By Rigard Sevenster, 2 May 2014
Without going into legal jargon, trust law in South Africa is primarily based on two things: the Trust Property Control Act of 1988 and common law principles. This should not be confused with the numerous fiscal laws that govern the taxation of trusts. In layman’s terms, common law principles are those legal principles and precedents based on previous court judgements and rulings. These previous court cases form the precedents on which future legal requirements and legal proceedings involving trusts may be based. Our trust law is therefore constantly evolving, as new precedents are set through new court cases.
There have recently been a number of significant court cases that shaped trust law in our country. A few examples amongst many include:
In the majority of cases, the courts were asked to examine the validity of the trust or the validity of actions of the Trustees. The trusts were seen as nothing more than alter egos of the individuals in question, thereby defeating any protection that the trust could have offered.
The essential elements of a trust clearly suggest that there are three distinct roles within a trust: There is the founder who creates the trust. There are the trustees who accept the assets in their care and administer the trust assets in line with their fiduciary duties. Then there are the beneficiaries for whom the trust assets are managed and who ultimately benefit from the trust. But here is the tricky part...In South Africa the founder can also be one of the trustees. Not just that, he or she can also be one of the beneficiaries. A person can just not be the only trustee and the only beneficiary. It is this concession that creates estate planning avenues but simultaneously creates the biggest headaches.
The difficulty for most of us is to separate the idea of ownership and control and enjoyment of an asset. If I gave the asset...and I manage the asset...and I also enjoy the asset, then surely it must be mine and I can control it? Here lies the catch – you gave up ownership of the asset as the founder. It is not yours to control anymore. If you are also listed as one of the trustees, then the asset’s ownership vests in your capacity as a trustee, not in your personal capacity. This is a legal concept that has been elaborated on in our courts.
Bottom line – you relinquished control of the asset in your personal capacity, you now manage it as a trustee for the benefit of the beneficiaries. And if the question ever arises, you will have to prove that you managed it in the best interest of the beneficiaries and not in your own.
Bottom line: have the necessary evidence that the trust is managed in the interest of the beneficiaries and not in the interest of the trustees; and make sure that nothing points to a single person exercising too much control over assets.
An important side note is that a court can undo an individual’s transfer to a trust if it finds that the transfer was made with the intention of defrauding creditors or to avoid assets being part of a divorce settlement. These transfers are considered fraudulent and in some cases carry legal penalties. It is vital to plan for asset protection well before you even anticipate being the subject of any liability. Just as vital is that you work closely with experienced and credible legal professionals before engaging in any measure of asset protection.