Oral trusts - valid and useful?

The Trust Property Control Act defines a trust is a structure into which property is transferred, which is then administered by trustees, on behalf of one or more beneficiaries, in accordance with the trust instrument, which could be a trust deed, a will or a court order. It means that this Act does only apply to written trusts and not to oral/verbal trusts.

It is however true that oral/verbal trusts are valid in law (as decided in the Groeschke case of 2013). The creation of an inter vivos trust is regulated by the Law of Contracts and in South Africa oral/verbal contracts are recognised. A very common misconception exists that a contract must be written and signed by all parties thereto in order to have legal consequence and effect. However, South African law only requires two types of agreements to be in writing - an agreement for the sale of immovable property and a suretyship. In all other forms of agreements, the legal rights and obligations created will be the same for written and oral agreement between parties. Verbal agreements and oral contracts are generally valid and legally binding as long as they are reasonable, equitable, conscionable and made in good faith.

Although oral/verbal trusts are not subject to the Trust Property Control Act, they will still be subject to common law, similar to other oral/verbal agreements. Trusts will only be subject to this Act once reduced to writing (Section 2 of this Act). The moment an oral/verbal trust is reduced to writing, it will then automatically be governed by this Act, and has to be lodged with the Master of the High Court.

It is also interesting to note that an existing written trust instrument can be amended either in writing or orally/verbally, provided it is done in compliance with the common law and the trust instrument. However this Act requires any amendment, whether in writing or orally/verbally, to be lodged with the Master of the High Court, so it will have to be reduced to writing (Sections 2 and 4 of this Act).

The fact that oral/verbal trusts are legal in South Africa, may help to solve an issue where trustees want to transact in the trust, but the trust is not yet registered with the Master of the High Court. In the Simplex v van der Merwe case of 1996, where the trustees tried to purchase a property in a trust before the trust was registered with the Master of the High Court, and their appointments as trustees confirmed by the Master of the High Court, the Court held that a person could not enter into an agreement to purchase a property as a trustee “on behalf of a trust to be formed” and that a person can only act in the capacity of trustee once he/she has the prior written authority to act as a trustee, which authority can only be furnished by the Master of the High Court. This adverse judgement could have been averted if there was an oral/verbal trust in place.

The practical difficulty with an oral/verbal trust may however be the reluctance of a third party to deal with a trust that has not been reduced to writing and registered with the Master of the High Court. This ‘interim’ issue may be countered by the person who formed the trust doing the following:

1. Producing a sworn affidavit, confirming that an oral/verbal trust has been created;
2. Producing an undertaking to reduce the oral/verbal trust to writing once the contract has been signed; and
3. Producing a confirmation that the trustees (once authorised by the Master of the High Court) will ratify that contract.

It appears if an oral/verbal trust may be useful, even only as an interim measure when an urgent transaction has to be concluded, but the trust is not registered with the Master yet.