Can a business trust be labeled a partnership?

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Even though a trust is not a legal “person”, a trust has an existence, separate and apart from the founder, the trustees and the beneficiaries. It should therefore achieve a separation between ownership/control and enjoyment. The majority of trustees in a business or trading trust should be persons other than the beneficiaries. If not, the trust will be regarded as a partnership. In the Land and Agricultural Bank of South Africa v Parker case of 2005, the Court held that there is nothing wrong with using a trust for business purposes, but that there should be a separation between control and enjoyment of assets – that being the very core of trust law and the basis on which it was developed. This principle is reinforced by Section 12 of the Trust Property Control Act, which states that “Trust property shall not form part of the personal estate of the trustee except in so far as he as the trust beneficiary is entitled to the trust property.”

A look at the use of trusts for business and trading

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Bankruptcies in South Africa averaged 229 companies per month from 1980 until 2020. In August 2000, an all-time high of 511 companies declared bankruptcy, compared to the record low of 63 companies in May of 1988. Projected bankruptcies for 2021 is 220 companies per month and 240 companies per month for 2022. It is a known fact that more than 90% of business owners close their doors within five to seven years of opening them. Up to 90% of these business owners were likely stripped of their personal assets, resulting from sureties and guarantees that they signed as business owners. This could have been avoided had the business owner set up a trust to protect their assets from SARS, the banks, and other creditors.

Consider a trust as planning tool in case of Dementia

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An ageing worldwide population carries a high risk of dementia, a condition that is so far neither preventable nor curable. An estimated 35.6 million people – differently put 0.5% of the global population – are affected. Alzheimer’s disease (a condition that affects the brain) is the most common form of dementia, a general term for memory loss and other intellectual abilities serious enough to interfere with daily life. It is named after Dr Alois Alzheimer, who first described the condition in 1906. It accounts for 50% to 80% of dementia cases. It is a progressive disease – the symptoms are mild at first and become more severe over time. In the case of very serious forms of mental illness, a person may not be able to look after their own affairs any longer.

Could your trust be disregarded by the courts?

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The fact that you have a written trust deed is no guarantee that your assets are safe and that the trust is safe from attack. If you never intended to create a “genuine” trust from the outset, the trust may be attacked and labelled as a sham trust; in other words, a “smoke screen”. If, on the other hand, you intended to create a trust, but you have dealt with the trust assets as if they were your own, then your creditors, SARS and soon-to-be-ex-spouse can attack the trust and have it labelled as an alter ego trust; in other words, an extension of yourself. Despite the fact that the trust does in fact exist, the Courts will disregard the trust and treat the assets as if they belong to you. There must be a clear separation of control from enjoyment of trust assets. All trustees - and not just one of them - should control the trust assets for the enjoyment of the beneficiaries. You will experience dire consequences if your trust is labelled as either a sham trust or alter ego trust. These terms “sham trust” and “alter ego trust” are often used interchangeably, which is incorrect. The two concepts are completely different and should be distinguished from each other.

What trustees should know about property transactions

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In terms of the Alienation of Land Act, any deed of sale of immovable property has to be in writing, and the parties thereto or their agents have to be legally authorised to act at the time of signing of the contract. Section 2(1) of the Act provides that no alienation of land shall be or any force or effect unless it is contained in a deed of alienation signed by the parties thereto or their agents acting on their written authority.

Estate planners beware of abuse when your mental capacity deteriorates

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I have read a recent court case where a shocking judgement was made by a judge, which should send warning signals to estate planners and ‘family’ trustees. The father, who is the estate planner and also a trustee, was diagnosed with Alzheimer’s Disease already in 2013. (As usual) the siblings started fighting over their share in the substantial assets the father built up in trust over the years. The controlling ‘so-called’ independent trustee is biased through his relationship with one of the siblings. He hides behind the fact that he is the life-long trusted friend of the founder. This is in clear contravention of the clear objective set out in the trust – to create a fund for the benefit of all beneficiaries. The father always wished for equal treatment of all the siblings. The controlling trustee influenced the other trustees to benefit the sibling he is related to at the expense of the other siblings. The Court papers stated and the judge even admitted that the father was not participating in any trust matters for a long time. The judge even refers to the other trustees as the “active trustees” in his judgement. This is clearly not allowed in our law and any such abuse of a person’s mental state should be frowned upon. What are the lessons to be learned from this case?

A perspective on beneficiaries’ rights

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Many trustees believe that beneficiaries have no rights, especially if they are contingent beneficiaries in a discretionary trust.

When trust assets are at risk during divorce

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The reality is that almost half of all marriages end in divorce. It is also a reality that future-to-be-ex-spouses usually attack trust structures set up by their spouses in an attempt to maximise their claims. Aside from being an emotionally traumatic life event, divorce can often have a severe impact on a person’s financial security and quality of life. Divorce generally goes hand in hand with a great deal of distress over the manner in which the assets that have been built up during the marriage are to be divided.