Is a trust at risk if the founder did not make the initial donation?

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.