duties as trustees ceased. These duties required that they appoint a third trustee when a vacancy occurred—a duty they signally failed to fulfil.
The essence of a trust is the separation of ‘control’ and ‘enjoyment’
The core idea of the trust is the separation of ownership (or control) from enjoyment.
Though a trustee can also be a beneficiary, the central notion is that the person entrusted with control exercises it on behalf of (and in the interests of) another. This is why a sole trustee cannot also be the sole beneficiary.
It may be said that the English law of trust, and the trust-like institutions of the Roman and Roman-Dutch law, were designed essentially to protect the weak and to safeguard the interests of those who are absent or dead.
Trustees have a fiduciary duty in respect of the administration of the trust assets
The trustee is appointed and accepts office to exercise fiduciary responsibility over property on behalf of and in the interests of another. It is this separation that serves to secure diligence on the part of the trustee, since a lapse may be visited with action by beneficiaries whose interests entitle them to demand better.
The same separation tends to ensure independence of judgment on the part of the trustee, as well as careful scrutiny of transactions designed to bind the trust, and compliance with formalities.
What does all this mean to ordinary people dealing with trust structures?
Firstly, the decision to form a trust is not one that should be taken lightly, since such formation gives rise to a whole host of legal obligations and requirements.
Secondly, the office of trustee is an onerous one, since a trustee acting outside their authority can be held to be personally liable in certain circumstances. Any person seeking office as a trustee of a trust would do well to acquaint themselves with the Trust Property Control Act.
There are also many good books available dealing with the law of trusts.
Thirdly, trustees need to understand that their obligation is to administer the trust assets for the beneficiaries. Any personal interest runs contrary to the principle of a trust and can, in extreme cases, result in the trust being set aside. This will negate the purpose for which the trust was originally established.
Finally, don’t forget the formalities. Make sure that the trustees are acting within the authority granted in the trust deed, and remember that tax returns and financial statements need to be completed each year.
Many people are under the impression that once the trust has been formed and the property has been transferred into it, the trust deed can simply be filed for the next ten years. Particularly in the case of immovable property, transfer can be held up for months whilst the trust runs around trying to get its tax affairs into order.
Written by Steven Jones
Steven Jones is a retired tax practitioner and member of the South African Institute of Professional Accountants.
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