Trust-to-Trust: Is the trust at risk if the founder did not make the initial donation?
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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.
It remains to be seen how the courts will rule if the trustees are left with a right to demand the initial donation (and the founder, likewise, with the obligation to make the initial donation) and the founder is either sequestrated or liquidated or dies.
If the trustees cannot claim the amount or asset owed, does the trust then “die”? The “claim” against the estate is not secured, so the trustees have no guarantee that they will receive the donation from the estate and will have no one else from whom to claim the donation.
Some are even of the view that prescription may apply to the donation, under the “Acquisition of ownership by prescription” chapter of the Prescription Act 68 of 1969, whereby “a person shall by prescription become the owner of a thing which he has possessed openly and as if he were the owner thereof for an uninterrupted period of 30 years or for a period which, together with any periods for which such thing was so possessed by his predecessors in title, constitutes an uninterrupted period of 30 years”.
Founders and trustees should read the trust instrument and establish whether the initial donation was made and if not, ensure that it is done to prevent potentially exposing the trust assets, when it may be too late for trustees to demand the initial donation from the founder, who may no longer be around.
Phia van der Spuy is a chartered accountant with a Master’s degree in tax and a registered Fiduciary Practitioner of South Africa®, a Master Tax Practitioner (SA)™, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze®, the provider of a digital trust solution.
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