1 some topical issues relating to trusts presented by professor walter geach ca (sa) ba llb (cape...
TRANSCRIPT
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Some Topical Issues relating to Trusts
Presented by
Professor Walter GeachCA (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 IssuesInteresting New Cases and Issues 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 IssuesInteresting 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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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’
Substance over Form: Compare with the Provisions of
the Companies Act 2008
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‘effect will be given to unexpressed agreements and tacit understandings’
Substance
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A TRUST
B TRUST
RESPONDENTS: BENEFICIARIES WITH THEIR CHILDREN
FNB v Britz and Others (20 July 2011)
RESPONDENTS: TRUSTEES
RESPONDENTS: TRUSTEES
Owned property
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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
FNB v Britz and Others (20 July 2011)
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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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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
FNB v Britz and Others (20 July 2011)
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Substance:The Importance of
the Trust Deed
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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
The Importance of the Trust Deed
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Section 19
vs
Compliance Notice issued by Commission
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Section 20 (4) 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
Companies Act:Enlightened Shareholder Approach
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A trust deed is a trust’s “constitutive charter”A trust deed is a trust’s “constitutive charter” Outside the provisions of a trust deed, the trust cannot Outside the provisions of a trust deed, the trust cannot
be bound be bound
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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Company
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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 Choices1. Different types of company: New Companies Act
2. Close corporations
3. Trusts
4. Combinations: For example trusts owning shares or members’ interests
5. Tax issues
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1. Trustees hold an office: Powers and duties
2. Beneficiaries get rights
3. There is a separation of control/ownership from benefits: a person has divested himself of property
4. Certain laws apply depending where the trust is (a) formed (b) administered (c) managed
5. The trust deed applies
6. The Master has powers
When there is a Trust there are certain
Inescapable Consequences
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Why a Trust?
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Why a Trust? 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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Consider costs Existing ownership of assets: Recoupments, CGT, transfer
duty Acquisition of new assets
Why a Trust?
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TrustsFundamental Issues:
Different Types of Trusts
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Definition of a TrustAnd Ownership
‘Ordinary’ trust ‘Bewind’ trust
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Ordinary Trust
an arrangement an arrangement
ownership in property ownership in property
is by virtue of a trust instrument is by virtue of a trust instrument
made overmade over or or bequeathedbequeathed
to a trustee /sto a trustee /s
to be administered or disposed ofto be administered or disposed of in terms of the trust instrumentin terms of the trust instrument
for the benefit of the beneficiary or beneficiaries orfor the benefit of the beneficiary or beneficiaries or for the achievement of the object stated in the trust instrumentfor the achievement of the object stated in the trust instrument
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Bewind
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Definition of a Trust: And Ownership
What is the position What is the position
when there is only one beneficiary?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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DiscretionDiscretion regarding Income and/or capital Whether to distribute To whom to distribute How much to distribute When to distribute
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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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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.”
Beneficiaries Rights
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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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Trustees + beneficiaries = amendments
Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)
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How does a Trust Operate?
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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
Steyn and Others NNO v Blockpave (Pty) Ltd
2011 (FB)
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Resolutions
There is only one legally regular and permissible way in which a trust communicates with the world, and that is through its resolutions
Steyn and Others NNO v Blockpave (Pty) Ltd
2011
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A trust operates in two different spheres: Internally and Externally
Steyn and Others NNO v Blockpave (Pty) Ltd
2011
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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
Steyn and Others NNO v Blockpave (Pty) Ltd
2011
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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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The minority is obliged to act jointly with the other trustees
in executing the resolution
adopted by the majority
Van der Merwe NO and Others v Bosman and Others
2010
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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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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)
The Sleeping Trustee
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The Sleeping TrusteeSection 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 TrustIs 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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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 tothe trust property.
Trust Property Control Act
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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
Trust as a Person: Property to be Identified
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Statutes that define a Trust as a Person
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. Founder/donor/settlor
2. Planner (client)
3. Trustees
4. Beneficiaries
5. Master
6. 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: Authority1. 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
20112011
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)
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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Be mindful of joint action rule of authority of trustees of powers of trustees of capacity of trustees of trust objectives
Contracting by and with a trust
Steps to be taken by 3rd parties
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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
Turquand Rule Vd Merwe NO and Others v Hydraberg Hydraulics CC
and others
17 June 2010
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TrusteesDuties
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Trustees: Comply with all LawsSection 17A trustee must not without the written consent of the Master destroy any document which serves as proof of the 1. Investment2. Safe custody3. Control4. Administration5. 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 LawsSection 10Trustees 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 TrusteeSection 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 TrusteeRAS 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
No other person has an interest in trust property
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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
Removal of a Trustee
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TrusteesResignation
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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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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
Trustees: Resignation
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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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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
Ras and Others NNO v Van der Meulen and Another
2011 (SCA)
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The MasterSection 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
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
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The Protector
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Must approve any suggested amendments to the trust deed
Can veto decisions of trustees Can appoint/remove trustees
The Protector
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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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“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’ . . .”
Land and Agricultural Bank of SA v Parker
2005 2 SA 77 (SCA)
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They treat the property as their own, and invoke the existence of the trust only when it suits them
Van der Merwe NO and Others v Bosman and Others
2010
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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
Van der Merwe NO and Others v Bosman and Others
2010
VAN DER MERWE NO AND OTHERS v BOSMAN AND VAN DER MERWE NO AND OTHERS v BOSMAN AND OTHERS 2010OTHERS 2010
'Where trustees of a family trust, 'Where trustees of a family trust,
including the founder,including the founder,
act in breach of the duties imposed by the trust deed,act in breach of the duties imposed by the trust deed,
and purport and purport on their sole authority on their sole authority to enter into contracts to enter into contracts binding the trust, binding the trust,
that may provide evidence that the trust form that may provide evidence that the trust form is a veneer is a veneer that in justice should be pierced in the interests of creditorsthat in justice should be pierced in the interests of creditors
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VAN DER MERWE NO AND OTHERS v BOSMAN AND VAN DER MERWE NO AND OTHERS v BOSMAN AND OTHERS 2010OTHERS 2010
§ I am not able to ignore the trust's existence as a formally I am not able to ignore the trust's existence as a formally constituted legal concept when it comes to compliance constituted legal concept when it comes to compliance with the peremptory requirements of applicable with the peremptory requirements of applicable legislation. legislation.
§ WhenWhen law law and and equityequity cannot concur, it is the law that cannot concur, it is the law that must prevaimust prevail
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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
Jordaan v Jordaan
2001 (3) SA 288 (K) de facto control
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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.
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A TRUST
B TRUST
RESPONDENTS: BENEFICIARIES WITH THEIR CHILDREN
FNB v Britz and Others (20 July 2011)
RESPONDENTS: TRUSTEES
RESPONDENTS: TRUSTEES
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The Respondents are therefore entitled to transfer ownership of the assets of both trusts to themselves as and
when they please
FNB v Britz and Others (20 July 2011)
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Formation of a Trust: Requirements
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1. Trust deed
2. Must be an intention to create a trust: obligation must be imposed on trustees
3. Beneficiaries must be clearly identified
4. Trust object must be clearly stated. Law of contract (inter vivos) and law of testation (testamentary)
5. The object must be lawful
6. Property must be clearly identified
7. Trustees to be authorized and to have capacity
8. Comply with all laws, especially Trust Property Control Act
Trust Requirements
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Termination of a Trust
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In terms of the trust deed: arbitrary dates? Why terminate? No more assets No beneficiary
Termination of a Trust
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The amendment of trust deeds
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The Amendment of Trust Deeds Trust Property Control Act Courts and the common law Power of other parties
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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
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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
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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
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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
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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
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Potgieter v Potgieter NO and Others 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
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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
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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
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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
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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
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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’ ............................
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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
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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
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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
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