Entrepreneurial law

Unit 4: Trusts
Slides prepared by Susan de Kock
Based on prescribed textbook
Overview

► Despite the fact that a trust does not have

separate legal personality there are a number of
advantages of creating a trust.
► One of these is that the trustees can as a general
rule not be held liable in personam for the
liabilities of the trust.
► There are three parties to a trust:
► (a) the founder (donor), who donates assets to
the trust;
► (b) the trustees, who manage the trust; and
► (c) the beneficiaries of the trust.
Introduction to trusts
Theme 1
Learning Outcomes

► LO1: Differentiate between the various types of

trusts and the methods in which they may be created.

► LO2: Discuss the formation and the legal nature of a

trust.
► LO3: Apply the rights and duties of the respective
parties to a trust to a set of facts.
► LO5 Advise on the advantages and disadvantages of a
business trust with reference to a set of facts.
Prescribed Material

► Chapter 18
► Para 18.1, 18.4, 18.5, 18.6, 18.7, 18.8, 18.9, 18.10,
18.12, 18.13.
► Trust Property Control Act 57 of 1988
► Braun v Blann and Botha NNO 1984 (2) SA 850 (A)
► Crookes NO v Watson 1956 (1) SA 277 (A)
► Land and Agricultural Bank of South Africa v Parker and
Others 2005 (2) SA 77 (SCA)
Meaning and uses of a trust – Par 18.1
► Useful device
► Estate and financial planning
► Used to protect assets
► Used as a structure for business or trading purposes in
place of company or close corporations
► Advantage
► Its flexibility
► Lack of formality in its creation and operation
Meaning and uses of a trust continued…
► Trust
► legal relationship that has been created in a trust deed
(otherwise known as a trust instrument)
► Four characteristics:
► the relationship is created by the person who is known as the
founder, donor or settlor
► the founder places assets under the control of another person (or
persons), who is known as the trustee (or trustees)
► during founder’s lifetime – inter vivos trust or founder‘s death –
testamentary trust
► Purpose of the exercise is to benefit third persons (beneficiaries)
Meaning and uses of trust continued…

► Three main parties to a trust:

► the founder
► the trustees
► the beneficiaries
► If trust has person occupying all three
positions, may be a sham and may be
legally disregarded
Business trust

Trust Transfers assets to trustees in

Creator terms of trust deed
The Trust

The trustees are the Trustees

owners of the assets
but only in an
official capacity
They manage the
Trust Trust trust benefits for the
beneficiary beneficiary Trust income beneficiaries &
incur no personal
liability for the debts
of the trust
► Business trust: trust that carries on business or trading
activities
► Trust deed will have
► clauses that are necessary to allow trustees to achieve business
objectives of parties to that trust
► clauses that confer wide powers on trustees such as power to
carry on business &
► clauses that confer extensive borrowing & lending powers on
trustees
► Beneficiaries will have similar rights to shareholders of
company
Trust Property Control Act

► One statute that applies to trusts

► Administrative aspects relating to trusts
► Only 27 sections
► Does not regulate the formation or administration of
trusts
► Does have direct bearing on trusts, particularly the
authorisation and duties of trustees
Trust Property Control Act continued…
► Defines trust as:
► an arrangement
► through which the ownership of property of one person
► is by virtue of a trust instrument made over or bequeathed
► to another person, the trustee, to be administered or disposed of
according to the provisions of the trust instrument for the benefit
of the beneficiary or beneficiaries as designated in the trust
instrument, or for the achievement of the object stated in the
trust instrument; or
► to the beneficiaries designated in the trust instrument, which
property is placed under the control of another person, the
trustee, to be administered or disposed of according to the
provisions of the trust instrument for the benefit of the
beneficiary or beneficiaries as designated in the trust instrument,
or for the achievement of the object stated in the trust
instrument.
Trust Property control Act continued…
► Four types of trust:
► inter vivos trust
► testamentary trust
► where ownership and control of trust assets lies with the trustee
(ordinary trust)
► where the beneficiary or beneficiaries have ownership of trust assets,
but these are under the control of the trustees (bewind trust)

► Third trust for business purposes

► Non-beneficial ownership
► Trust is for the benefit of beneficiaries
► Section 12 – that the trust property does not form part of the estate of
the trustee, except in so far as the trustee is him or herself a beneficiary
of the trust
Basis of law of trusts

► Common law
► Decided case law
Trust and the Companies Act

► Trust is a juristic person for purposes of the Act

Business trusts – Par 18.4
► Ordinary trust
► Trustees power to carry on the business and
trade
► Trustees have power to take business risks and
trade with assets
► Beneficiaries usually have right to sell interest in
trust
► Trust can borrow money – creditors look to trust
assets for satisfaction
► Powers of Trustee – 18.4.1
► Trust deed of business trust specifically gives trustees power to trade /
carry on business
► Rights of beneficiaries – 18.4.2
► Trust deed could allow for beneficiaries to be able to sell, cede or
otherwise deal with their interests in the trust
► Beneficiaries often given a certificate of interest that details the rights
of beneficiaries
► Beneficiaries enjoy limited liability
► Issue of separation of ‘control’ from ‘benefit’ 18.4.3
► Land and Agricultural Bank of South Africa v Parker
► Seperation of trustees and beneficiaries core of Trust law
► In cases of family business trust the Master must ensure there is an
independent trustee or trustees provide security or AFS must be audited
► Trusts and limited liability – 18.4.4
► Creditors look to the trust property alone for satisfaction of their claims
► Must ensure trust does not become treated as a partnership
Parties to a trust – Par 18.5

► Founder
► Trustees
► Beneficiaries
The trust deed, deed of trust or trust
instrument – Par 18.6

► Trust is a creation of document

► Trust deed – document that creates trust
► Trust created through contract or will
► Trust deed is the ‘constitutive charter’
Types of trust – 18.7
► Inter vivos trusts / testamentary trusts
► business trusts would typically be inter vivos trusts
► Family trusts / business trusts :
► Public trading trust – invite public – give certificate
► Private trading trust
► Other trusts
► Statutory trusts
► Court ordered trusts
► Charitable trusts
Legal nature of trusts – 18.8

► Creation of document
► Contract (inter vivos)
► last will and testament
► Must be reduced to writing
► Crookes NO v Watson 1956 (1) SA 277 (A) – inter vivos
trust is really a contract
► Inter vivos trusts must meet requirements of contract
► Testamentary trust must meet requirements for valid Will
Consequences of forming a valid trust –
Par 18.9
► Trustees have certain obligations, duties and
powers
► Trust Property Control Act
► Common law
► Trust deed

► Beneficiaries have certain rights

► Trust deed
► Protection: Trust Property control Act
How to form a valid trust – Par 18.10
► Intention of founder to create a trust
► Obligation on trustees to manage and control the assets under
their care for the benefit of the beneficiaries
► Object must be lawful
► Trust property must be defined with certainty
► Trust object must be sufficiently certain
► Beneficiaries must be ascertained / ascertainable
► Must be at least one beneficiary
► Reduced to writing in trust deed or deed of trust
► One trustee appointed at least – capacity to act as
trustee
Authorisation of trustees

► Trust Property Control Act

► Trustee
► Any person who acts as trustee by virtue of an authorisation under s 6 of the Act

► Can only act if trust is already formed

Duties of trustees 18.2
► Duties in
► Trust Property Control Act
► Common law
► Act with care, diligence & skill that can reasonably be expected of
person who manages affairs of another
► Open separate trust account at banking institution
► Must keep records indicating the property that is held by trustee in
trust
► Must make any account or investment at financial institution
identifiable as a trust account or trust investment
► Must at written request of Master, account to Master in accordance
with Master’s requirements for trustee’s administration & disposal of
trust property
Duties of trustees
► May not destroy any document that serves as proof of the
investment, safe custody, administration, alienation or
distribution of trust property before expiry of period of five years
from termination of trust without written consent of Master
► Must give effect to terms of trust deed / trust instrument
► Must act with the utmost good faith
► Must exercise independent discretion at all times with respect to
trust matters
► Must not expose assets of trust to undue risk
► Must invest trust property productively
► Must account to beneficiaries
► Must act within powers granted in terms of trust deed
Powers of trustees

► Trustee derives powers from Trust deed.

► NO provision of power – inferred power was not intended
Rights of beneficiaries – Par 18.13

► Must have a beneficiary

► No beneficiary = nullity
► Must be identifiable
► Can still be one that is going to be born
► Can be founder
► Can also be trustee
► Rights can be ceded provided not prohibited
Activity

► Differentiate between:
► Ordinary and a bewind trusts; and
► Testamentary and inter vivos trusts
► When you would want to form each of the trusts
described above?
► How you would form each of those trusts?
Questions