Transcript Document

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
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Interesting New Cases and Issues
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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
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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
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Substance
over Form
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Substance over Form:
Compare with the Provisions of
the Companies Act 2008
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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’
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Substance
‘effect will be given to unexpressed agreements
and tacit understandings’
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FNB v Britz and Others (20 July 2011)
A TRUST
RESPONDENTS:
TRUSTEES
B TRUST
RESPONDENTS:
TRUSTEES
Owned property
RESPONDENTS:
BENEFICIARIES WITH THEIR CHILDREN
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FNB v Britz and Others (20 July 2011)
 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
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FNB v Britz and Others (20 July 2011)
 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
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FNB v Britz and Others (20 July 2011)
 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
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Substance:
The Importance of
the Trust Deed
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The Importance of the Trust Deed
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
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 Section 19
vs
 Compliance Notice issued by Commission
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Companies Act:
Enlightened Shareholder Approach
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
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 A trust deed is a trust’s “constitutive charter”
 Outside the provisions of a trust deed, the trust cannot
be bound
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Company
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
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16
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
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Trusts
and Other Entities
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Planning and Choices
1.
2.
3.
4.
5.
Different types of company: New Companies Act
Close corporations
Trusts
Combinations: For example trusts owning shares or
members’ interests
Tax issues
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When there is a Trust
there are certain
Inescapable Consequences
1.
2.
3.
4.
5.
6.
Trustees hold an office: Powers and duties
Beneficiaries get rights
There is a separation of control/ownership from benefits:
a person has divested himself of property
Certain laws apply depending where the trust is
(a) formed (b) administered (c) managed
The trust deed applies
The Master has powers
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Why a Trust?
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Why a Trust?
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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
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Why a Trust?
Consider costs
 Existing ownership of assets: Recoupments, CGT, transfer
duty
 Acquisition of new assets
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Trusts
Fundamental Issues:
Different Types of Trusts
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Definition of a Trust
And Ownership
 ‘Ordinary’ trust
 ‘Bewind’ trust
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Ordinary Trust
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an arrangement
ownership in property
is by virtue of a trust instrument
made over or bequeathed
to a trustee /s
to be administered or disposed of
in terms of the trust instrument
for the benefit of the beneficiary or beneficiaries or
for the achievement of the object stated in the trust instrument
Bewind
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Definition of a Trust:
And Ownership
What is the position
when there is only one beneficiary?
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Rights of
Beneficiaries and
Types of Trusts
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Terminology
 Bewind
 Vested right
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 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
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Vesting
 Vesting confers a right
 Different from a real right
 Different from a discretionary right
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Discretion
Discretion regarding
 Income and/or capital
 Whether to distribute
 To whom to distribute
 How much to distribute
 When to distribute
34
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
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Rights of Beneficiaries
Discretionary
 All beneficiaries have rights including discretionary
beneficiaries
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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
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Beneficiaries Rights
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.”
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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.
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Trust Law:
Where is it Found?
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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
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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
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Potgieter v Potgieter NO and Others
2012 (1) SA 637 (SCA) (30 September 2011)
Trustees + beneficiaries = amendments
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How does a Trust
Operate?
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Steyn and Others NNO v
Blockpave (Pty) Ltd
2011 (FB)
 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
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Resolutions
Steyn and Others NNO v
Blockpave (Pty) Ltd
2011
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There is only one legally regular and permissible way in
which a trust communicates with the world, and that is
through its resolutions
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Steyn and Others NNO v
Blockpave (Pty) Ltd
2011
A trust operates in two different spheres:
 Internally
and
 Externally
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Steyn and Others NNO v
Blockpave (Pty) Ltd
2011
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
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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:
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Van der Merwe NO and Others v
Bosman and Others
2010
The minority is obliged to act jointly with the other trustees
in executing the resolution
adopted by the majority
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The Sleeping
Trustee
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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
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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
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The Sleeping Trustee
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)
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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
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Legal Nature of a Trust
Is a Trust a Person?
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A Trust is not a Person
unless
a Statute defines it as such
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Trust Property Control Act
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.
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Trust as a Person:
Property to be Identified
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
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Statutes that define a Trust
as a Person
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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
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The Parties
to a Trust
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The Parties to a Trust
1.
2.
3.
4.
5.
6.
Founder/donor/settlor
Planner (client)
Trustees
Beneficiaries
Master
The Protector
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Founder
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The founder is either
1. A contracting party (inter vivos)
or
2. A deceased (testamentary)
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Trustees
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Trustees
Trustees hold an office
 Responsibilities to client?
 Terms of the trust deed
 Letter of wishes?
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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
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Steyn and Others NNO v
Blockpave (Pty) Ltd
2011
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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.
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Lupacchini NO and Another v
Minister of Safety and Security
2010 (6) SA 457 (SCA)
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The acts of a trustee who lacks authorisation are invalid
There is no criminal sanction for acting in that way
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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
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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
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Contracting by and with a trust
Steps to be taken by 3rd parties
Be mindful of
 joint action rule
 of authority of trustees
 of powers of trustees
 of capacity of trustees
 of trust objectives
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Turquand Rule
Vd Merwe NO and Others v Hydraberg Hydraulics CC
and others
17 June 2010
 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
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Trustees
Duties
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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
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Trustees: Comply with all Laws
Section 10
Trustees have a duty to open a separate trust account at a
banking institution
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Removal of a Trustee
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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
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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
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No other person has an interest in trust property
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Removal of a Trustee
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
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Trustees
Resignation
81
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.’
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Trustees: Resignation
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
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The Master
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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
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Ras and Others NNO v Van der
Meulen and Another
2011 (SCA)
 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
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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
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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
The Protector
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The Protector
 Must approve any suggested amendments to the trust
deed
 Can veto decisions of trustees
 Can appoint/remove trustees
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Piercing the
Trust Form
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Piercing the Veil
 Section 20 of the Companies Act
 Section 65 of the Close Corporations Act
 Trusts: common law
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Land and Agricultural Bank of SA
v Parker
2005 2 SA 77 (SCA)
“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’ . . .”
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Van der Merwe NO and Others v
Bosman and Others
2010
 They treat the property as their own, and invoke the
existence of the trust only when it suits them
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Van der Merwe NO and Others v
Bosman and Others
2010
 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
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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
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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 prevail
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Jordaan v Jordaan
2001 (3) SA 288 (K) de facto control
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No trustees’ meetings or minutes
No consultation with other trustees
No record of decisions taken
Loans made to the planner without formality
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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.
99
FNB v Britz and Others (20 July 2011)
A TRUST
RESPONDENTS:
TRUSTEES
B TRUST
RESPONDENTS:
TRUSTEES
RESPONDENTS:
BENEFICIARIES WITH THEIR CHILDREN
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FNB v Britz and Others (20 July 2011)
 The Respondents are therefore entitled to transfer
ownership of the assets of both trusts to themselves as and
when they please
101
Formation of a Trust:
Requirements
102
Trust Requirements
1.
2.
3.
4.
5.
6.
7.
8.
Trust deed
Must be an intention to create a trust: obligation must be
imposed on trustees
Beneficiaries must be clearly identified
Trust object must be clearly stated. Law of contract (inter
vivos) and law of testation (testamentary)
The object must be lawful
Property must be clearly identified
Trustees to be authorized and to have capacity
Comply with all laws, especially Trust Property Control Act
103
Termination
of a Trust
104
Termination of a Trust
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In terms of the trust deed: arbitrary dates?
Why terminate?
No more assets
No beneficiary
105
The amendment
of trust deeds
106
The Amendment of Trust Deeds
 Trust Property Control Act
 Courts and the common law
 Power of other parties
107
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
108
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
109
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
110
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
111
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
112
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
113
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
114
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
115
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”:
•
1/5th to each beneficiary
116
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
117
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’ ............................
118
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
119
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
120
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
121
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