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Knowing the legal background

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:

  • a couple of divorce cases (Jordaan vs. Jordaan 2001(3) SA 288; Badenhorst v Badenhorst, [2006] 2 All SA363 (SCA));
  • cases involving banks or creditors (FNB v Britz and Others (20 July 2011); Landbank v Parker, [2004] 4 All SA 261 (SCA));
  • and family members having a dispute (Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011)).

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.

What it boils down to: You have to lose control

  • Without a doubt, the biggest mistake made by the vast majority of individuals, is that they don’t understand what a trust is. Many think of it as some kind of vehicle where they can put their assets to protect them, but that the assets are still theirs to do with as they see fit. This goes completely against the concept of a trust and puts them and the trust in a very vulnerable position.
  • Essentially, a trust is a legal arrangement (a contract) under which the founder (sometimes called the donor or settlor) transfers ownership of assets into the care of another person (the trustee) to be administered for the benefit of a third person or group of people (the beneficiaries). The key phrase here is transfer ownership. It is one of the essential elements of a trust. There has to be real intention of the founder to give over ownership. When you, as the founder, hand assets over to the trustees, they no longer belong to you and you can no longer treat those assets as your own. The control over those assets should now lie with the trustees.

Where the confusion comes in: The three different roles

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.

Steps to ensure a legally sound trust

  • Make sure that an actual trust came into being. The founder had to have had the intention to create a trust and had to actually hand the assets over to trustees for the benefit of identifiable beneficiaries;
  • Have a sound trust agreement (deed) in place. It should provide flexibility but not provide the wrong kind of powers to any individual. Make sure it is updated with changing circumstances and changes in legislation;
  • Trustees should know their legal duties and keep up to date with any changes to trust law. Trustees should also study the trust deed and be aware of their powers and responsibilities;
  • Separate the ownership and control of the assets from the enjoyment of the assets (remember the three different roles). If you control the assets as your own, they will be regarded as your own. So no veto powers in the trust deed. No testamentary reservation where you decide how assets should be split in your will;
  • Have an independent trustee who is involved with all decision making, not just as a token trustee. This person should not be a beneficiary or a direct family member. Consider appointing a corporate (professional) trustee;
  • Keep the administration of the trust meticulously up to date. This is exceptionally important. Paperwork that is kept up to date will indicate that the necessary steps are always taken by the trustees in performing their duties. This includes the following: minutes of meetings, resolutions of all transactions, email communication, yearly financial statements (including an asset register), loan agreements, etc. All of these need to be in writing and kept up to date. This is the first question that any court will ask if the trust is ever involved in a dispute.

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.

No quick-fixes for troubles on the horizon

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.

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