Jan 22, 2021 | Article
In a recent court case, van Rensburg v van Rensburg N.O. and Others (24 March 2020) issues around a testamentary trust were highlighted yet again. As the will of a deceased person forms the trust instrument, no further trust instrument is required to be lodged with the Master of the High Court. A will typically does not provide detailed provisions of how the trust should be administered. This often leads to issues arising at a later stage.
In this case, the joint will of the mother and father provided that upon the death of the father a testamentary trust had to be established for the benefit of the mother; i.e. the trustees had to apply the trust income, and even trust capital, of the trust, for the maintenance and benefit of the mother until her death. Upon her death the trust should have terminated and the trust assets were to be divided equally between the four children, or the survivors of them. All four children had also been appointed trustees of the testamentary trust in terms of the will. After the mother’s death the brother, requested the banking details from his sisters, so he could pay over their respective portions of the trust assets as required in terms of the will, in an
effort to wind up the trust.
Unfortunately the one sister’s emails were intercepted and fraudulent bank account details were confirmed, upon which payment was effected. Her siblings were of the view that it was not fraud perpetrated against the trust, but rather her own issue. She approached the court to have the trustees removed as she was of the view that they, as trustees and beneficiaries of the trust, were conflicted. She requested the appointment of new trustees, for them to decide whether to pursue the matter against the trustees or the brother, whom she believed acted negligently to pay her share to an incorrect account.
The following issues were addressed in the application proceedings:
Termination of the trust and the resultant lack of beneficiaries
The one issue that was addressed was whether the trust terminated upon the death of the mother. In this instance the will was clear in terms of the termination date – i.e. it had to terminate upon the death of the mother. It was not the intention for the trustees to hold the assets for the benefit of the children, only for the benefit of the mother. After the mother’s death, no further beneficiaries could be appointed as the trust had effectively terminated. The sister was therefore not successful to allege that the trustees were conflicted due to them being beneficiaries of the trust as well. Even though people may refer to one another as beneficiaries in communication, it does not make them beneficiaries, if they are not
beneficiaries as indicated in the trust instrument (will). The lesson is that a testator/testatrix should carefully consider his/her wishes when drafting a will, as no rights, which beneficiaries normally have, such as a right to information, will be available to such legatees. A will should also clearly stipulate when the trust ought to terminate as well as the instructions upon termination, if termination is so directed.
Removal of trustees
Another issue that was addressed was the removal of trustees. The removal of trustees, especially for a testamentary trust, where the testator/testatrix handpicked the trustees, will always be a delicate matter. The judge quoted the Volkwyn N.O. v Clarke and Damant case of 1946, which stated that it “is a matter not only of delicacy…but of seriousness to interfere with the management of the estate of a deceased person by removing from the control thereof persons who, in reliance upon their ability and character, the deceased has deliberately selected to carry out his wishes. Even if the…administrator has acted incorrectly in his duties, and has not observed the strict requirements of the law, something more is required before his removal is warranted. Both the statute and the case cited indicates that the sufficiency of the cause for removal is to be tested by a consideration of the interests of the estate”.
The judge also referred to the Gowar v Gowar case of 2016, where the court was mindful of the fact that disharmony may exist in the administration of a trust and that this is in itself not sufficient for the removal of a trustee. The Court held that the “overriding question is always whether or not the conduct of the trustee imperils the trust property or its proper administration. Consequently, mere friction or enmity between the trustee and the beneficiaries will not in itself be adequate reason for the removal of the trustee from office…
Nor, in my view, would mere conflict amongst trustees themselves be a sufficient reason for the removal of a trustee at the suit of another”. That case established a couple of important principles:
- The Court’s power to remove a trustee must be exercised with caution – it should consider whether the trustee’s conduct endangered the trust property or its proper administration. Conflict between the trustees and/or beneficiaries are therefore not sufficient reason for a court to remove a trustee. The overriding factor is the welfare of the beneficiaries and the proper administration of the trust and the trust property. A trustee’s removal will be ordered only if the trustee’s continuance in office will prevent the trust from being properly administered, or will be detrimental to the welfare of the beneficiaries.
- Neither dishonesty or even misconduct is required for the removal of a trustee – the only requirement is that such removal must be in the interests of the trust and its beneficiaries.
In this case the trust terminated (as discussed above) and the role of the trustees terminated with it, thus the judge correctly stated that the removal of the trustees would be redundant.
The following is clear from this case:
· Trustees of a trust need to read through and completely understand the trust instrument.
- The terms of a will creating a testamentary trust have to be unequivocally clear. This includes the wishes of the testator/testatrix, including whether he/she desires heirs to be nominated beneficiaries of the testamentary trust or just residual heirs of the estate, as in this case. The decision may have tax and other consequences.
- Trustees need to verify banking details before making payments from the trust’s bank account.
- When a trust terminates, there are no beneficiaries left and the roles of the trustees terminate with the trust.
~ Written by Phia van der Spuy ~
Jan 15, 2021 | Article
A lesbian couple have launched an application in the Gauteng High Court (Johannesburg) intended to block an artificial insemination sperm donor from claiming parental rights to their child. A notice filed by lawyers for the couple indicated that the couple, in a permanent life partnership, were litigating against the sperm donor. The application challenged the constitutionality of a section of the Children’s Act, amended in 2005, that created room for the sperm donor to claim parental rights.
The couple decided to launch what promises to be a landmark application after the sperm donor, known to them before the artificial fertilisation, sought parental rights after their child was born. A standing agreement between the three was that he would not seek recognition as a father or be involved in the child’s life in any way. The man went against the agreement after birth and now intends to oppose the application.
Jan 15, 2021 | Article
You can have a wedding ceremony in a church with a minister’s blessing … but that does not necessarily mean you are legally married. This emerged when a woman sought continued maintenance from her ex-husband who believed he was no longer liable to pay as she had ‘remarried’.
The woman and her new ‘husband’ never signed a wedding register and the ‘marriage’ was not officially registered with the Department of Home Affairs. However, her ex stopped paying her maintenance of R10 000 a month, which he said he was only obliged to pay if she did not remarry. The woman held him in contempt and the Gauteng High Court (Pretoria) ruled in her favour, declaring that the ceremony was not an official marriage and her ex-husband therefore violated the maintenance agreement.
The aggrieved ex turned to the SCA, which confirmed the earlier court ruling that the ceremony was not a marriage. The judges overturned the contempt of court order against the ex-husband, noting that as a lay person, he had accepted the advice of his lawyer to stop paying maintenance as he believed it was a true marriage. The fifth judge delivered a dissenting judgment: ‘But for the non-completion of the marriage register, it was a complete marriage ceremony’. He said the law was manipulated by the woman, aided by the minister, so the ex-husband would have to continue to support her even though, at the time, she had a new partner. ‘This, in my view, is a contrived and disingenuous scheme which a court should frown upon, instead of giving it its imprimatur,’ he said.
Dec 4, 2020 | Article
December 1st, 2020
The increased tendency of South Africans to establish geographically diversified estates – whether as a result of cross-border travelling, studying, work or business opportunities – has complicated not only their own lives, but also those of their fiduciary advisers. Many potential complexities may arise when multiple jurisdictions are applicable during the planning process; one being the tension between freedom of testation and the principle of forced inheritance. In South Africa (SA) we possessively guard the right to give away property by way of a last will and testament, while the right to receive an inheritance is as important in many European jurisdictions. Another substantial difference between many jurisdictions is the concept of joint assets of a married couple.
Central to the fiduciary planning process is the law of succession and the consequences of the applicable matrimonial property regime. Various attempts have been made to unify or harmonise the substantive law and clarify the private international law principles. South Africa is one of the 44 contracting states to the Hague Convention on the Conflicts of Laws Relating to the Form of Testamentary Dispositions (www.hcch.net, accessed 9-11-2020), in terms of which a disposition by will shall be valid if its format complies with the internal law of the jurisdiction regulating at least one of the following connecting factors – situs of property, the place where the will was made, or where the testator had his last domicile or habitual residence. These factors are, however, not the only factors to consider, as further investigations are sometimes necessary to determine whether the relevant countries have different laws governing succession to moveable and immovable assets. Although other Hague Conventions followed, they still only produced treaties and have no legislative powers, with many jurisdictions never officially adopting the international agreements.
The European Union (EU), however, may promulgate regulations and directives for its member states, although individual member states may elect not to accept it. Two of the most recent attempts have dealt with the regulation of succession and matrimonial property matters. The EU Succession Regulation (also called Brussels IV) is aimed at the alleviation of some issues linked to succession in the EU and the need to govern a family’s worldwide estate by way of a single will, while the Council Regulation (EU) 2016/1103 of 24 June 2016 (EU Matrimonial Property Regulation) aims at providing international couples with more legal certainty regarding jurisdiction and the recognition and enforcement of property matters – also in the case of death. The fiduciary advisor should be aware of the potential impact of the succession-law concepts in an applicable jurisdiction, as well as international law, on their client achieving their wishes. The advisor should also consider the various administrative processes, such as the winding-up of the deceased estate, in different jurisdictions and how that interplays with the terms of the will or multiple wills. Some jurisdictions do not recognise the concept of formal estate administration by an executor, while others prescribe a very specific process.
EU Succession Regulation
The Regulation deals with aspects such as jurisdiction, recognition, enforcement, applicable law, the validity and admissibility of wills, and succession agreements. It also established the European Certificate of Succession, which enables individuals to prove their status and rights as beneficiaries and regulates the administration of certain estates in an EU jurisdiction. Certain aspects, such as in community of property-regimes, life insurances, pension plans, joint ownership and the creation, administration and dissolution of trusts, falls outside the scope of the Regulation.
The Succession Regulation applies to all deaths on or after 17 August 2015, aimed at simplifying it for EU citizens to deal with the legalities and consequences of multi-jurisdictional wills and succession matters. The Regulation, however, applies to any person who has property in an EU jurisdiction and not only EU citizens. Although the basic test applied to both movable and immovable property is that of last habitual residence of the deceased person, with only member states being guaranteed subsidiary jurisdiction, it is not limited to EU citizens and may have an effect on any testator with assets in at least one of the applicable EU countries (excluding Denmark, Ireland and the United Kingdom (UK)). As the Regulation applies to all persons with property situated in the EU, a South African national may specify in their will that South African law is to apply to their assets situated in an EU state. This election will prevent interpretive uncertainty and protect against forced heirship laws, which may be applicable in the particular EU state where the asset is situated. Where the deceased habitually resided outside the EU, the courts of a member state in which assets of the estate are located, will have jurisdiction to rule on the succession if the deceased had nationality of that member state or had their previous habitual residence in that member state. Although the general rule is that the jurisdiction whose succession laws apply, will also have the power to administer the estate of the deceased, the Regulation makes provision for a country to refuse application of the law that is incompatible with its own public policy.
EU Matrimonial Property Regulation
In terms of Regulations 2016/1103 and Council Regulation (EU) 2016/1104 of 24 June 2016, a competent court and rules regarding the determination of the national laws applicable in case of divorce or death, were established. These Regulations became operative on 29 January 2019 and adopt common rules on jurisdiction, applicable law and the recognition and enforcement of decisions in the area of the property regimes of international couples, covering both marriages and registered partnerships, in cases of death and divorce. Although it does not deal with succession matters per se, it does provide international couples with some legal certainty regarding jurisdiction and the recognition and enforcement of property matters, including prenuptial agreements drafted on or after 29 January 2019, in another EU country. Matters on the applicable law, apply to marriages concluded on or after 29 January 2019, except if the spouses have made a choice of law applicable to their matrimonial property regime before that date.
The Regulation makes provision for universal application in terms whereof the designated law applies, even if it is not the law of a member state, as well as the principle of unity of the applicable law. Spouses may, therefore, choose the law applicable to their matrimonial property regime, regardless of the nature or location of the property. They may elect any jurisdiction, even in a non-EU state, with which they have a close link, such as habitual residence or nationality. This principle of unity of the applicable law enables married couples to have their various related procedures handled by the courts of the same state. Advisors should encourage couples, where possible, to align their matrimonial property regime with their respective successions in accordance with the Succession Regulation.
Fiduciary practitioners in SA should take cognisance of these regulations, taking into consideration habitual residence, nationality and all other connections the spouses may have with any EU jurisdiction.
Conclusion
The Succession Regulation simplifies probate in cases of cross-border deceased estate administration and an executor in a non-member state will as a general rule be in a stronger position than they were before the introduction of the Regulation. The Regulation, unfortunately, only addresses this issue by way of a European Certificate of Succession, within the context of member states, and does not alleviate the difficulties experienced by practitioners in non-member states, like SA, in which case an Apostille certificate needs to be issued. To benefit from the Regulation the applicable choice of law should be clearly stated in each will, and preferably also the domicile and/or habitual residence of the testator. Drafters of wills must carefully consider the implication of revocation and/or variation clauses.
The Matrimonial Property Regulation provides common rules to apply to the marriages of international couples, and advisors should appreciate the potential advantages thereof at death of a client.
Dr Eben Nel BJuris LLM LLD (NMU) LLB (Unisa) PD Fin Planning (UFS) FPSA® is the Chairperson of the Fiduciary Institute of Southern Africa (FISA), Research Associate at Nelson Mandela University, advocate, and Fiduciary Adviser at PSG Trust in Port Elizabeth.
This article was first published in De Rebus in 2020 (Dec) DR 18.
Picture source: Gallo Images
Nov 27, 2020 | Article
As a general rule, income received by, or accrued to, a discretionary trust will be taxed in the hands of the trust, unless it is distributed before the trust’s financial year end (February each year) to a South African resident beneficiary, in which case it will be taxed in the beneficiary’s/ies’ hands, even though it may not have been physically paid to the beneficiaries and remains payable at the end of the financial year it has been distributed or vested.
In terms of Section 7(1) of the Income Tax Act income distributed or vested, but not yet paid in cash to a beneficiary, which:
- remains due and payable to them;
- has been credited to them;
- has been reinvested, accumulated, or capitalised in their name or on their behalf; or
- has been otherwise dealt with in their name or on their behalf;
- is deemed to have accrued to the beneficiary and will be taxed in their hands (ITC 1328 case of 1980), subject to the other anti-avoidance provisions – Section 7(2), 7(3), 7(4), 7(6), or 7(8) of the Income Tax Act). That means that one would have to first establish whether any of these other anti-avoidance provisions apply. If so, then this provision will not apply.
Section 25B of the Income Tax Act, which is the principal taxing section relating to trusts provides that (subject to Section 7 of the Income Tax Act) the income of a trust is taxed either in the trust or in the hands of the beneficiary as follows:
If the income vests during the year in a beneficiary, that beneficiary is taxed on it
If the income does not vest in the beneficiary, then the trust is taxed on it
Section 25B of the Income Tax Act (for trust income) and Paragraph 80(2) of the Eighth Schedule of the Income Tax Act (for trust capital gains), read together with Section 7(1), essentially codified the Conduit Principle first articulated in South African common law. The Conduit Principle is unique to trusts and allows trustees to distribute income and capital gains to beneficiaries together with the tax payable thereon, in order for the beneficiaries to pay less tax than would have been paid on the same income or capital gains in the trust.
Be mindful to classify the distributions due correctly in the financial statements to avoid being caught under the provisions of Section 7C of the Income Tax Act which taxes interest-free loans.
Trustees should timeously communicate income or capital gains distributed to beneficiaries so that they can include that in their respective tax returns.
Beneficiaries should also be mindful when such distributions are made to them, without receiving any cash from the trust, as they may not have the cash to pay the taxation relating to such distributions.
It will be prudent of trustees to pay at least enough cash to the beneficiaries to cover their tax obligations to Sars.
By Phia van der Spuy
Nov 27, 2020 | Article
Outsiders often assume that trustees have both the authority and the capacity to enter into transactions binding the trust. If trustees have not ensured that these requirements are met, to what extent can outsiders be deemed to have known?
In the instance of companies and close corporations, the Courts have adopted a principle called the “Turquand Rule”, which provides that a contracting party, who was dealing in good faith, can assume that acts have been properly and duly performed and that the required approvals were obtained, subject however to the requirement that those acts have to be within the company’s constitution. Section 20(7) of the Companies Act 71 of 2008 provides that a person dealing with a company in good faith, is entitled to presume that the company, in making any decision while exercising its powers, has complied with all the formal and procedural requirements in terms of the Companies Act, the company’s Memorandum of Incorporation (MOI) and any rules of the company, unless, in the circumstances, the person knew or ought reasonably to have known of any failure by the company to comply with any such requirements.
There is no such equivalent provision in the Trust Property Control Act. The Court in the van der Merwe NO and Others v Hydraberg Hydraulics CC and Others, van der Merwe NO and Others v Bosman and Others case of 2010 held that the “Turquand Rule” could not be applied to the trust, because the trust instrument did not provide a power to the trustees to authorise one or more of them to make decisions on the board of trustees’ behalf, or to act as principals in respect of the trust’s affairs, without acting jointly with the rest of the trustees.
In the Nieuwoudt v Vrystaat Mielies case of 2004, the Court held that the powers provided to the trustees in the trust instrument only related to the fact that they could sign on behalf of the rest of the trustees; not that they could make decisions on behalf of the board of trustees.
The Court held in the Land & Agricultural Bank of SA v Parker case of 2005 that “within its scope the rule may well in suitable cases have a useful role to play in securing the position of outsiders who deal in good faith with trusts that conclude business transactions.”
It is advisable for those dealing with trusts to assume that the rule does not apply to trusts in the present state of South African law. The liability is therefore on the outsider to ensure that due process was followed, unlike where one deals with a company, in which case the company will be bound even if, for example, the director lacked authority because the internal requirement of delegation had not been met.
What about property transactions?
Contracting parties are particularly cautious in the case of the purchase or sale of immovable property. In terms of the Land Alienation 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.
The Thorpe v Trittenwein case of 2007 confirmed the principle that where one trustee is authorised to act on behalf of other trustees, and the sale of land is involved, such authorisation must be received in writing in the form of a resolution duly signed by duly authorised trustees by the Master of the High Court. Any deed of sale entered into by one trustee purporting to act on behalf of other trustees, where that trustee is not authorised to do so by their co-trustees, may be deemed null and void. This is because it will not comply with the requirements of the Alienation of Land Act (Section 2), and cannot be ratified thereafter. This case confirmed that a sale cannot be ratified by the signature of a written authorisation to act after the fact. The written authority, therefore, must be granted prior to the signature of the deed of sale to the duly authorised trustee.
What should a contracting party do?
· View the Letters of Authority from the Master authorising the trustees to act
· View the trust deed to make sure that the board of trustees is properly constituted and has the capacity to enter into the type of contract in question
· Ensure that all internal formal or procedural requirements have been met such as a resolution authorising a trustee to sign a contract on behalf of the trust.
This is a useful article written by Phia van der Spuy
-Ant Jenkins
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