Unit 5- Trusts

Law for Land Managers 1B

Trusts

Unit 5 Trusts Objectives At the end of this unit you should be able to: • • • • • • • • • • •

Define a trust Name and discuss the two types of trusts Identify the parties to a trust Discuss the requirements for creating a valid trust Discuss the capacity of a trustee Discuss the appointment of a trustee Discuss the powers and duties of a trustee Name the instances under which the service of a trustee terminates Name the remedies of a beneficiary Discuss the trust for an impersonal purpose Name the instances when a trust terminate]

Sections: 1. Introduction 2. Requirements for creating a valid trust 3. The trustee 4. Powers of a trustee 5. Duties of a trustee 6. Termination of the services of a trustee 7. The beneficiary 8. Remedies of the beneficiary 9. The trust for an impersonal purpose 10. Amending trust provisions 11. Termination of a trust

Unit 5

Page 1 of 10

Law for Land Managers 1B

Section 1

Trusts

Introduction

A testator usually makes use of a trust where he wishes to benefit someone, but for the beneficiary’s own protection, entrusts the ownership and control of the assets, in the interests of the beneficiary, to a third party. E.g. “I bequeath my farm in trust to my daughter Y. My son X is nominated as trustee. The trust must be dissolved when Y turns 21 years old. Y will be the trust income and capital beneficiary. Thus the farm will belong to the trust after the testator’s death and control over it will be exercised by the trustees until Y becomes 21. The income from the farm will be applied to Y’s benefit and once she turns 21 the farm will be transferred into her name. There are 2 types of trusts namely: a) The trust inter vivos b) The trust mortis causa The trust inter vivos does not form part of the law of succession as it is a trust created between living persons and it is based on the law of contract. Thus we will only be dealing with trusts mortis causa, however to do so it is important to note that under both types of trusts we find further two types of trusts namely the normal or private trust, which includes the trust for an impersonal purpose, and the bewind trust. The trust where the beneficiary is the owner is called the bewind trust and the trust where the trustee is the owner is called the private trust. A trust is created through a trust instrument which can be defined as a written agreement, a testamentary writing or a court order which creates a trust. A trust can be said to be a legal relationship by which one person is to administer property on behalf of another or in the pursuance of an impersonal object. E.g. The executor of a deceased’s estate or a partner in a partnership A trust exists where the creator of the trust (founder) hands over or is bound to handover the control of an asset, which, or the proceeds of which is to be administered by another (the trustee) in his capacity as such for the benefit of some person (the beneficiary) other than the trustee or for some impersonal object. The trustee holds a public office and as such is subject to public control by the Master of the High Court.

Unit 5

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Law for Land Managers 1B

Section 2 2.1.

Trusts

Requirements for creating a valid trust

Serious intention to create a trust The founder must have the intention of creating a trust and he must have the capacity to act and make a will if the trust is embodied in a will.

2.2

The trust must be in writing A testamentary writing or a court order even an Ante nuptial Contract. Thus the intention to create a trust must be expressed in a legally valid manner. If in a will all the formalities required to make a will must have been complied with.

2.3.

The trust properly must be defined or be easily determinable.

2.4.

The trust object must be clear. E.g. In the case of a private trust the beneficiaries must be determined or capable of being determined.

2.5.

The trust object must be lawful The object or purpose of a trust may not be in conflict with the legislation or public policy.

A founder may stipulate that the trust property not form part of beneficiary’s insolvent estate but pass to the beneficiary personally. E.g. “I leave my farm to A if he becomes insolvent the farm must go to B.” See: Vicken’s Trustee v Cloete 1914 CPD 575 A trust mortis causa only takes effect upon the death of the testator (founder). There are 3 parties to a trust namely: the founder, the trustee and the beneficiary.

Section 3 Unit 5

The trustee Page 3 of 10

Law for Land Managers 1B

3.1

Trusts

Capacity

This is the person who administers and controls the trust property for the benefit of the trust beneficiaries or for an impersonal purpose. A trustee can be any person who’s authorized including the founder of the trust to be a trustee. The founder may nominate any person to become a trustee however such person should be authorized to be a trustee by the Master of the High Court. Any acts by trustees who are not authorized to be trustees will be considered null and void. Simplex (Pty) Ltd v Van der Merwe 1996 (1) SA 111 (W) A trustee can be a natural or Juristic Person as the law requires that he or she must have the capacity to act and be in a position to accept trusteeship. Ex Parte Leandy 1973 (4) SA 363(N) There is no law that stipulates how many trustees there can be, more than one can be appointed and they will jointly be liable for the administration of the trust, they may also delegate their powers to one another. Goolam Ally Family Trust t/a Textile Curtaining and Trimming v Textile Curtaining and Trimming (Pty) Ltd 1989 (4) SA 985 (C ) 3.2

The appointment of the Trustee Normal practice dictates that the founder nominates the trustee by name in the trust instrument; however the founder may appoint a person with the power of nominating a trustee. The founder may also give the trustees, he has nominated, a power of assumption, i.e. the power to appoint a trustee, in the absence of such power a trustee has no right to appoint another trustee. Smith v Van der Werke 1984 (1) SA 164 (T); Marais Naude 1987 (3) SA 739 (A) Practice also dictates that before one approaches the court for an appointment of a trustee where there is a vacancy the beneficiaries should be consulted. Ex Parte Leandy 1973 (4) 363 (N) 367 The founder may also give the Master of the High Court the power to appoint trustees. The Court has the power and duty to appoint trustees to prevent the trust from failing. Ex Parte Leandy 1973 (4) SA 363 (N) 367; Administration, Estate Richards v Nichol 1996 (4) SA (C) 259

Section 4 Unit 5

Powers of the trustee Page 4 of 10

Law for Land Managers 1B

Trusts

1.

Power of Sale This power must expressly be or impliedly be provided for in the trust instrument. There is no common law Rule which grants the trustee the power to sell trust property, he/she will have to approach the court to do so. Ex Parte Moodley 1968 (4) SA 22 (D

2.

Power of advancement This power must be conferred on the trustee either expressly or impliedly as there is no common law Rule to this effect. Ex Parte Hulton 1954(1) SA 460 (C); Ex Parte Thompson 1972 (1) SA 528 (NC)

3.

Power to continue business Unless expressly or impliedly conferred in the trust instrument the trustee has no power to continue with business as there is a general caveat against taking business risks. The Trustee will have to approach the court for such power. Ex Parte Estate Klosterschulte 1962(2) SA 314(T)

4.

Power to exchange trust property Trust property may only be exchanged in the following circumstances: a) where the power to do so is expressly stated in the trust instrument b) where the trustee has the power of sale and re-investment c) where the property is in the process of deterioration Unless these 3 circumstances exists, the trustee requires the consent of the beneficiaries or the court’s consent in case of minors, to exchange trust property, the exchanged property than falls into the trust estate.

5.

Power to burden trust property If expressly or impliedly provided the trustee has the power burden the trust property with for example a mortgage. Ex Parte Bellingan’s Executions 1936 CPD 515

Section 5 Unit 5

Duties of the trustee Page 5 of 10

Law for Land Managers 1B

Trusts

1.

Duty to provide security The court has the common law power to exempt a trustee from providing security. However unless such exception is granted the Master of High Court will not grant his/her authority to such trustee unless he/she provides security.

2.

Duty to take possession of the trust assets The trustee must take possession of the trust assets for the trust. The trustee then has a duty to make an inventory of the trust property. Before a trustee takes possession of the trust property he must lodge with the Master of the High Court the trust instrument.

3.

Duty to keep trust assets separate It is important that the trustee keep his personal estate separate from the trust estate.

4.

Duty to invest The trustee must be directed by the trust instrument and he must use great care in administering trust property and he must not expose it to any business risk.

5.

Duty to preserve The trustee has a duty to conserve the trust property and free encumbered trust property.

6.

Duty to avoid conflict of interests A trustee may not have any of his personal interests clash with those of the beneficiaries and he may also not favour one beneficiary over the other.

A trustee is entitled to a reasonable remuneration where no provision is made in the trust instrument for a trustee’s remuneration. If a dispute ensues with regards to remuneration the Master of the High Court may fix the remuneration of the trustee. A trust is not a juristic person but a legal institution sui generis i.e. an institution or concept that has its own set of rules and does not conform to the rules of any other legal concept or institution. In a private trust the assets and liabilities vest in the trustees and they sue and can be sued on behalf of the trust in respect of the trust property. Beneficiaries, on the other hand, cannot do so however they can sue the trustees. Blann and Botha 1984(2) SA 850(A)

Unit 5

Page 6 of 10

Law for Land Managers 1B

Section 6

Trusts

Termination of the service of the Trustee

A trustee’s services are terminated when the following happens: 1.

At the Death of the Trustee

2

Resignation of the Trustee by giving notice to the Master of the High Court and the beneficiaries.

3.

Removal from office by the Court on application by any party with an interest in the trust property

4.

Where the trustee is declared mentally ill or incapable of managing his own affairs.

5.

Where a trustee becomes insolvent

6.

Where the purpose of the trust has been achieved

Section 7

The beneficiary

The beneficiary may be a person or an impersonal purpose for which the benefit of the trust is intended. This is a person on whose behalf the trustee must appropriate the trust property. The trustee may be a beneficiary where there is more than one trustee; a founder may also be a trustee. The trustee may not be the only beneficiary as he cannot hold the property on behalf of himself; a founder may also be a trustee. In the absence of a trust beneficiary the trust property is administered like the remainder of the founders’ estate. In Re Estate Grayson 1937 AD 96 The trust beneficiary has a personal right against the trustee, which obliges the trustee to carry out the provisions of the instrument. In the case of a bewind trust, ownership of the trust property vests in the beneficiary and he/she has a real right in respect of the trust property. Here the beneficiary has a stronger position, where the trustees neglect to comply with the provisions of the trust instrument.

Unit 5

Page 7 of 10

Law for Land Managers 1B

Section 8

Trusts

Remedies of the beneficiary

Where the trustee fails to comply with the provisions the beneficiary has the following remedies, he or she can: 1.

Obtain a prohibitory interdict against a trustee who wants to sell trust property without authorization.

2.

Sue the trustee for failing to comply with the provisions in the trust instrument.

3.

Oblige a third party who receives trust property with the knowledge that it is not authorized, to restore the property to the trust.

4.

Institute a claim of damages against a trustee who negligently or deliberately mal-administered the trust property and in so doing caused the beneficiary to suffer damages.

Section 9 the

The Trust for an impersonal purpose (Also know as Charitable Trust)

These are trusts that are intended to be used for charitable purposes. Here the trustee is the entitled party and acts on behalf of an impersonal objective. The courts take a more lenient approach to charitable trusts in the following ways: 1. 2 3.

A charitable trust need not fail because its object is not clearly stated or its beneficiaries are not easily determinable. The power of assumption is conferred on the trustee to determine the beneficiaries Here the Cy prês doctrine is applied in that where the court cannot determine the testators’ intention, it is sufficient if it is determined as near as possible.

Section 10

Amending Trust Provisions

The court has no common law power to vary trust provisions, however certain statutory powers have been given to the Court to vary or revoke trusts of immovables, i.e. The Immovable Property (Removal or Modification of Restrictions Act 94 of 1965 Section 1)

Unit 5

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Law for Land Managers 1B

Trusts

However despite the court not having the common law power to vary the provisions of a trust instrument there are grounds that the court can consider in order to vary such provision, they are: 12.6.1. 12.6.2. 12.6.3.

Necessity The implementation of the creator’s intention Variation cy-prês of charitable trusts

Section 11

Termination of a Trust

A trust will terminate if the following exist. 1.

The trust object is realized

2.

Trust assets have been destroyed without fault on the part of the trustee.

3.

If it fails for some reason

4.

Where the capital beneficiary’s rights are accelerated, e.g. where the capital beneficiary renounces his rights and no other intention is stated in the trust instrument

5.

The trustee and beneficiaries agree to terminate the trust.

Unit 5

Page 9 of 10

Law for Land Managers 1B

Trusts

REVISION QUESTIONS 1. What is a trust? 2. Name the two types of trust? 3. Who are the parties to a trust? 4. What are the requirements for creating a valid trust? 5. Who can be a trustee? 6. How is a trustee appointed? 7. What are the powers and duties of a trustee? 8. When can the service of a trustee be terminated? 9. What remedies do the beneficiaries have against the trustees? 10. When does a trust terminate?

Unit 5

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