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WELCOME
TRUSTS: COMMON MISTAKES IN DRAFTING A TRUST DEED
LEGAL NATURE OF A TRUST A Trust is NOT similar to a company or cc. A Trust does not possess a separate legal
personality. A trustee, in his legal capacity, is regarded as a
separate entity. Trustee has the structure of the owner of the bare dominium.
Trust has the structure of a stipulatio Alterii. Inter vivos trust is an agreement and the rules of
the law of contract apply.
THE TRUST CONSTITUTION
THE TRUST DEED1. The Deed of Trust is the trustees’ constitution and if
a responsibility, duty or power is not expressly stated then it cannot be implied by the trustees. The trustees have no authority to ‘assume’ that they may carry out a particular duty or power and if they do so then they are acting ultra vires.
2. It is a dynamic document that must be reviewed regularly. Tax and trust laws change!
3. Experience has shown that at least 9 out of 10 trusts either have wrong clauses or are missing clauses.
THE TRUST DEED
Main reasons for bad clauses in trust deeds in South Africa:-Bad drafting; Ignorance of unique trust law system
in the RSA; Using precedents foreign to RSA
trust law.
THE TRUST DEED
Bad drafting; Trust templates are regularly plagiarised
by different companies; This plagiarism was recently referred to
in Potgieter v Potgieter (629/2010) [2011] ZA SCA 181 (30 September 2011) where the attorney who prepared the deed stated in Court;
THE TRUST DEED
“It unintentionally found its way into the draft, because I slavishly copied a precedent without realising that the statement was inapposite to the deed that I prepared.”
Same template is never updated to changes in trust case law or tax law.
Same template is not customised to meet the individual requirements of the client.
THE TRUST DEEDNOTE:
There is no finite list of problem clauses. For the rest of this presentation we will be looking at some of the problematic clauses found in standard inter vivos trusts. This is not the A to Z of all the problem clauses that are to be found. There are literally thousands of trust deeds in circulation and how well it has been written all depends on the skills of the drafter. Each trust deed must be analysed in isolation to determine whether it is compliant or not.
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1. FOUNDER/SETTLOR/DONOR
Common misconception between Founder and Funder. Incorrect belief that if a grandparent is the Founder then none of the attribution rules apply (i.e. section 7(3) and paragraph 70). Income Tax Act looks to Funder.
Distant Founder is difficult to trace if trust deed to be varied by agreement between Founder and trustees.
Section 9(4) of the Transfer Duty Act.
2. ANALYSIS OF TRUST DEED CLAUSES - BENEFICIARIES
Father and/or mother not included as income and/or capital beneficiaries.
Only children are defined as beneficiaries and not descendants. This limits the extent of the beneficiaries and reduces the ability to distribute income to multiple beneficiaries.
Grandchildren can only benefit by representation per stirpes. Grandchildren can only benefit if a parent predeceases them.
Only trusts established by the trustees qualifying as beneficiaries. This excludes existing trusts.
ANALYSIS OF TRUST DEED CLAUSES - BENEFICIARIES
Only beneficiary is a trust. CGT will be incurred in the second trust at the effective trust rate of 27%.
The class of beneficiary is defined as the ‘spouse’ of John Smith. Should be the spouse / widow of John Smith.
Trustees have the power to appoint beneficiaries of their choice i.e. “general” and “specific” (also referred to as “special”) power of appointment. Only specific power of appointment accepted in our trust law Braun v Blann & A 1984 2 SA 850 (A).
ANALYSIS OF TRUST DEED CLAUSES - BENEFICIARIES
Beneficiaries must benefit in equal shares. Definition of beneficiary is too broad ie
ascendants, descendants, spouses of descendants, related by blood and affinity etc.
3. ANALYSIS OF TRUST DEED CLAUSES – TRUST FUND
“Income of the trust not allocated by the trustees within six months following the financial year end, shall form part of the trust fund”.
This wording is in contradiction of the Income Tax Act and case law.
4. ANALYSIS OF TRUST DEED CLAUSES – VESTING DATE
The vesting date is subject to pre-emptive conditions. Some examples of these are;
a) The date of death of the Donor, or
b) terminate 90 (NINETY) days after the death of the survivor of the Donor and his spouse, or
c) The date of the Donee’s 30th birthday, or
d) The 8th June 2001.
The vesting date should be left entirely at the discretion of the trustees.
5. ANALYSIS OF TRUST DEED CLAUSES – TRUSTEES
Should the number of trustees fall below the minimum number specified then all their powers are suspended. Only power being the power of assumption. This will create liquidity issues for the beneficiaries.
“There shall at all times be a minimum of THREE (3) and a maximum of FIVE (5) Trustees in office, provided that if there is only one trustee as a result of the resignation or death of a co-trustee, the remaining trustee will only be authorised to exercise all the powers of trustees for the maintenance and administration of the trust fund until such time as another trustee has been appointed”.
Does maintenance and administration also include making distributions?
ANALYSIS OF TRUST DEED CLAUSES – TRUSTEES
Too much power is placed in the hands of one trustee i.e.
“Notwithstanding anything to the contrary herein contained, for as long as Mr B acts as a trustee he shall be entitled to veto any resolution proposed by the trustees”.
“Mr B has the right to act alone in all matters concerning the trust without consulting the other trustees”.
“Notwithstanding anything to the contrary herein contained, for so long as Mr B is a trustee he shall be entitled to both a deliberative and a casting vote in respect of any decision to be made by the trustees”.
ANALYSIS OF TRUST DEED CLAUSES – TRUSTEES
Where the veto right is structured positively in the sense that one of the trustees (who is also a beneficiary) can overrule the rest then this will have negative implications with regards to income tax, capital gains tax and estate duty tax.
Trustees are not afforded the right, or right is limited, to appoint an alternate trustee in the event of a them being temporarily unable to fulfill their responsibilities. Where they are afforded this right most trust deeds are silent on the alternates remuneration.Trustees are not given the power of assumption i.e. the ability to appoint additional trustees. Often the deed is worded in such a way that they can only replace a vacating trustee thereby never being able to add additional trustees.
ANALYSIS OF TRUST DEED CLAUSES – TRUSTEES
The trustees are also all beneficiaries. In terms of Cameron’s judgement in Land and Agricultural Bank of South Africa v Parker the independent outsider;
No power for the majority of the trustees to remove a trustee. No clause allowing a trustee to contract with the trust. A trustee immediately ceases to act as a trustee once he/she
has handed in her resignation. Soekoe NO v Le Roux (Unreported OFSPD case no 898/2007 §28 & 50).
Actions of a Trustee ratified before the trust came into existence.
One trustee has the power to remove trustees from office.
6. ANALYSIS OF TRUST DEED CLAUSES – ADMINISTRATIVE MATTERS
Clarity on whether majority decision or unanimous consent. If silent then it is unanimous.
Clarity on what constitutes a quorum. Problems may arise if the quorum is stipulated in the deed as a number ie a quorum for meetings of the trustees shall be two trustees.
Decisions of the trustees shall be taken on the vote of the majority of the trustees present at a meeting at which a quorum is present.
7. ANALYSIS OF TRUST DEED CLAUSES – DISTRIBUTION OF INCOME DURING EXISTANCE OF
TRUST
Trustees must have the power to credit distributed income / capital against a loan account.
Trustees must have the power to differentiate between different classes of income.
8. ANALYSIS OF TRUST DEED CLAUSES – TESTAMENTARY RESERVATION
The core idea of a trust is the separation of Ownership from enjoyment. Although a trustee may be a beneficiary, the central notion is that the person entrusted with control exercises it on behalf of and in the interests of another. Therefore the essential notion of trust law is that enjoyment and control must be functionally separate. Where the trust form is employed and there is no separation of beneficial interest from control and everything is permitted to remain “as before”, the core idea of the trust is debased and this may invite abuses of the trust form.
SUMMARY OF COMMONLY FOUND PROBLEM CLAUSES
1. Key terms used throughout the trust deed are not adequately defined or are incorrectly worded.
2. Incorrect Beneficiaries. 3. Mistakes dealing with the power and authority of
trustees.4. Insufficient clarity when dealing with administrative
matters.5. Manner in which income and capital are allocated.6. Termination date of trust. Pre-emptorary clauses.7. Control clauses granted to one trustee.
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