The trust beneficiary can of worms - 4 April 2024

Who would have thought that the way beneficiaries are defined in a trust deed and the rights provided to them (or not for that matter) have a bearing on so many things – whether a beneficiary has any rights worthy of protection, whether they can ask for trust information, whether they can insist on the proper administration of the trust, whether they are entitled to any benefits, whether they have to be included in “beneficial owner” reporting to the Master and SARS, and so on. The Trust Property Control Act does not even define a beneficiary and is relatively silent as far as matters regarding the beneficiaries of a trust are concerned. The nature and rights of beneficiaries are accordingly determined with reference to the trust instrument and our common law. The courts often confuse the rights beneficiaries have and some cases disqualify certain persons as beneficiaries, which leaves trusts wide open to abuse with often unintended consequences. The incorrect treatment of beneficiaries may even result in fines when trustees incorrectly report on “beneficial owners” to the authorities.

Types of beneficiaries

Often template trust deeds are used without due consideration by the estate planner regarding people intended to benefit from the trust. Multiple labels exist that attempt to identify or classify beneficiaries, such as “actual”, “immediate”, “potential”, “future”, “discretionary”, and “contingent” beneficiaries. These terms are often (incorrectly) interchangeably used (even the courts get it wrong sometimes) with (incorrect) expectations created by some of these labels. Some of these labels may not even qualify a person as a “beneficiary” of a trust (the Nktobe v Bengu case of 2015 and the Maluleke case of 2022). This may result in far-reaching (unintended) consequences and hardship. It may, therefore, be more appropriate to ask what rights beneficiaries have rather than relying on labels given to beneficiaries. Rights afforded to persons may establish their interests in the trust and can give them locus standi (a right to be heard in court).

What rights do beneficiaries (only if they are regarded as “beneficiaries”) have?

Vested right

A ‘vested right’ is defined as a “right accrued to a possessor with no conditions”, or the legal definition being “a right belonging completely and unconditionally to a person as a property interest which cannot be impaired or taken away without the consent of the owner.” A beneficiary obtains a vested right in an asset and/or income and/or capital gains in a trust, either in terms of the provisions of the trust instrument (a permanent vested right), or through the trustees exercising their discretion (a vested right only then and reverting back to a hope thereafter).

Contingent right

A contingent right is “something which may ripen into a vested right on the happening of an event, but it must be such that the happening of the event, without more gives the vested interest” (Stern and Ruskin v Appleson case of 1951). An example is you will receive something if you complete a degree. This is not very common in typical South African discretionary trusts.

A spes, hope or expectation

Most actual beneficiaries in typical South African discretionary trusts only have hopes or expectations to receive anything from the trusts. It is, however, required that the person is regarded as an actual “beneficiary” of the trust and cannot just be a potential beneficiary.

Depending on how the courts view beneficiaries, they may also be afforded (or refused) the following specific rights.

Protection against maladministration

In the Gross v Pentz case of 1996, it was made clear that although contingent beneficiaries have no vested rights in the trust assets, such beneficiaries still have vested interests in the proper administration of the trust. Our law affords a beneficiary the right to protect their interests against maladministration by trustees (Potgieter v Potgieter case of 2012). This was confirmed in the Griessel v de Kock case of 2019, where the Court held that a contingent beneficiary in a trust does have rights worthy of protection by the Court. Our law, therefore, also affords the contingent beneficiary the right to protect their interests against maladministration by trustees.

Right to be party to trust deed amendment

In 2017, the Chief Master, in his Directive, used the Potgieter v Potgieter case of 2012 to provide clarity on the involvement of beneficiaries in the amendment of a trust instrument or the deregistration of a trust. The Court held in this case that the “appellants enjoyed no vested right to either the income or the capital of the trust. They were clearly contingent beneficiaries only. But that does not render their acceptance of these contingent benefits irrelevant... The only relevant consideration is whether the right is worthy of protection, and I have no doubt that it is.”

Right to reporting

Many people believe that trustees are under no obligation to account to beneficiaries. The Doyle v Board of Executors case of 1999 created a legal precedent that beneficiaries are entitled to (extensive) information. The trust, in this case, was created in 1949 with Mrs D as the income beneficiary. Her son was to become the capital beneficiary only on her death. Mrs D died in 1994, whereupon the son demanded full and complete accounting from the date that BoE was appointed as trustee – which was in 1951. BoE argued that it was only the income beneficiary – Mrs D – who had been entitled to this accounting since she was the only beneficiary then, and the son only became entitled to the accounting as at the date of Mrs D’s death – the date he became the capital beneficiary. The Court disagreed and held that the trustees have a duty to provide full trust administration reports and accounting records to trust beneficiaries and even to contingent beneficiaries born later, dating back to the time the discretionary trust was established. Again one should at least qualify as an actual beneficiary of the trust to rely on this right.

In the Maluleke case the court held that, on a pure reading of the beneficiary clause and until a resolution was taken by the trustees to “make” them beneficiaries, no listed person in the trust deed had any right to be called a “beneficiary”, even if the trustees took 6 years to select any. This is clearly wrong, as it implies that the trust had no beneficiaries until then (for 6 years). Without beneficiaries a trust does not exist, which may cause great issues for the trust. The Court held that the applicants had no locus standi (a right to be heard) as they had no interest in the trust property because they were not selected as “beneficiaries”.

Interest in trust property

Some sections in the Trust Property Control Act allow “any person having an interest in the trust property” or trust documents certain rights, such as the right to approach a court to have a trustee removed, the right to obtain copies of trust documents from the Master, and the right to have a trust deed amended or to have a trust deregistered. In the Ras v van der Meulen case of 2011 it was interpreted to only apply to beneficiaries of a trust. In the Nkotobe v Bengu case of 2015, “potential” beneficiaries approached the Court to remove the trustees. They argued that as potential beneficiaries, they had sufficient legal interest in the proper administration of the trust. The Court held that the applicants did not have sufficient legal interest in the trust assets to give them a right to apply to the Court for the trustees’ removal. In terms of the trust instrument, they had nothing more than an expectation to be appointed as beneficiaries since certain requirements were not met for them to qualify as beneficiaries (they had to apply to be appointed). It therefore seems that one has to at least qualify as an actual beneficiary of the trust to be regarded as having sufficient interest in the trust. The wording of the trust deed is therefore instrumental.

Beneficial Owner reporting

The Trust Property Control Act requires trustees to report information on “beneficiaries” but does not provide any further guidance in terms of the various labels beneficiaries can be given as explained above. The only requirement is that named beneficiaries in the trust deed are to be included. These requirements are slightly different from the international FATF Recommendation 25. Depending on one’s interpretation, it may include or exclude persons listed on the trust deed who may not have been selected as actual “beneficiaries” by the trustees yet (Maluleke case). Further guidance will have to be provided by the Master and SARS.

Conclusion

Setting up a trust and selecting beneficiaries requires a good understanding of trusts, the different ways beneficiary clauses can be worded, as well as a proper consideration of one’s circumstances, otherwise unintended consequences may transpire. Many trust deed wordings create only “potential” beneficiaries with no rights, which may not be the wishes of the estate planner.