Can the founder of a trust be replaced?

There seems to be a misconception regarding the position of the founder of a trust, as often we notice that a founder has already been ‘replaced’ in a trust, or we receive a request to replace the founder. The motivation for replacement stems from the death of the founder; an arbitrary person initially being named as the founder in the trust deed after the estate planner was told when they registered the trust that they could not be the founder, trustee and beneficiary; the fact that the family has lost contact with the arbitrary founder; the fact that the founder became unable to act (such as when the founder developed a mental illness such as Alzheimer’s Disease); the fact that people are getting divorced or are ending a relationship; etc.
 
When trust practitioners set up trusts for their clients, they often choose arbitrary founders for the trust, completely disregarding this critical requirement. 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 (Goodricke and Son (Pty) Ltd v Registrar of Deeds case of 1974). The Trust Property Control Act even 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 key element of the trust arrangement is the transfer of ownership and control of the trust assets from the (true) founder to one or more trustees who hold the trust assets, not in their personal capacities, but for the benefit of the trust beneficiaries. The founder is the person who sets up the trust, and who had the true intention to do so. The intention to create a trust is manifested by the handing over of assets (including the initial donation) to the trustees by the founder by virtue of a trust instrument to be administered by the trustees in accordance with the terms of the trust instrument for the benefit of the beneficiaries. This intention is generally what comes into question when determining whether the founder created the trust to administer the assets, or whether they are merely using the trust as a means through which to conduct their personal affairs, which will affect the validity of the trust. It is, therefore, not possible to replace a founder, as the ‘replacement’ founder certainly did not have the intention to set up the trust.
 
For somebody to serve as the founder of a trust, they must have contractual capacity, since the founder enters into a contract with the trustees (Crookes v Watson case of 1956). Any individual who founds an inter vivos trust must, therefore, be aware of the Law of Contract. People who have no contractual capacity (as a legal matter, basically these people are presumed not to know what they are doing) are persons under the age of seven (where the parent acts on behalf of the child), mentally incapacitated persons, or persons under the influence of drugs or alcohol. Some persons have limited contractual capacity, such as minors between the age of seven and eighteen (the minor can then enter into contracts with the consent or assistance of their parents or guardians), persons under curatorship, and persons who have been sequestrated.
 
A founder should not reserve privileges for themselves in the trust instrument. If someone wants to replace the founder for that person to take over the privileges of the founder, it may rather be indicative of a greater problem – such as where rights and privileges were retained by the founder – which may be an indication that the founder did not really intend creating a trust in the first instance and never intended to relinquish control over their assets placed in trust to a board of trustees.
 
If a founder passes away, becomes unable to act, or loses contact with the trustees and/or beneficiaries the trust instrument should make provision for such eventualities – such as inserting provisions to amend the trust instrument or terminating the trust when the founder is no longer alive or able to act. Such a right of a founder stems from the fact that the founder is a party to the trust. This stems from the legal principle that a trust instrument executed by a founder and the trustees of a trust for the benefit of others is akin to a contract for the benefit of a third party, also known as a stipulatio alteri (Crookes v Watson case of 1956). The parties to a contract can amend or terminate a contract by law. These retained powers in a trust instrument would therefore not be indicative of the founder’s lack of intention to create a trust. Founders should not have too many other rights in the trust instrument though.
It should, therefore, never be necessary to ‘replace’ a founder of a trust – rather structure the trust properly when it is created.