Jan 21, 2022 | Article
The removal of trustees will always be a delicate matter, especially in terms of a testamentary trust where the testator or testatrix handpicked the trustee(s). It was held in the Gowar v Gowar case of 2016 that the Court’s power to remove a trustee must be exercised with caution – it should consider whether the trustee’s conduct endangered the trust assets or its proper administration. Conflict between the trustees and/or beneficiaries is, 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 assets.
Relationship between trustees
The Court held in the McNair v Crossman case of 2019 that if the relationship between co-trustees has broken down to the extent that they no longer have any mutual respect and trust for each other, a trustee’s removal can be brought under Section 20(1) of the Trust Property Control Act since it could place the trust assets and the trust administration at risk. If none of the trustees wants to step down, the Court can remove one or more of them.
It was held in the Fletcher v McNair case of 2020 that the breakdown of a relationship between co-trustees, resulting from outside the trust, is not sufficient reason to remove a trustee. The test is whether the trust assets and its affairs are placed at risk. It cannot be assumed that as a result of a lack of trust, respect, or compatibility amongst trustees, the trust assets are placed at risk, and therefore, the trustee has to be removed.
It was held in the Haitas v Froneman case of 2021 that a trustee must first participate in trust matters before they can claim that a deadlock exists and, therefore, demand the appointment of an independent trustee. Trustees often refuse to participate in trust matters and attend trustee meetings due to a conflict with co-trustees. Trustees sometimes even refuse to attend meetings without legal representation. Trustees should rather attend these meetings and take legal advice thereafter if they so wish. Non-participation is dangerous as the trustee snookers themselves. If a trustee claimed a deadlock and requested the appointment of an independent trustee, the issue is whether or not there is a deadlock to break since they have not even engaged with their co-trustees.
Relationship between trustees and beneficiaries
It was held in the McNair v Crossman case of 2019 that the mere friction or enmity between the trustee and the beneficiaries would not in itself be an adequate reason for the removal of the trustee from office.
The Fletcher v McNair case of 2020 confirmed the following legal principles regarding the removal of trustees:
· Mere friction or enmity between a trustee and beneficiaries will not in itself be adequate reason for the removal of a trustee from office.
· Where there is disharmony between the trustees and the beneficiaries, the test is whether the relationship risks the trust estate or its proper administration.
· Neither mala fides (acting in bad faith) nor misconduct are required for the removal of a trustee.
· The important consideration is the welfare of the beneficiaries and the proper administration of the trust and the trust assets.
In the Haitas v Froneman case of 2021, the sole beneficiary wanted the trustees removed for “not doing their job”. Unfortunately, doing their job requires trustees to follow the instructions in the trust instrument and not their own judgement or that of the beneficiaries. The Court acknowledged that the trustees have, in some respects, been lax in maintaining proper accounting records of the trust. The problem actually pre-dated the death of the deceased, who did not require audited financial statements (even though that was required in terms of the trust instrument) and ran the businesses single-handedly. The Court acknowledged that it was negligent of the trustees to give the deceased free rein during his lifetime. The Court confirmed the following legal principles regarding the removal of trustees:
· The general principle is that a court will exercise its ‘common law’ jurisdiction to remove a trustee if the continuance in office of the trustee will be detrimental to the beneficiary or prevent the trust from being properly administered. A trustee has a fiduciary duty to act with due care and diligence in administering property on behalf of another.
· The Courts have taken a pragmatic approach as to what misconduct should be construed as jeopardising trust assets, and the Courts’ power to remove a trustee is one that should be used with circumspection. Regardless of whether the common law or Section 20(1) of the Trust Property Control Act is utilised, the Courts have emphasised that when a deceased person has deliberately selected certain persons to carry out their wishes because they believe they are best placed to do so, a court should be loath to interfere and remove them as trustees.
· Neither mala fides (acting in bad faith) nor misconduct necessarily warrant the removal of a trustee. Disharmony in the administration of a trust is only relevant if this exposes the trust assets. Removal of a trustee will only be necessary if it is in the interests of the trust and its beneficiaries.
· Conduct of the trustees, which the beneficiary does not like, does not on its own justify their removal. In fact, the Court has found that enmity (disharmony, hostility, friction, conflict, dislike, hatred or aversion) between the beneficiary and the trustees is not of and in itself an adequate reason for their removal. The conduct of trustees must be detrimental to the trust assets. It is only then that their conduct may warrant removal. It is not necessary that their conduct be unquestionable or faultless but generally, where there is no wrongdoing or misconduct and no financial gain on the part of trustees, the Courts will not interfere.
~ Written by Phia van der Spuy ~
Jan 21, 2022 | Article
The Constitutional Court in Bwanya v Master of the High Court, Cape Town and Others [2021] ZACC 51confirmed the ruling of the Western Cape High Court in October 2020 that section 1 of the Intestate Succession Act, 81 of 1987 (ISA), is unconstitutional in so far as it excludes life partners in a relationship intended to be permanent from the definition of “spouse”.
The majority of the held that unfair discrimination on the basis of marital status is prohibited by section 9 of the Constitution, and that any such discrimination is presumed to be unfair unless it can be shown not to be unfair.
Taking into consideration that there are indications that more than three million South Africans are in life partnerships, the court found that not to extend the right to inherit under intestate law from one another would be unfair discrimination on marital status.
The court also allowed an appeal against the ruling by the Western Cape High Court that it cannot find that the provisions of the Maintenance of Surviving Spouses Act, 27 of 1990 (MSSA), are unconstitutional, because it is bound by the earlier decision by the Constitutional Court in Volks NO v Robinson and Others [2005] ZACC 2. The court found that whether or not a life partnership existed is a factual question and that it can, therefore, decide on the facts that it existed in the current matter. The court was of the view that the decision in Volks does not bind it under all circumstances.
The court ordered, inter alia, that both section 1 of the ISA as well as section 2 of the MSSA are unconstitutional and that it should be read to include a partner in a life partnership complying with the test of reciprocal duties of care, maintenance and support. The order is postponed for 18 months to give Parliament the opportunity to amend the two pieces of legislation.
Comment:
Practically speaking executors should now seriously consider any claims from life partners under either of the mentioned acts and obtain legal advice in appropriate circumstances, as failure to consider them could result in further litigation.
Source: FISA
Dec 3, 2021 | Article
All trustees to play an active roll
Trusts are often trusts in name only, with an essential principle of trust law, namely the independence of trustees, neglected (Tijmstra v Blunt-Mackenzie case of 2002). It is, therefore, important to note that all trustees are acting in a fiduciary capacity, and no one trustee can hide behind another. A fiduciary duty is an onerous, legal obligation (a duty of loyalty and care) of a person managing property or money belonging to another person to act in the best interests of such a person. All trustees are to act with the care, diligence and skill, which can reasonably be expected of a person who manages the affairs of others (Section 9(1) of the Trust Property Control Act).
It is a fundamental rule of trust law that, in the absence of contrary provisions in the trust instrument, the trustees must act jointly if the trust’s estate is to be bound by their acts, and a unanimous vote will be required in matters of substance. The rule derives itself from the nature of the trustees’ joint ownership of the trust assets in ownership trusts. Since co-owners must act jointly, trustees must also act jointly (Coetzee v Peet Smith Trust case of 2003 and Nieuwoudt v Vrystaat Mielies case of 2004). Co-trustees are required to act jointly concerning trust administration at all times. When dealing with third parties, even if the trust instrument stipulates that a decision can be made by the majority of trustees, all trustees are required to be involved in the decision and have to sign each resolution (Land and Agricultural Bank of South Africa v Parker case of 2005).
Is more expected of the independent trustee?
Even though the Chief Master’s Directive does not require an independent trustee to be a professional person (also suggested in the Land and Agricultural Bank of South Africa v Parker case of 2005), it is in the best interests of the trust that the independent trustee has sufficient knowledge of the impact of statutory requirements on the trust, including an understanding around compliance with relevant tax law, and the effect of changes in legislation on the trust. Take note that the independent trustee, upon their appointment, must sign a Sworn Affidavit declaring that they are “knowledgeable in the law of trusts”.
The Court held in the Land and Agricultural Bank of South Africa v Parker case of 2005 that an independent trustee should be an “independent outsider” who ensures that there is adequate separation of control from enjoyment with a proper realisation of the responsibilities of trusteeship. The independent trustee should play an active role in the trust and ensure that the trust functions properly and that the provisions of the trust instrument are observed (also confirmed in the Chief Master’s Directive of 2017). The Court also held that the conduct of trustees who do not observe the trust instrument should be scrutinised and checked by the independent trustee. The Court held that any failure to observe these duties constitutes a breach of trust. That should serve as a warning to so-called ‘independent trustees’ who look the other way in their client’s wrongdoing.
The Chief Master’s Directive requires independent trustees:
To be competent to scrutinise and check the conduct of the other appointed trustees who lack a sufficiently independent interest in the observance of substantive and procedural requirements arising from the trust instrument.
To be knowledgeable about the law of trusts and not conclude or approve transactions that may prove invalid.
To have business knowledge and experience of the business field in which the trust operates.
To realise that failure to observe the duties of an independent trustee may risk action for breach of trust.
Trustees can delegate the execution of a decision
There is a big difference between abdicating responsibility and the delegation of the responsibility to execute a decision already taken. A number of estate planners and trustees get it wrong, especially when father, mother, children, family, etc. are acting as trustees, and often as “silent” or “puppet” trustees, which is not tolerated (Slip Knot Investments 777 (Pty) Ltd v du Toit case of 2011). They basically rely on one trustee, often the independent trustee, to carry the burden of trusteeship on their behalf.
However, after acting jointly, the trustees may delegate certain functions to one or more of them while retaining responsibility for the actions taken on their behalf. The acting trustee then becomes the agent of the board of trustees.
If there is reliance on independent trustees, have agreements in place
Often the estate planner and other family trustees assume the independent trustee will ‘carry’ the trust. Considering the requirement for all trustees to participate, do not assume the independent trustee will ensure the compliance of the trust on their own. Our law does not expect all trustees to be experts in all the fields (legal, accounting, taxation, and the business which the trust operates in). Each board of trustees’ skills are varying and unique; also that of the independent trustees. The board of trustees should, therefore, analyse any unique contribution each trustee can make, and formally agree with them for any unique role they will play, such as giving advice to and guide the other trustees regarding taxation matters, investments, land matters, etc. Have a formal agreement in place with the independent trustee, specifically dealing with any special role they are required to play in the trust, in line with our law and the trust instrument.
~ Written by Phia van der Spuy ~
Dec 1, 2021 | Article
In the recent High Court judgment of Knuttel NO and Others v Shana and Others (GJ) (unreported case no 38683/2020, 27-8-2021) (Katzew AJ), the court had to decide whether the rules related to the commissioning of affidavits could be relaxed in certain circumstances.
The deponent to the founding affidavit was infected with COVID-19 at the time of deposing and certain extraordinary steps were taken for the commissioning of the oath. The question that essentially had to be answered was whether there was substantial compliance with the requirements for the commissioning of the oath to the founding affidavit and whether the extraordinary steps taken for the commissioning constituted substantial compliance with the requirements for the commissioning of oaths.
The respondents principally complained that the founding affidavit was not signed by the deponent in the presence of the Commissioner of Oaths (the commissioner) and that this conflicted with the Regulations Governing the Administering of an Oath or Affirmation (the Regulations), which were made by the Minister of Justice in terms of s 10(1)(b) of the Justices of the Peace and Commissioners of Oaths Act 16 of 1963 (the Act). The Act empowers the minister to make regulations prescribing the form and manner in which an oath or affirmation shall be administered, and a solemn or attested declaration shall be taken, when not prescribed by any other law. Regulation 3(1) requires that a deponent shall sign the declaration in the presence of the commissioner.
The legal practitioner on behalf of the applicant deposed to a separate affidavit wherein he gave a detailed explanation of the steps taken by him to ensure substantial compliance with the requirements in reg 3(1) and to ensure that the deponent to the founding affidavit signed in the presence of the commissioner, which, as already stated, was physically impossible due to the deponent’s infection with COVID-19 at the time.
The procedure followed by the legal practitioner can be summarised as follows:
- An unsigned draft founding affidavit was e-mailed to the deponent with instructions to read, initial and sign it before e-mailing it back to the legal practitioner.
- The legal practitioner then engaged the services of a commissioner who, in the legal practitioner’s presence in the office of the commissioner spoke to the deponent via a video WhatsApp call.
- Having identified the deponent as the person she professed to be, the commissioner then posed the usual questions before she administered the oath in the conventional way, except that the deponent initialled and signed the affidavit prior to the video call.
Considering the question posed, the court referred to the full court judgment of S v Munn 1973 (3) SA 734 (NC), which confirmed that the Regulations are directory only and that non-compliance would not invalidate an affidavit if there was substantial compliance with the formalities in such a way as to give effect to the purpose of obtaining the deponent’s signature to an affidavit. The Full Court in the Munn case found that the purpose of obtaining the deponent’s signature to an affidavit is primarily to obtain irrefutable evidence that the relevant deposition was indeed sworn to. Consequently, non-compliance with the Regulations does not per se invalidate an affidavit. As far back as 1973, the Munn case confirmed that the requirement of person-to-person physical presence between a commissioner and deponent is not peremptory and can be relaxed on proof on the facts of substantial compliance with the requirements.
In the case under discussion the court consequently held that there was substantial compliance with the requirement for person-to-person presence in administering the oath for the founding affidavit.
This finding is in line with foreign case law where judicial recognition has been given to the relaxation of the requirement of person-to-person presence for administering of an oath. In the case of Uramin (Incorporated in British Columbia) t/a Areva Resources Southern Africa v Perie 2017 (1) SA 236 (GJ), the court allowed the use of a video link to lead evidence in a civil matter from witnesses who were abroad. The judge administered the oath to them virtually before their evidence was led. Similarly, in the Canadian Superior Court of Justice (see Rabbat et al v Nadon et al 2020 ONSC 2933) the court permitted the virtual commissioning of affidavits considering the restrictions due to COVID-19.
The question of commissioning the oath without physical person-to-person presence arises more frequently in the digital era we live in. This judgment is a welcome guideline for litigants who require a departure from the rigidity of physical presence when commissioning affidavits. One would be well-advised to take heed of the judgment and the process followed therein should you be in a position, which requires some departure from the Regulations.
By Theo Steyn
Source: De Rebus
Nov 26, 2021 | Article
Gauteng High Court (Johannesburg) Judge Fiona Dippenaar has considered the better quality of life and opportunities in a foreign country in her decision to rule against a father who sought to scupper his five-year-old daughter’s imminent emigration with her mother. The Star reports Dippenaar presided over an urgent application brought by a mother identified as AK, father LKG and daughter A. The mother submitted before Dippenaar that she resorted to launching the urgent application because she had found a permanent job as a clinical psychologist in New Zealand. She contended that it was in A’s best interests to move to New Zealand because she had been the child’s primary caregiver since birth. LKG opposed the move on the grounds that it would severely prejudice his relationship with his daughter.
Dippenaar ruled that AK’s submissions had merit, notes the report in The Star. ‘In my view, it cannot be concluded that the relocation is not bona fide or reasonable. It can also not be concluded that the relocation decision was not taken bona fide,’ she said. ‘The opposition of the application on this basis lacks merit. The respondent has put up no primary facts which would justify the inferential conclusions he seeks to draw.’ Dippenaar pointed out that in addition to the fact that AK was a primary caregiver, it was a fact that she was relocating for greener pastures with her new nuclear family. ‘The applicant is a trained clinical psychologist who has secured a good position in the profession and the location of her choice,’ she said. ‘She is relocating with her nuclear family, a (new) husband, a (new) baby and A to pursue a new life in a secure location with free education and health-care programmes and a much lower unemployment rate than in SA.’
Dippenaar added: ‘Although it is in A’s best interests to have a good relationship with both her biological parents, the prejudice to her best interests if the relief sought is not granted, in my view, by far outweighs the prejudice if the relief is granted. It would be less detrimental to A not to deprive the applicant of the opportunity to relocate to New Zealand. It is open to the respondent to mitigate such prejudice to A by negotiating or obtaining generous access to A, albeit primarily virtually, at least on a day-to-day basis.’ Dippenaar terminated the parental rights that AK had to give or refuse consent to the child’s relocation
Source: LegalBrief
Nov 26, 2021 | Article
This is a useful article by Phia van der Spuy dealing with this topic:
Trustees should act in the best interests of all the beneficiaries, in line with the terms of the trust instrument. In the Griessel v de Kock case of 2019 the Court held that the “role of a trustee in administering a trust calls for the exercise of a fiduciary duty owed to all the beneficiaries of a trust, irrespective of whether they have vested rights or are contingent beneficiaries whose rights to the trust income or capital will only vest on the happening of some uncertain future event”. If income and capital beneficiaries are not the same people, it may present a potential conflict which the trustees would have to manage.
Define beneficiaries well
Beneficiaries are the only persons who can ever benefit from a trust. There is flexibility regarding how the estate planner can arrange who is to benefit from the trust assets. For a start, one can distinguish between those who can benefit from the capital (the assets) of the trust and those who can benefit from the income generated by assets in the trust. One can also ‘vest’ income and/or capital in one or more beneficiaries (which they are entitled to), or only give one or more beneficiaries discretionary or contingent rights (only a hope to receive something) to trust income and/or capital until the trustees have exercised their discretion in favour of such beneficiaries, upon which such distribution vests in the beneficiaries. In some trusts, beneficiaries may have a combination of rights, such as vested rights to trust income and discretionary rights to trust capital (which beneficiaries hope to receive), or vice versa. This mechanism provides the estate planner with an opportunity to specify which beneficiaries should receive which benefits (income and/or capital) from the trust. This is a personal preference and choice of the estate planner, which needs to be carefully considered by them when the trust is registered.
Potential conflict between different types of beneficiaries
When capital and income beneficiaries are different people, extra care should be taken to ensure that all beneficiaries’ needs are considered. Capital beneficiaries may prefer capital growth and capital preservation, while income beneficiaries may favour maximising income, even if it is at the cost of capital growth or capital preservation. The apportionment of expenses to income and capital beneficiaries may also become a challenge when attempting to establish fairness.
Possible solution
Income should be clearly distinguished from capital in the trust instrument, especially if different people are income and capital beneficiaries. Be mindful how you define ‘income’ in the trust instrument since it may include all ‘fruits’ from assets – such as the occupation of a property – or it can narrowly refer to actual revenue received, such as rental income. The term ‘net income’ – gross income less expenses – should also be clearly defined, and the trust instrument should allow trustees to distribute both income and net income to capitalise on the benefit of the ‘conduit principle’. If only income is distributed, the expenses related to the income will not be capable of deduction for tax purposes in the hands of the beneficiary or the trust and will be lost. Capital beneficiaries, on the other hand, may benefit from the distribution of an actual trust asset or from a gain made on the disposal of trust assets, depending on its definition in the trust instrument.
The treatment of unallocated income should also be defined to reflect the founder’s intention – in other words, whether it will form part of trust capital at the end of a financial year, if unallocated, or whether it will keep its nature as income. If the trust instrument is silent, it may be assumed that income and capital will always retain their individual natures.
In the event that income and capital beneficiaries are different, it is good practice to state in the trust instrument that if the income is insufficient for the maintenance of an income beneficiary that trust capital can be used to make good on any such shortfall. This will assist the trustees in optimising the trust’s investment returns while taking into account the needs of all beneficiaries to prevent unintended hardship. Focusing solely on a trust’s short-term income production may have a detrimental effect on the long-term position and value of the trust’s assets, which, in the long run, may negatively impact both the income and capital beneficiaries.
Advice to trustees
Part of the process of taking control of the trust assets is to ensure that money in the trust is properly invested. The trustees begin this process by establishing, where possible, the intention of the founder of the trust. They would then establish the needs of each of the beneficiaries. The trustees are required to establish the short, medium and long-term requirements of the income beneficiaries, as well as those of the capital beneficiaries. Once the needs of the beneficiaries have been established, negotiated, and agreed upon, the trustees can then ascertain their investment powers before making an appropriate investment.
In the Sackville West v Nourse case of 1925, the beneficiary succeeded in a claim for damages for negligence against a trustee who had made an unwise investment. The trustees, therefore, have to perform a delicate balancing act between seeking out safe investments and avoiding risk, versus investing trust assets productively while considering beneficiary needs – for both income and capital beneficiaries. Since an element of risk-taking seems unavoidable, trustees should record and document their reasons in arriving at investment decisions.
~ Written by Phia van der Spuy ~
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