Author: Trinette Hartley (Sanlam)
Trusts (and more specifically inter vivos discretionary trusts) are known to be useful estate planning tools with numerous benefits. Unfortunately, many trusts are created without a full understanding of what trusts are and how they work. This leads to trusts being created for the wrong reasons, trust deeds being invalid and trustees abusing their power. As a result, our courts are increasingly clamping down on trusts and one should therefore make sure that (a) the trust is properly created, (b) the trust deed is correctly drafted, and (c) the trust is appropriately managed by the trustees. This article focuses on the requirements for creating a valid trust.
An inter vivos trust is created during the founder’s lifetime by way of an agreement between the founder and the trustees. In terms of this agreement, the trustees will administer the trust assets for the benefit of the beneficiaries. The trust deed indicates who the beneficiaries are and prescribes how the trustees will administer the trust assets and what their duties and powers will be in doing so.
Before focusing on the trust deed and the management of the trust, it is important to consider whether a valid trust was created in the first place. The fact that the Master has issued Letters of Authority and assigned a registration number does not make the trust valid. It is not the Master’s duty to test and investigate the validity of a trust – the courts will do that if the trust gets involved in a dispute. In order to avoid the trust from being torn apart in a dispute, the following essential requirements should be met:
- The Founder must be capable of entering into a contract and must have the intention to create a trust.
- The Founder’s intention must be expressed in a way that imposes an obligation on the trustees to administer assets for the benefit of the beneficiaries.
- The trustees must accept the assets and the terms and conditions in accordance with which these assets will be administered, invested and distributed.
- The trustees must be authorised to act as trustees.
- The trust deed must make provision for ascertained, defined or ascertainable beneficiaries, or the impersonal object of the trust must be clearly defined. A trust without a beneficiary or objective is worthless.
- The objective of the trust must be lawful and the provisions of the trust deed cannot be contrary to law or public policy.
It often happens that the founder is not related to the beneficiaries. In fact, in many of these cases the founder doesn’t even know the beneficiaries – a document was merely placed in front of the neighbour’s cousin’s best friend who was told where to sign. Does this person really have the intention to create a trust for the benefit of your family? And will he really be making the initial donation to the trust? Not only does this affect the potential validity of the trust, but it also negates a possible transfer duty concession that could have been enjoyed, had the founder been a family member of the beneficiaries. In terms of section 9(4)(b) of the Transfer Duty Act 40 of 1949 no transfer duty will be payable if fixed property is transferred to a beneficiary who is related to the founder (within three degrees of consanguinity), provided that no consideration is paid directly or indirectly by such relative in respect of the acquisition of such trust property.
Section 6(1) of the Trust Property Control Act provides that a trustee may only act as such after being authorised thereto by the Master. Therefore, only after the Letter of Authority has been issued, can a trustee validly represent the trust. In cases such asSimplex (Pty) Ltd v Van der Merwe and Others NNO, Watt v Sea Plant Products and Van der Merwe v Van der Merwe the courts held that an act by a person acting without authority from the Master has no legal consequences and that a trustee may not, prior to authorisation, acquire rights for, or contractually incur liabilities on behalf of a trust.
The opposite also applies, in that a trustee’s responsibility does not cease unless the Master has withdrawn his authorisation (by removing a trustee’s name from the Letters of Authority). This was confirmed in Soekoe NO & Others v Le Roux where Rampai J held that a person’s resignation does not legally relieve him of his duties as trustee and that such person remains legally accountable until the Master has officially removed him from his office as trustee.
If you are not sure about the validity of your trust, it is advisable to contact a qualified trust practitioner who will be able to determine whether the trust was validly created and, where there is a problem with the validity, be able to provide a solution.