By Edrick Roux and Bindiya Desai

When performing any given task, using the right tool for the job will make the task significantly easier to accomplish and will also ensure that the quality of the task is superior. The same holds true for estate planning exercises and there are few tools that are on par with a trust in this regard.

A trust is a unique vehicle, which involves the exchange of assets for a complete separation of ownership and enjoyment of these assets from the personal estate of an estate planner, which in turn leads to enhanced protection from creditors. Flexibility when making use of the funds held in trust and of course the removal of assets will also reduce estate duty payable by an estate planner in future as these assets can no longer be attributed to him.

As with all things in life, there are some key elements that must be present before a trust will be able to serve the needs of the estate planner effectively, among others:

• The trust deed must be drafted meticulously and it is crucial that it be drafted specifically with the needs of the estate planner in mind. Making use of a template could lead to undesired, and sometimes disastrous, consequences such as the situation which arose in the case of Potgieter and Another v Potgieter NO and Others 2012 (1) SA 637 (SCA).
• The parties to the trust should be identified – not only with convenience in mind – but also in respect of potential benefits, which may be available.
• The tax consequences surrounding the use of a trust must be considered. This discussion should not confine itself to a tactical discussion, but should instead extend to a strategic discussion, particularly in light of the recent proposals made by the Davis Tax Committee.

Each party involved in the creation of a trust deed is exceptionally important, and each has their own unique considerations to take into account.

The parties involved in the creation of the trust, and those who are later involved in the administration of the trust, are of critical importance.

It should be noted that not all of the parties who are involved in the trust deed will necessarily be involved in the administration of the trust. What follows is a brief discussion of the significance of the respective parties at the relevant stages.

Parties to a trust

The parties involved with a trust deed can generally be divided into three categories:

• The founder of the trust – this is the individual who has created the trust and makes the initial donation of funds to the trust. This is usually, but not always, the estate planner.
• The trustees of the trust – these are those individuals or entities who take responsibility for the effective administration of the trust and will ultimately handle the day to day activities of the trust.
• The beneficiaries of a trust – these are those individuals or entities, which may benefit from the trust.

Of the above, only the founder and the trustees will have a role in the creation of the trust and the conclusion of the agreement to create the trust will make the parties enter into an agreement, which is essentially a stipulatio alteri.

The founder

The identity of the founder merits some consideration, particularly since the founder of a trust can never be amended or replaced in any way and will likely continually play a role in the trust.

The founder may be involved with the trust as a trustee, a beneficiary or could even be required to take part in decisions in respect of any future amendment of the trust. Where the founder of a trust is chosen carelessly or simply based on convenience, far reaching consequences could arise.

These consequences could range from unnecessarily incurring transfer duty, which could be limited to some degree by careful planning, or could even render the amendment of the trust deed next to impossible in the event where the founder is required for the amendment and can no longer be traced.

Trustees of the trust

In South African law a trust is not a legal person, save in terms of certain pieces of legislation, but is regarded as a sui generis entity – which can only operate through the trustees – which must be appointed by the Master of the High Court, who has jurisdiction over the area where the trust is created.

Arguably, this makes the appointment of the trustees of the trust the most important decision that needs to be made when creating a trust. The individuals appointed as trustees must act in a fiduciary capacity, in accordance with the provisions of the trust deed and must ensure that the best interests of the beneficiaries are paramount when taking any action in their capacity as trustee.

Who can, and for that matter who should, act as trustees of a trust is a matter of great importance, yet from a practical point of view it is often treated almost casually.

The question is often raised as to how the following individuals fit into the scope of trusteeship, namely –

• the estate planner;
• an independent trustee; and
• a protector.

What follows is a brief discussion of the above.

Estate planner as trustee and the concept of a ‘sham trust’

In the past it was regarded as a risk for the estate planner to be intricately involved in the trust administration.

It was seen as creating the impression of control over the trust assets, which could later be used against him or her should creditors, or even a spouse in the process of instituting divorce proceedings, wish to lay a claim on the assets held in trust.

This would be done on the basis of such a trust being an alter ego of the estate planner.

This is often referred to, incorrectly, as a claim that the trust is a so-called ‘sham trust’ and, therefore, the assets should be regarded as being that of the estate planner. Although the terms ‘sham’ and ‘alter ego’ are often used interchangeably, from a legal technical point of view this is incorrect and could theoretically lead to pleadings being excipiable.

The term ‘sham trust’ refers to a trust which is created incorrectly, thus due to a failure to ensure that one or more of the essentiallia of a trust are present, the trust never validly came into existence and is, therefore, void ab initio.

It is for this reason that an investigation surrounding a ‘sham trust’ will involve an investigation of the trust deed to determine whether all of the essentiallia are present, whereas an alter ego investigation will revolve around the use of the trust assets and the measure of control, which is afforded to an estate planner.

Although there is no prohibition on an estate planner being a trustee of his or her own trust, such an appointment must be done with the proper checks and balances taken into account to minimise the risk that a trust may be found to be the alter ego of an estate planner.

The independent trustee

The designation of a trustee as an ‘independent trustee’ has become relatively common in practice and the norm has become that a trust will have an independent trustee appointed. An independent trustee is essentially a trustee that will act in the best interests of the beneficiaries at all times.

By the very nature of the designation, an independent trustee should not be a beneficiary of the trust. Where a trust does not contain an independent trustee, the measure of control afforded to the trustees of the trust, provided that they are also beneficiaries of the trust, is substantial and accordingly the risk factor of the trust increases.

The concept originally came into the limelight as a result of the case of Parker (Land and Agricultural Bank of South Africa v Parker and Others 2005 (2) SA 77 (SCA); Parker NO and Others v Land and Agricultural Bank of SA [2003] 1 All SA 258 (T)). An aspect which is often overlooked, however, is that the mention of the independent trustee does not form part of the ratio dicadendi at all, but was in fact only mentioned as an obiter dictum.

Quite often it is misconstrued as being a legal requirement to have an independent trustee appointed to a trust deed, but this is simply not the case. Failure to appoint an independent trustee will not have any effect on the validity of the trust, however, it may affect the level of control of the estate planner.

Thus it is always preferable, but strictly speaking not necessary from a legal perspective, to have an independent trustee appointed.

A protector

A concept which is foreign to our law, the protector, is the ultimate guardian of the trust and although the protector has no authority to actively administer the trust, as such power always remains with the trustees, the protector does possess the authority to dismiss trustees should they fail to adhere to their duties.

Similar powers could easily be drafted into a trust deed by a skilled drafter, however, great care should be taken to ensure that the estate planner is not exposed to unnecessary risks.

The appointment of a protector could also lead to unintended tax consequences as the effective management of the trust may then be deemed to follow the location of the protector and not the trustees.

The beneficiaries

One of the cornerstones of trust law is that there must be identifiable, or clearly ascertainable, individuals who are to receive the benefit of the trust, colloquially known as the beneficiaries of the trust.

These beneficiaries, who must be defined in the trust deed itself, can comprise of natural persons, juristic persons or even in some instances further trusts that are created as part of an estate planning process.

Practically the difference between an identified beneficiary and identifiable beneficiaries can be illustrated as follows –

• an identified beneficiary is one who is specifically mentioned in the trust deed for example, John Doe (ID No: XXX); or
• an identifiable beneficiary generally refers to a specific class of beneficiaries for example, the children of John Doe.

What is important to note, however, is that a group of beneficiaries must not be too widely defined, as a lack of identifiable beneficiaries could lead to the trust being invalid and could lead to unintentional consequences.

Although the beneficiaries are part of the trust deed, they have no control over the trust or the management thereof and unless they are in possession of a vested interest in the trust assets, which can only occur in certain circumstances, they only have a hope to be benefitted, known as a ‘spes’ and thus can have no claim on performance by the trustees.

Conclusion

The importance of ensuring that one obtains expert advice when dealing with an estate planning exercise cannot be emphasised enough. Every step taken in the process, beginning with the first consultation with your client through to the delivery of the final draft of a trust deed needs to be tailored to cater for the specific needs of each individual client at hand.

There is only one way to achieve this level of personal service and that is by ensuring that you have a skilled and trusted adviser who can assist you throughout the entire process. If such an expert is not involved in the process, the risk of having ones estate planning resulting in unwanted costs, which could likely have been avoided, becomes much higher.

Importantly it is necessary to take into account that such an adviser must not only be versed in the laws surrounding trusts and estates, but should ideally be skilled in virtually all areas of law, with particular emphasis on the laws of taxation.

These advisers, although generally few and far between, are well worth seeking out as they can ensure that the wishes of the estate planner are catered for as far as possible while also adding value to any discussions surrounding estate planning.

Edrick Roux LLB (UP) and Bindiya Desai BCom Law LLB (UJ) are senior associates at PricewaterhouseCoopers Africa in Johannesburg.

This article was first published in De Rebus in 2016 (Dec) DR 32.