Unfortunately, shortcomings, blatant errors and/or omissions often only surface once creditors, the South African Revenue Service (Sars), a soon-to-be-ex-spouse, and so forth, attack the trust at a time when it may seem beneficial to such persons or creditors to disregard the trust.
* A clear and unambiguous intention on the part of the founder to create a trust. Clients are often advised that the founder cannot, or should not, simultaneously hold the role of trustee and/or beneficiary. This is simply not true.
The Trust Property Control Act acknowledges the fact that the founder can also be a trustee through the definition of a trustee as “any person (including the founder of a trust) who acts as trustee” The proposed founder of a trust should always be asked whether he/she has a true intention to create a trust for the benefit of the beneficiaries. The intention to create a trust is manifested by the handing over of assets to the trustees by the founder by virtue of a trust deed.
* The founder expresses his/her intention in the creation of the trust deed in such a way as to create an obligation. This intention is generally what comes into question when determining whether the founder created the trust to administer the property, or whether he/she is merely using the trust as a means through which to conduct his/her personal affairs.
Because a trust is regarded as a contract, the Courts will look at the substance of the arrangement rather than simply looking at the trust deed. If it is clear from the substance of the arrangement that the founder did not intend to give up control over the assets, the trust may be disregarded.
Reserving rights and powers to retain control over trust assets, such as the right to amend the trust deed, without deferring to the trustees, reservation of decisions for the founder to deal with trust assets, and a testamentary reservation clause, in terms of which a right is retained by the founder to dispose of trust assets in his/her will, may be indicative that the founder did not really intend to create a trust, thereby invalidating the trust.
* Trust property should be clearly and certainly defined so that it can easily be identified. The Trust Property Control Act requires a maintained asset register for the trust, stipulating the description, value and location of each asset. The financial records should also clearly indicate which properties are held by the trustees.
* Beneficiaries (or object) must be clearly and certainly defined, to be identifiable. A trust is formed to benefit some persons or some object (such as a charity). As such, there should be a “person”, identified by name and preferably an identity number, or “class of persons”, identifiable through the description of such a class, such as “the descendants of”. A trust without identified or identifiable beneficiaries is invalid. The trustees should also not have the power to appoint any beneficiaries.
* The trust object must be lawful. The Master of the High Court does not censor a trust’s object. Instead, this is left to those interested in the trust to establish if the trust object is unlawful. The object is generally openly stated in the trust deed, and all parties who have dealings with that trust will be able to establish the object from the trust deed. An example of this would be “To hold trust assets for the benefit of the beneficiaries”.
* Property must physically be transferred to the trustees (discretionary trust) or beneficiaries (vested trust). While a company can exist without assets, it is not possible for a trust to exist without assets. A founder’s failure to relinquish control over trust property to the trustees may delay the trust from coming into operation.
Although some people interpret the principle established in a 1994 case to mean that you do not have to make the physical initial donation to establish a trust, as long as there is an obligation to make such initial donation in the trust deed, which is then made at a later date, it is recommended to rather make the initial donation as soon as the trust is registered, to avoid attacks from Sars and creditors.
In the application of the Substance Over Form Principle in South Africa, the trust should not only legally own the trust property, but it should be clear from the actions and behaviour of the trustees and the founder that the assets in substance are managed by the trustees, and not by the founder, or only one of the trustees, otherwise the legal form of the trust will be ignored, the trust will be disregarded and the assets will be regarded as belonging to the founder, thereby negating the benefits sought when first establishing the trust.
Under certain circumstances – such as when the founder has died – it may be impossible to change provisions in the trust deed. It is therefore important to review your current trust deed and the execution thereof, to ensure that these requirements are met, and changes made, if necessary, before it is too late.
Phia van der Spuy is the founder of Trusteeze.
The views expressed in this article are not necissarily those of the Independent Group