Oct 11, 2021 | Article
In many instances, it may make sense to utilise existing trusts as part of your legacy plan.
Your assets can be bequeathed to an existing trust – if the trust instrument allows for it.
If this is the case, the trustees of that trust have to be specifically empowered in terms of the trust instrument to accept such a bequest.
Review the trustee power clause to ensure that the trustees can, in fact, accept further donations or bequests.
An obvious asset to bequeath to a trust is a loan owed by the trust to the testator or testatrix. Such loans typically originate from the sale of assets to a trust.
The testator or testatrix can also bequeath other assets to one or more existing trusts.
While it appears one can bequeath assets to both vesting and discretionary trusts (both ownership trusts, where the assets are held by the trustees for the benefit of beneficiaries), it is important to be mindful of certain principles.
Powers afforded to trustees
South African trust law distinguishes between a general and specific power of appointment afforded to a trustee.
The Braun v Blann & Botha case of 1984 established the principle that only a specific power of appointment of trustees is accepted or permitted.
If the trustees are granted powers that are too broad in terms of the trust instrument – such as the power to create further trusts as they wish or to include new beneficiaries (such as those not envisaged by the testator or testatrix when they drafted their will) – it may well be that the granting of such broad powers to trustees may pose a risk of attack on such trust by Sars, creditors and disgruntled beneficiaries.
Some even argue that a power to completely exclude a beneficiary from benefiting (as is the case with most discretionary trusts as it is the only way for it to qualify as a discretionary trust) from the trust may open a bequest to such trust to a risk of attack.
It is important to note that despite the fact that a bequest to a discretionary inter vivos trust (with broad trustee powers) may be open to attack, any attempt to empower trustees with an impermissible general power of appointment (unlimited discretionary powers) would, in any event, lead to the trust being declared invalid.
Bequest to existing vesting trust
A bequest to a vesting inter vivos trust was tested in the Kohlberg v Burnett case of 1986.
The testator bequeathed the residue of his estate to two trusts that he created about a year before his death.
It was claimed that the trust instrument did not form part of his will, that the bequest was a bequest to the beneficiaries under the trusts, that the identity of the beneficiaries could only be identified from the trust instrument, and that one cannot incorporate the terms of a document into one’s will by merely referring to it.
It was argued that the will failed to identify the beneficiaries of the bequest and that the assets would, therefore, devolve intestate.
The Court did not agree with this argument. It confirmed that a bequest to an inter vivos trust is valid without the terms of the trust being incorporated into the will, as required in terms of a testamentary trust.
It held that a trust is not a legal persona, but that trustees are entitled to act and hold property on behalf of a trust, that the beneficiaries of the bequests were the trusts which are clearly identifiable from the will, and that individuals who benefit in terms of the trust instrument are not beneficiaries in terms of the will, but rather in terms of the (existing) trust instrument.
It is important to note that the two existing trusts, in this case, vested certain rights in the beneficiaries.
The trust instruments gave clear instructions in terms of how the trustees were to deal with the income and capital of the trusts. In terms of the trust instruments, they had no discretion to deal with the income and capital of the trusts – it was, therefore, vesting trusts and not discretionary trusts.
In this case, there was no question of a delegation of testamentary powers – a principle that is not allowed in South African law.
Only a testator or testatrix can instruct how their assets should be dealt with post-death and no one else. The law does not allow a testator or testatrix to delegate their testamentary powers beyond certain limited exceptions – including through a trust structure.
What about existing discretionary trusts?
This case did not deal with discretionary trusts, where trustees have full discretion to deal with trust assets, which, in certain instances, may be equated to a delegation of testamentary powers.
It appears that it is the level of discretion afforded to the trustees in the trust instrument that is the determining factor in terms of whether a person can bequeath their assets to a discretionary inter vivos trust.
One would, therefore, need to study the terms of the trust instrument before bequeathing one’s assets to a discretionary trust and effect amendments if necessary.
For example, it is suggested that the beneficiaries (or even the trust instrument, which may affect the rights of beneficiaries or obligations of trustees) should not be allowed to be amended post the testator’s or testatrix’s death.
The trustees must be mindful and exercise extra care when dealing with assets bequeathed to a discretionary trust.
In summary, ensure the trust instrument allows for the receipt of bequests and that the trustees are not afforded too wide powers in the trust instrument, especially a right to amend beneficiaries or their rights.
By Phia van der Spuy
Sep 10, 2021 | Article
We are participating again in the National Wills Week
Contact us during the week of
13 – 17 September 2021
and we will draft or update your basic Will at no charge
Sep 3, 2021 | Article
It is highly advisable for the Founder/Donor/Settler of a new trust to ensure that there is a physical transfer of the asset/donation referred to in the trust deed as soon as the trust has been registered with the Master of the High Court and a bank account has been opened in the name of the trust.
Herewith a useful article by Phia van der Spuy dealing with this subject:
The trust assets defined in the trust instrument should be physically transferred by the founder to the trustees.
The founder has to relinquish control over the assets. The trust should be structured in such a way as to ensure there is a clear separation between control and ownership and enjoyment of trust assets. If that is not achieved, the trust may be at risk of attack.
In terms of the trust instrument, the founder is required to make an initial donation to the trust. In most cases, the founder stipulates an amount of money as the initial donation. Even if the amount is small (sometimes as little as R100), it must, by law, be deposited into the trust’s bank account. Under Section 11 of the Trust Property Control Act, the trustees are not allowed to hold the cash in their hands on behalf of the trust. Nor are they allowed to deposit the cash into a bank account that is not in the trust’s name.
The question arises whether it is a requirement for the founder to have transferred the initial donation to the trustees for the trust to come into existence.
Some people interpret the principle established in the Deedat versus The Master case of 1994 to mean that you do not have to make the initial physical donation to establish a trust, as long as there is an obligation to make such initial donation in the trust instrument, which is then made at a later date. The judge found in this case that “It may well be that the definition of a trust in the 1988 Act is wide enough to encompass property, duly identifiable, which is only to be acquired by the trustees in future from outside sources”.
The principle was confirmed in the Cunningham-Moorat versus Bester case of 2017, where the court ruled that it is not an essential factor for the formation of a valid trust that the trust assets (the initial donation) must be transferred to the trustees, but that a valid trust is legally recognised once it is registered with the Master of the High Court and the Letters of Authority issued. If the transfer does not happen, the trustees acquire the right to demand the initial donation from the founder – but the trust will exist.
It is, however, recommended to rather make the initial donation as soon as the trust is registered, in order to avoid attacks from the South African Revenue Service, creditors, and others.
Aug 20, 2021 | Article
ALL ABOUT TRUSTS:
It often happens that trustees do not actively participate in trust matters on an on-going basis – such as when soon-to-be-ex-spouses do not want to face one another in trustee meetings, or when people simply rely on an (invalid) clause in a trust instrument to abdicate their responsibility as trustee. Here’s a closer look at what our law allows.
Alternate trustee
A trust instrument may allow the use of an alternate trustee in the event that an appointed trustee cannot attend a meeting or is temporarily absent and cannot participate in the trust’s affairs. Even if the trust instrument allows for the use of a temporary alternate trustee, the actions by the alternate trustee may be null and void for the following reasons:
- Section 6 of the Trust Property Control Act requires a person to be duly authorised by the Master of the High Court before they can act as a trustee of the trust. The Act does not make provision for the appointment of an alternate trustee.
- Our common law requires all trust decisions to be made by duly appointed trustees of the trust, and no one else.
- There is no room in our law for a “silent” or “sleeping” trustee who appoints someone else to act on his or her behalf.
A trustee cannot empower an alternate trustee to act on his or her behalf to exercise a general discretion and decision-making which vests in the trustee. Alternate trustees can, therefore, not make decisions as they wish. A stipulation in the trust instrument allowing a proxy (see below) or alternate trustee to vote as they “may deem fit”, results in an abdication of a trustee’s powers, which is not allowed. If an alternate trustee is allowed to exercise their independent judgement and form a personal view at a trustees meeting, he or she would be allowed to act like an appointed trustee, without being duly authorised, as required under Section 6 of the Act (Hoosen v Deedat case of 1999).
A proxy
A possible solution for a trustee who cannot attend a meeting is the use of a proxy. A proxy is a written authorisation from an absent trustee that grants a limited power of attorney to another person (the proxy) to vote on behalf of and in accordance with the directions of the trustee.
A proxy allows a duly authorised person to represent a trustee at a meeting if it is specifically allowed in the trust instrument. The court held in the Malatji v Ledwaba case of 2021 that there is no common-law principle allowing representation by proxy. If the trust instrument does not specifically allow for the use of a proxy, the parties have to be present in person at the meeting to be entitled to vote. The court held further that a proxy is a form of a mandate, and requires a mandate to be extended by the principal to an agent to exercise the vote to which the principal was entitled at the meeting. The votes “by proxy” on behalf of the deceased and absent beneficiaries were therefore not allowed in terms of our common law and in conflict with the provisions of the trust instrument.
Such a proxy can merely act as the messenger of the trustee they represent and convey the thoughts and/or votes of the trustee who granted the proxy. A stipulation in the trust instrument allowing a proxy to vote as they “may deem fit”, results in an abdication of a trustee’s powers, which is not allowed. If a proxy is allowed to exercise his or her independent judgement and forms a personal view at a trustees meeting, the proxy would be acting a trustee of the trust, without being duly appointed as trustee, as required in terms of the Act.
Even if another trustee of the trust acts as a proxy for a trustee, allowing such a person to act and decide as they wish is not allowed, as it would result in an abdication of power to the proxy.
Although the Steyn v Blockpave case of 2011 accepts that a trustee who cannot personally attend a meeting can make use of a proxy, it must not be broadly interpreted. Only the use of a proxy as described above will result in valid decisions taken by the board of trustees.
No delegation of authority
Trustees may delegate tasks (in other words, they may execute decisions already taken by the board of trustees), but they are still required to make decisions and exercise discretionary powers personally and independently, without the influence of any other person. In the Hoosen v Deedat case, the court held that a trustee who is chosen because of a certain special quality or ability may not delegate their powers, authority, or duties to anyone else. The court emphasised that a trustee cannot abdicate his or her powers and, in so doing, be released from the responsibility as a trustee. No act of a person, while acting as a trustee, will indemnify them against the liability for breach of trust where they fail to show the degree of care, diligence and skill required in terms of Section 9(1) of the Act.
It is clear that the fact that trust instruments, in many cases, contain a general stipulation that the trustees shall have unlimited or unfettered discretion, does not allow them to do as they please. They have to be able to prove that they remain involved in all trust matters, that they have applied their minds, and that they always act in the best interests of the beneficiaries.
Phia van der Spuy
Jul 21, 2021 | Article
We saw a slight uptick on the local markets yesterday, after a volatile week.
Jul 18, 2021 | Article
As is sadly all too frequent, wills can trigger family disputes on the death of the testator.
An extreme example of this is the Miramar murders which took place in Tapei in 2016; an alleged double murder and suicide resulted in the death of three brothers, all members of a prominent Taipei family. The late Tycoon Huang Jung-tu, the brother’s father, had amassed a colossal business empire estimated to be worth US$3 billion, which included the famous hotel and retail chain empire, known as the Miramar Group. The shootings occurred in November 2016 at a corporate meeting in the headquarters of part of this empire, the Mayfull Food Corp, one of Taiwan’s major meat importers and distributors. At the meeting, chaos ensued following the discussion about how to split the inheritance of the business left by their father; the younger brother reportedly took out a pistol and shot two of his brothers before he committed suicide with a single shot to his head.
A further complication was the family dynamic; the late father had been married twice with seven sons, and had a further two sons from another relationship, creating a myriad of obstacles!
How to avoid disputes in inheritance
Talks about inheritance need not end in murder! Many do, however, end in disputes because no will or succession plan has been put in place. The current pandemic has encouraged more people to address their wills. There are still, unfortunately, an overwhelming majority of individuals whose wills are not up-to-date and therefore do not reflect their current intentions.
For individuals with assets placed in other countries it is even more crucial to have a will, or to have more than one will.
Should individuals invest in one or more wills?
Depending on the circumstance, it can be appropriate to have one will covering worldwide assets. In others, it is advisable to have more than one will – an “international” or “offshore” will or wills.
A substantial benefit of having an offshore will is that, rather than being required to wait for a will to be submitted in the home jurisdiction before the offshore assets can be administered, the offshore will can be submitted simultaneously to that of the home will. The estate should be finalised quicker, and at a reduced cost. In Jersey, for example, the person entitled to administer the estate is required to make a personal appearance at the jurisdiction’s Court to swear the oath. If they are unable or unwilling to fly to Jersey, a local agent will need to be appointed in order to attend the Court on their behalf. It is, on the other hand, a far more time- and cost-effective way of handling a Jersey estate if there is a Jersey will that appoints a local executor, for example a Jersey lawyer.
Furthermore, some jurisdictions have marital regimes which impact inheritance. This is the case in Italy and can mean, firstly, that assets in the sole name of one spouse are, effectively, owned jointly by both spouses and, additionally, that those assets might not be free to dispose of by will.
It can also be the case that an offshore will has been drafted in accordance with offshore estate planning advice. The will can therefore utilise any available tax planning opportunities, or reduce or avoid offshore probate fees.
Another benefit is that where the offshore asset is a property, an offshore will can minimise difficulties in relation to the succession to the property. From a practical standpoint, the offshore will can be drafted in the local language, use local terminology and nuances, and so avoid any potential problems of drafting a will which does not work. English wills, for example, often include trusts which are, usually, not recognised in civil law jurisdictions such as France and Spain. Furthermore, some jurisdictions have forced heirship rules; this means that assets in that jurisdiction can only pass in a prescribed manner. On some occasions an offshore will can override such rules, but the home will can compensate for this by seeking to balance out the distribution of the estate overall.
Other advantages are demonstrated by South African wills; these include a clause specifying how much can be charged to administer the estate, as a percentage. This is a binding agreement and can be negotiated to reduce the cost. There can be exchange control concerns where, typically, the individual does not want offshore assets going to South Africa as part of the administration of the estate because there are restrictions on how much can be taken out of South Africa. It should be noted that the South African exchange control rules are changing, and it is best to always seek local advice.
Risks associated with offshore wills
While there are certain disadvantages associated with offshore wills, such as the risks of accidental revocation and partial intestacy, these can be reduced by careful drafting and good advice. Likewise, although it may cost more money to have more than one will initially, the additional costs are offset by the money that the estate saves as the result of having a more streamlined estate administration.
Jonathan Colclough, Fisa member and Partner, BDB Pitmans, UK.
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