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Some Topical Issues relating to Trusts

Some Topical Issues relating to Trusts. Presented by Professor Walter Geach CA (SA) BA LLB (Cape Town) MCOM FCIS Professor in the Department of Accounting, University of the Western Cape. 1. Interesting New Cases and Issues. Amending a trust deed: When invalid

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Some Topical Issues relating to Trusts

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  1. Some Topical Issues relating to Trusts Presented by Professor Walter Geach CA (SA) BA LLB (Cape Town) MCOM FCIS Professor in the Department of Accounting, University of the Western Cape 1

  2. Interesting 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 2

  3. Interesting 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 3

  4. Substance over Form 4

  5. Substance over Form: Compare with the Provisions of the Companies Act 2008 • 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’ 5

  6. Substance ‘effect will be given to unexpressed agreements and tacit understandings’ 6

  7. FNB v Britz and Others(20 July 2011) A TRUST RESPONDENTS: TRUSTEES RESPONDENTS: TRUSTEES B TRUST Owned property RESPONDENTS: BENEFICIARIES WITH THEIR CHILDREN 7

  8. FNB v Britz and Others(20 July 2011) • 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 8

  9. 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 9

  10. FNB v Britz and Others(20 July 2011) • 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 dutiesto safeguard the property, for the benefit, and interests of the beneficiaries 10

  11. Substance: • The Importance of the Trust Deed 11

  12. The Importance of the Trust Deed • 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 12

  13. Section 19 • vs • Compliance Notice issued by Commission 13

  14. Companies Act:Enlightened Shareholder Approach • 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 14

  15. A trust deed is a trust’s “constitutive charter” • Outside the provisions of a trust deed, the trust cannot be bound 15

  16. Company Section 20 (6) Each shareholder has a claim for damages against any personwho • 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 16

  17. Potgieter v Potgieter NO and Others2012 (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 17

  18. Trusts and Other Entities 18

  19. Planning and Choices • Different types of company: New Companies Act • Close corporations • Trusts • Combinations: For example trusts owning shares or members’ interests • Tax issues 19

  20. When there is a Trust there are certain Inescapable Consequences • Trustees hold an office: Powers and duties • Beneficiaries get rights • There is a separation of control/ownership from benefits: a person has divested himself of property • Certain laws apply depending where the trust is (a) formed (b) administered (c) managed • The trust deed applies • The Master has powers 20

  21. Why a Trust? 21

  22. 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 22

  23. Why a Trust? • Consider costs • Existing ownership of assets: Recoupments, CGT, transfer duty • Acquisition of new assets 23

  24. Trusts Fundamental Issues: Different Types of Trusts 24

  25. Definition of a Trust And Ownership • ‘Ordinary’ trust • ‘Bewind’ trust 25

  26. Ordinary Trust 26

  27. an arrangement ownership in property is by virtue of a trust instrument made over or bequeathed to a trustee /s to be administered or disposed of in terms of the trust instrument for the benefit of the beneficiary or beneficiaries or for the achievement of the object stated in the trust instrument

  28. Bewind 28

  29. Definition of a Trust: And Ownership What is the position when there is only one beneficiary? 29

  30. Rights of Beneficiaries and Types of Trusts 30

  31. Terminology • Bewind • Vested right 31

  32. 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 32

  33. Vesting • Vesting confers a right • Different from a real right • Different from a discretionary right 33

  34. Discretion • Discretion regarding • Income and/or capital • Whether to distribute • To whom to distribute • How much to distribute • When to distribute 34

  35. Stander and Others v Schwulst and Others2008 (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 35

  36. Rights of Beneficiaries Discretionary • All beneficiaries have rights including discretionary beneficiaries 36

  37. 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 37

  38. Beneficiaries Rights 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.” 38

  39. Stander and Others v Schwulst and Others2008 (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. 39

  40. Trust Law: Where is it Found? 40

  41. Potgieter v Potgieter NO and Others2012 (1) SA 637 (SCA) (30 September 2011) • Trust law = • The Trust Property Control Act • The trust deed • The common law 41

  42. Potgieter v Potgieter NO and Others2012 (1) SA 637 (SCA) (30 September 2011) • The trust deed: the trustees could amend the trust deed • The common law: the beneficiaries must agreeto changes if they had accepted the benefits given to them in terms of the deed 42

  43. Potgieter v Potgieter NO and Others2012 (1) SA 637 (SCA) (30 September 2011) Trustees + beneficiaries = amendments 43

  44. How does a Trust Operate? 44

  45. Steyn and Others NNO v Blockpave (Pty) Ltd 2011 (FB) • 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 45

  46. Resolutions Steyn and Others NNO v Blockpave (Pty) Ltd 2011 • There is only one legally regular and permissible way in which a trust communicates with the world, and that is through its resolutions 46

  47. Steyn and Others NNO v Blockpave (Pty) Ltd 2011 • A trust operates in two different spheres: • Internally • and • Externally 47

  48. Steyn and Others NNO v Blockpave (Pty) Ltd 2011 • 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 48

  49. 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: 49

  50. Van der Merwe NO and Others v Bosman and Others 2010 The minority is obliged to act jointly with the other trustees in executing the resolution adopted by the majority 50

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