Trusts: separating control and enjoyment

Family trusts, which are typical in South Africa, often cause issues, as typically the estate planner is the founder, one of the trustees and also a beneficiary, blurring the roles, thoughts and actions of trustees. Although it is allowed in our law that the same person can act in all three these roles (Goodricke and Son (Pty) Ltd v Registrar of Deeds case of 1974), the Court held that an essential element for the creation of a valid trust is the creation of an obligation to administer assets otherwise than purely for oneself. The key is that the benefits must only accrue to beneficiaries at the discretion of the trustees and a beneficiary cannot be in any position to exert pressure on the trustees to pass a benefit on to him or her. Especially in a discretionary trust, the trustees should exercise their absolute, unfettered discretion at all times and should be allowed to withhold benefits from beneficiaries.

The Land and Agricultural Bank of South Africa v Parker case of 2005 emphasised the fact that the separation between control and enjoyment is at the very core of trust law and the basis on which it has developed. Trustees hold legal ownership of trust assets, because trust assets do not form part of the assets or the estate of any beneficiary of a trust. Trustees only have non-beneficial (bare) ownership in trust property. This means that trustees will not personally benefit or enjoy the trust property. The term ‘bare ownership’ is used in the sense that trustees hold trust property for the benefit of the beneficiaries, not for their own use or enjoyment. Any indication that the founder retains control over the assets may result in the trust being labelled as an alter ego trust. In this case, dire Estate Duty consequences may result.

In a specific case (Liebenberg v MGK Bedryfsmaatskappy (Pty) Ltd case of 2003), a trustee entered into a deed of suretyship binding the trust as a surety and co-principal debtor for all amounts owing by only one of the beneficiaries.The Court held that although wide powers were given to trustees (the trust deed stated that trustees should “manage the affairs of the trust”), these were subject to the express provisions of the trust deed, as well as the purpose of the trust.

The Court held that, as generally trustees are not allowed to expose trust assets to business risks in terms of the common law, the trust deed must provide the trustees with the express power to trade with trust assets. The trust deed stipulates that the value of trust assets must be secured from being diminished and the trustees must ensure an equal distribution of the trust assets between all beneficiaries at the termination of the trust. The Court also held that a power to stand surety could not be implied as being related to the power to make advances to beneficiaries and that such an implication could result in one beneficiary receiving all the benefit, and the others receiving nothing on termination of this trust.

It is also important to understand the intention of the founder of the trust. One would look at the purpose for which the trust was set up, as evidenced by the wording in the trust deed. The objective and purpose of a trust need to be established by reference to a variety of factors – the position and rights of beneficiaries should be established, and specifically what the beneficiaries are likely to receive at some time in the future, for example an equal distribution on the termination of the trust in this case. The Court held in this case that the purpose of the trust would be undermined if the trustees exposed all the assets of the trust for the benefit of just one of the beneficiaries, as all beneficiaries in this trust had to benefit equally upon the termination of this trust. Each trust deed has unique terms and should at all times be observed by the trustees. There are no general rules for trusts, and the trustees should study the trust deed.

The objectives and purpose of a trust can serve to limit a trustee’s powers, which can in turn result in certain transactions being regarded as invalid. This is a risk for any contracting party with a trust, especially as trust deeds are not readily available. In the event that a copy is not provided by the trustees, the contracting party can request a copy of the trust instrument from the Master of the High Court in terms of Section 18 of the Trust Property Control Act. This section provides that the Master can furnish a certified copy of any document under the Master’s control to a trustee, a trustee’s surety or representative or to any other person, who in the opinion of the Master, has sufficient interest in the document. The Master can be persuaded that substantial losses can be incurred should the trust instrument not allow the transaction, and that the contracting party has sufficient interest in such document.

Trustees can incur personal obligations and liabilities if they act improperly or outside of their capacity and specific powers provided in the trust deed. Therefore sometimes trustees are reluctant to exercise powers given to them in a trust deed to for example make interest-free loans to a beneficiary or to bind the trust as surety, as the trust deed may also require the trustees to invest the funds of a trust productively. Different provisions in the trust deed can therefore cause a conflict between the trustees’ different powers and obligations. Case law in general expects trustees to invest trust assets productively, wisely and in accordance with sound governance principals. Estate planners should therefore carefully consider their true intentions when they create trusts and ensure that the trust deed wording properly reflects that. It is also a good idea for estate planners to review current trust deeds and correct trust deeds which were typically incorrectly copied and pasted, while they are still alive.