Radical Changes to Trust Governance
31 January 2012
Posted by: TaxFind™
Radical Changes to Trust Governance
It is vital to ensure that you have your trust affairs in order, as they can far-reaching effects on your family, and with the prevalence of divorce and subsequent remarriage,many people will have more than one family to consider.An in-depth knowledge of the laws governing trusts in South Africa is key, as was highlighted in a recent court case where variations of a trust deed were declared invalid, meaning that the previous version prevailed.
A trust deed executed by a founder and trustees of a trust for the benefit of others is akin to a contract for the benefit of a third party, also known as a Stipulatio Alteri.In consequence, the founder and the trustee can vary or even cancel the agreement between them before the third party has accepted the benefits conferred on them by the trust deed. But once the beneficiary has accepted those benefits, the trust deed can only be varied with their consent as they now acquire rights under the trust.
In the case of Potgieter v Potgieter and Others (629/2010) ZASCA 181, a family trust was established where children A and B were declared as the capital beneficiaries.Subsequently the founder of the trust, the father of A and B, divorced and remarried a woman with two children of her own. These two children, X and Y,and their mother Z were then included as beneficiaries of the trust in a trust agreement entered into between the founder and the trustees of the trust.
However, the beneficiaries of the previous version, children A and B from the first marriage, were not consulted on this amendment and did not consent to the changes.And so, when the founder of the trust passed away, A and B contested the variation of the trust deed on the grounds that the deed could only be changed with their consent as capital beneficiaries.It was argued from the other side that the amendments were made before beneficiaries A and B had accepted the benefits conferred upon them. However, the original trust deed had a preamble that stated the following: "And whereas the beneficiaries have indicated their acceptance of the benefits conferred upon them hereof", as at the time that the trust was established. A and B were minors at the time, thus the benefits were accepted on their behalf by their father as their natural guardian.
It is accepted that the natural guardian of minors can indicate acceptance of the benefits conferred upon them by the trust deed on their behalf. As the founder of a trust, as a parent, if you initially stipulate that you wish for your children to be the beneficiaries of a trust that you are setting up, you are automatically indicating acceptance of the benefits.
Prior to the variation of the trust deed, the deceased will was changed to the effect that apart from a few legacies to employees,the residue of his estate was bequeathed to the trust. It was clear that it was his intention that A and B and his current wife and her children should inherit equally,hence the change of the trust deed to include them as beneficiaries and the change of the will to bequeath almost his entire estate to the trust (as varied).
The court a quo found in favour of A and B. This would usually result in a finding that the trust deed must be implemented in its original form. However, the court found that this would result in an untenable situation which would be in direct conflict with the intention of the deceased. The court then relied on Section 13 of the Trust Property Control Act 57 of 1988and on the values of the constitution and concluded that it had the power to grant an order which would give effect to the real intention of the deceased—this meant that A and B were awarded two-fifths of the trusts assets.
A and B appealed to the Supreme Court of Appeal, where it was ruled that the original provisions of the trust deed, prior to the purported amendments, must prevail. The Supreme Court of Appeal considered reasonableness and fairness, and although abstract values such as these are fundamental to our law of contract,they do not constitute independent substantive rules that courts can employ to intervene in contractual relations.Judges cannot decide to refuse to enforce a contractual provision simply because it offends their personal sense of fairness and equity.This would give rise to massive legal uncertainty!
The lesson? One must be extremely careful when setting up and amending trust deeds, as has been indicated above.The actions of trustees and beneficiaries are of paramount importance to determine whether the beneficiaries acquired certain rights.Poor trust administration, or not paying due regard to the law of trust, may hamper your objectives and can have far-reaching unintended effects on your family and loved ones.
Source: By Madeline Marais (Tax breaks)