Part B: Trusts
Purposes and types of trusts
A Trust exists when the creator(s) of the Trust, called the founder(s),
has handed over or is bound to hand over to another, called the Trustee(s),
control of property (including money) which, or the proceeds of which, is to be
administered for the benefit of some person or for some impersonal object or
purpose.
The terms of a Trust (namely the objects or purposes of the Trust, how
the Trustees are to be appointed, their powers, the use to which they must put
the Trust property, etc.) are usually set out in a document called the Trust
Deed.
A Trust is flexible in that it can be used to serve an indefinite variety
of purposes. A Trust may be created whereby the Trustees are obliged to use the
property entrusted to them for a specified, limited purpose and only in certain
clearly defined circumstances (eg: for the education of a minor until he or she
becomes an adult). However, a Trust
may also be created whereby the Trustees have a wide discretion to use the Trust
property for a general purpose (eg: for the provision of health care services to
disadvantaged persons). This latter
type of Trust is called a discretionary Trust.
In order for a valid discretionary Trust to be created, the object or
purpose of the Trust must be lawful and sufficiently certain. Certainty is
achieved if, for example, the beneficiaries or classes of beneficiaries under
the Trust (eg: all disadvantaged persons in a certain area) are specified with
sufficient clarity.
Trusts are regulated by the Trust Property Control Act, No 57 of 1988
("the Trust Act").
Persons who may appoint trustees
Depending on the terms of the Trust Deed, a Trust may be properly
established with only one Trustee; there is no upper limit in law to the number
of Trustees who may be appointed.
A Trustee may be appointed by, among others (and depending on the terms
of the Trust Deed), the founder, the other Trustees, by statute, by a public
official with the title Master of the High Court ("the Master") or by
the High Court itself.
The founders have the power to designate the original or initial
Trustees, as well as how their successors are to be chosen. The Trust Deeds of
discretionary Trusts usually specify how successors to the initial Trustees are
to be appointed. If the position of
Trustee in a Trust becomes vacant or cannot be filled for any reason, the Master
has the power in terms of the Trust Act to appoint a Trustee.
Qualification and formalities for appointment as trustees
The following rules regarding the qualifications for being appointed, and
for remaining in office as a Trustee, may be distilled from the Trust Act and
the common law:
A married woman no longer requires her husband's consent to become a
Trustee. A minor may be a Trustee, but only with the guardian's consent.
A corporation or other juristic person (such as a Company), or the
nominee of another entity such as a government department, may be a Trustee.
A Trustee who resides outside South Africa may, at the discretion of the
Master, be authorised to act as a Trustee of a Trust registered in this country.
The Trust Act would apply to such a person in the exercise of his or her duties
as Trustee.
The Trust Deed may specify further qualifications.
The Master is empowered to remove a Trustee from office if:
He or she has been convicted of a
criminal offence, of which dishonesty is an element; or
His or her estate is sequestrated,
liquidated or placed under judicial management; or
He or she has been declared by a
competent court to be mentally ill or incapable of managing his or her own
affairs.
Authorisation by the master
Although they may be appointed by the persons referred to above, the
Trust Act stipulates that Trustees may not act as such without the written
authorisation of the Master. This
written authorisation is commonly referred to as "Letters of
Authority".
Acceptance of trust
A person nominated or appointed as a Trustee must accept his or her
appointment. The acceptance is
signified by the completion of a form provided by the Master's office and
entitled "Acceptance of Trust as Trustee";
this form must be lodged with the Master before consideration will be
given to issuing Letters of Authority.
Trustees leaving office
Subject to the requirement that the needs and interests of the Trust and
its beneficiaries should not be prejudiced thereby, a Trustee may resign at any
time. The Trust Act requires that the Trustee must give notice of resignation to
the Master and, if applicable, to ascertainable beneficiaries.
In the case of a discretionary Trust with a large number of actual or
potential beneficiaries, it would not be necessary for a resigning Trustee to
give notice to beneficiaries.
A Trustee's position ceases to exist if the Trust is dissolved or
otherwise wound-up.
A Trustee may be removed from office by the High Court on application of
the Master or another person having an interest in the Trust property, if the
Trustee's continuing in office will prevent the Trust being properly
administered or would be detrimental to the welfare of beneficiaries.
The Master may remove a Trustee from office if the Trustee fails to
perform satisfactorily any duty imposed upon him or her by the Trust Act, or to
comply with any lawful request of the Master.
The Master's further powers of removal are set out above.
Trustees and Security
The Trust Act provides that a Trustee, as a person occupying an office of
confidence, must give security for the proper and faithful administration of the
Trust unless exempted by the Master from doing so.
Security in this context means financial guarantees that the Trustees
will properly carry out their functions.
Many Trust Deeds drawn for discretionary trusts exempt the Trustees from
providing security, and the Master usually goes along with this, although s/he
has the power to require security despite the terms of the Trust Deed.
If security must be given, it is usually in the form of a fidelity bond
containing a promise by a reputable insurance company to indemnify the Trust
against loss suffered through the default of the Trustee/s.
The Master will not issue Letters of Authority to a Trustee unless
security has been provided or exemption granted.
Administration of a trust: Duties of a trustee
Three main principles
govern the administration of the Trust:
The Trustees must give effect to the Trust Deed insofar as it is lawful
and effective.
The Trust Act requires the Trustees (in the performance of their duties
and the exercise of their powers) to act with the care, diligence and skill
which can reasonably be expected of a person who manages the affairs of another.
This principle has been expressed in various ways
: the Trustees must "use
greater care in handling Trust property than they might in dealing with their
own property"; the
Trustees must observe "scrupulous
care".
Except where they are bound by law to act in a certain way, Trustees must
exercise an independent discretion. It
is fundamental that Trustees avoid self-serving decisions and partiality.
In the case of a discretionary trust the only discrimination which would
be condoned would be that which favoured the most needy.
Some of a Trustee's more
important duties are set out below :
A Trustee's first duty on accepting appointment is to obtain a copy of
and become familiar with the contents of the Trust Deed.
The Trust Act obliges the Trustees to lodge the original Trust Deed or a
notarially certified copy with the Master.
In practice, the Trust Deed is lodged with the Master before s/he will
issue the Trustees with Letters of Authority.
It is a rule of the common law that, on taking office, Trustees must
immediately ascertain the nature of the Trust property (i.e. : all the assets of
the Trust) and its condition and location;
the Trust Act requires Trustees to register and identify each individual
Trust asset and to indicate clearly what property the Trustees hold in their
capacity as Trustees. Although Trustees are not obliged in law to make an inventory
of the Trust property they hold or administer, it is advisable for such an
inventory to be compiled and regularly updated.
The law requires Trustees to take control of the property and assets
given them by the founder/s of the Trust, and if possession is subsequently
lost, it must be recovered.
Trustees have a duty to collect diligently debts owed to them in respect
of Trust property.
The Trustees should invest money which accrues to the Trust Fund which is
not required for immediate payment, without delay.
It is improper for a Trustee to borrow Trust money.
It is the Trustees' duty to see that a reasonable return is obtained on
Trust capital.
In terms of the Trust Act, the Trustees must open a separate account at a
banking institution or building society and deposit in it Trust money which is
not yet invested.
The Trust Act requires Trustees to furnish the Master with a physical
address for the service of any notice or court process, and to advise the Master
by registered post within Fourteen (14) days of any change in that address.
Trustees' powers
The Trust Deeds for many discretionary Trusts accord the Trustees the
widest possible powers (similar in most respects to the powers of Companies) to
enable them to achieve the Objects of the Trust.
These powers may include the power to sell, let, mortgage and encumber
Trust property, both movable and immovable; to invest Trust funds; to borrow
money; to open and operate banking accounts; and to employ staff.
Ownership of trust property
Trustees become owners of the Trust property.
However, they are owners only in a legal and not a personal sense. They are owners in their capacities as Trustees, and the
Trust property does not form part of their personal estates;
in using and disposing of the property, they must comply with the Trust
Deed and all applicable laws.
The role of the master of the high court
In practice, the Master's supervision of a Trust is limited to close
control over the authorisation and/or appointment of Trustees.
However, the Trust Act gives the Master wide powers of supervision and
enquiry over the Trustees' conduct of the Trust's business;
the Master is empowered, inter alia,
to call on Trustees at any time to account for the administration and disposal
of the Trust's assets, and may remove Trustees and appoint others in their
place, as described above.
Remuneration of trustees
The Trust Act provides that a Trustee is entitled to the remuneration
provided for in the Trust Deed or, where no such provision is made, to a reasonable
remuneration.
Reasonable remuneration is not defined in the Act.
What constitutes reasonable remuneration in any particular situation is a
question of fact.
In order to facilitate the granting of income tax exemption and other tax
privileges, the Deeds of many discretionary trusts provide that Trustees are not
entitled to be paid for the work done or the time spent as Trustees, e.g. for
attending Trustees' meetings or fulfilling their other duties as Trustees.
However, such Trust Deeds provide that Trustees are entitled to be
reimbursed for expenses incurred on behalf of the Trust (e.g. the expenses of
travelling to Trustees' meetings) and for work actually done on behalf of the
Trust (e.g. in the case of an executive Trustee, a reasonable salary would be
permissible).