Can you add and remove beneficiaries from a trust?

Estate planners often create trusts and add beneficiaries, assuming that these beneficiaries can be removed or replaced over time. There may be problems with this assumption.

Divorce

During divorce, for example, the one spouse may recommend removing the other spouse as a beneficiary of the trust. He/she may need his/her approval to do so. The amendment can either be carried out in the form of an addendum to the original trust deed, or an amended trust deed can be drafted to completely replace the original trust deed, subject to the following. 

In general, there are three ways to amend an inter-vivos trust deed.

1. Contractual amendment while the founder is alive

An inter-vivos trust is a stipulatio alteri (a contract on behalf of a third person) (Crookes v Watson case of 1956). In terms of the principles applicable to a stipulatio alteri, the beneficiaries in the case of an inter-vivos trust acquire stipulated rights in the trust property only when they accept the benefits of the stipulatio. Because a trust is a contract, the parties to the contract are permitted to make amendments by unanimous agreement in terms of the rules of the Law of Contract. The founder and trustees (and beneficiaries who have accepted benefits, regardless what the trust deed stipulates) can therefore conclude a later agreement to amend or substitute an earlier agreement. It is important that each of the parties to the trust deed consent to the amendment. The trustees owe a fiduciary duty to the beneficiaries to act in their best interest. Amending an agreement would therefore need to be carefully considered by the trustees before they agree to it, even if they are instructed by the founder to make these changes. 

How do the beneficiaries “accept” benefits?

• If the beneficiaries made themselves part of the contract by writing to the trustees, then it is clear that they have accepted the benefits of the trust, even if the benefits are dependent upon the trustees’ exercising their discretion in the future
• If there were prior amendments to the trust, and the beneficiaries accepted these amendments, it may imply the acceptance of benefits
• If awards were made to discretionary beneficiaries in prior years, and these awards were accepted by the beneficiaries, it may imply that the beneficiaries accepted the benefits of the trust

2. Amendment in terms of the provisions of the trust deed

This takes place when the trust deed is amended in accordance with the variation clause of the trust deed. This method is usually relied upon when the founder has passed away. Where a beneficiary has already received benefits from a trust, he/she is deemed to be a party to the original agreement, and is therefore required to be a party to the amendment agreement, regardless of the provisions of the trust deed. Usually the variation clause determines how changes to the trust deed must be performed. In the event that the trust deed does not contain a variation clause, the trust deed would be amended using one of the other two options.

3. Amendment through application to Court

If the founder has passed away and the trust deed does not make provision for an amendment, amendment by Court application would be the only alternative course of action. Section 13 of the Trust Property Control Act allows a “trustee or any person” having “sufficient interest in trust property” to apply to the Court to change the provisions of the trust, where the provisions of the trust are against the public interest, or jeopardise the beneficiaries’ interests or the trust’s objective.

Clarification by the Master of the High Court

The Master of the High Court published a directive in March 2017 providing for the following in relation to the amendment of trust deeds:

1. Should the trust deed stipulate that the beneficiaries are required to be involved in a decision to amend the trust deed or to deregister the trust, the trustees must involve the beneficiaries in such decisions. 
2. Should the trust deed pertinently stipulate that the beneficiaries are not required to be involved in a decision to amend the trust deed or to deregister the trust, the trustees do not have to involve the beneficiaries in such decisions. 
3. If the amendment clause of the trust deed states that trustees cannot amend certain provisions of the trust deed, the trustees will be allowed to make amendments other than such prohibited amendments, without the consent of the beneficiaries. They will, however, require the consent of the beneficiaries to amend those clauses that the trustees are prohibited to change on their own.
4. Should the trust deed be silent on the involvement of the beneficiaries, but the beneficiaries have accepted benefits conferred by the trust instrument, the trust instrument can only be amended or terminated with such beneficiaries’ consent. 

Risk with residential property

SARS closed a loophole in 2002, where individuals were no longer permitted to “sell” their discretionary trusts holding residential property, in order to avoid paying Transfer Duty. The Transfer Duty Act levies Transfer Duty “on the value of any property … acquired by any person … by way of a transaction or in any other manner”. 

It is a requirement that a transaction has to take place. A “transaction” is defined in the Transfer Duty Act as, “in relation to a discretionary trust, the substitution or addition of one or more beneficiaries with a contingent right to any property of that trust, which constitutes residential property or shares or member's interest” in a residential property entity. The transaction has to be in relation to “property”. Property includes “a contingent right to any residential property or share or member's interest … held by a discretionary trust (other than a special trust … ), the acquisition of which is - 

(i)  a consequence of or attendant upon the conclusion of any agreement for consideration with regard to property held by that trust; 

(ii)  accompanied by the substitution or variation of that trust's loan creditors, or by the substitution or addition of any mortgage bond or mortgage bond creditor; or 

(iii)  accompanied by the change of any trustee of that trust”. 

Therefore applicable if any of the 3 conditions are met, together with the change in discretionary beneficiary.

“Residential property” means “any dwelling-house, holiday home, apartment or similar abode, improved or unimproved land zoned for residential use in the Republic (including any real right thereto), other than – 

(a)  an apartment complex, hotel, guesthouse or similar structure consisting of five or more units held by a person which has been used for renting to five or more persons, who are not connected persons, as defined in the Income Tax Act, 1962 (Act No. 58 of 1962), in relation to that person; or 

(b)  any `fixed property' of a `vendor' forming part of an `enterprise' all as defined in section 1 of the Value-Added Tax Act, 1991”.

Although the Transfer Duty Act does not define “acquire”, the Courts provided some guidance and held that “acquire” meant the acquisition “of a right to acquire the ownership of property” (CIR v Freddies Consolidated Mines Ltd case of 1957), or by a person of a personal right to obtain dominium (ownership and control) in immovable property (SIR v Hartzenberg case of 1966). 

Obviously a transfer of a vested right in a fixed property, held in trust, will trigger Transfer Duty in the normal way, as ownership of the property vests in the beneficiary concerned.

Be mindful when you have a trust deed drafted and anticipte any possible negative consequences relating to the inclusion of beneficiaries and their rights.