Estate planners often create trusts and add beneficiaries, assuming that these beneficiaries can be removed or replaced over time. This assumption may give rise to problems.
During divorce, for example, one of the spouses may recommend removing the other spouse as a beneficiary of a trust. He or she may need his or her approval to do this. The amendment can be carried out in the form of an addendum to the original trust deed, or an amended trust deed can be drafted to replace the original trust deed.
In general, there are three ways to amend an inter-vivos trust deed:
1. Contractual amendment while the founder is alive
An inter-vivos trust is a stipulatio alteri (a contract on behalf of a third person). In terms of the principles that apply to a stipulatio alteri, the beneficiaries of an inter-vivos trust acquire stipulated rights in the trust property only when they accept the benefits of the stipulatio.
Because a trust is a contract, the parties to the contract are permitted to make amendments by unanimous agreement in terms of the rules of the law of contract. Therefore, the founder and the trustees (and the beneficiaries who have accepted benefits, regardless of what the trust deed stipulates) can conclude a later agreement to amend or substitute an earlier agreement. It is important that each of the parties to the trust deed consents to the amendment.
The trustees owe a fiduciary duty to the beneficiaries to act in their best interests. Amending an agreement would therefore have to be carefully considered by the trustees before they agree to it, even if they are instructed by the founder to make the change.
How do the beneficiaries “accept” benefits?
If the beneficiaries made themselves part of the contract by writing to the trustees, it is clear that they have accepted the benefits of the trust, even if the benefits are dependent upon the trustees’ exercising their discretion in the future;
If there were prior amendments to the trust, and the beneficiaries accepted these amendments, it may imply the acceptance of benefits; and
If awards were made to discretionary beneficiaries in prior years, and these awards were accepted by the beneficiaries, it may imply that the beneficiaries accepted the benefits of the trust.
2. Amendment in terms of the provisions of the trust deed
This takes place when the trust deed is amended in accordance with the variation clause of the trust deed. This method is usually relied upon when the founder has passed away.
Where a beneficiary has already received benefits from a trust, he or she is deemed to be a party to the original agreement, and is therefore required to be a party to the amendment agreement, regardless of the provisions of the trust deed. Usually, the variation clause determines how changes to the trust deed must be performed.
In the event that the trust deed does not contain a variation clause, the trust deed would be amended using one of the other two options.
3. Amendment through application to court
If the founder has passed away and the trust deed does not make provision for an amendment, amendment by court application would be the only alternative course of action.
Section 13 of the Trust Property Control Act allows a “trustee or any person” having “sufficient interest in trust property” to apply to the court to change the provisions of the trust, where the provisions of the trust are against the public interest, or jeopardise the beneficiaries’ interests or the trust’s objective.
Clarification by the Master of the High Court
The Master of the High Court published a directive in March last year providing for the following in relation to the amendment of trust deeds:If the trust deed stipulates that the beneficiaries are required to be involved in a decision to amend the trust deed or deregister the trust, the trustees must involve the beneficiaries in such decisions.
If the trust deed pertinently stipulates that the beneficiaries are not required to be involved in a decision to amend the trust deed or deregister the trust, the trustees do not have to involve the beneficiaries in such decisions.
If the amendment clause of the trust deed states that the trustees cannot amend certain provisions of the trust deed, the trustees will be allowed to make amendments other than such prohibited amendments without the consent of the beneficiaries. They will, however, require the consent of the beneficiaries to amend the clauses that the trustees are prohibited to change on their own.
If the trust deed is silent on the involvement of the beneficiaries, but the beneficiaries have accepted benefits conferred by the trust instrument, the trust instrument can be amended or terminated only with such beneficiaries’ consent.
In 2002, the South African Revenue Service closed a loophole to prevent individuals from “selling” their discretionary trusts holding residential property in order to avoid paying transfer duty.
The Transfer Duty Act levies transfer duty “on the value of any property… acquired by any person… by way of a transaction or in any other manner”.
It is a requirement that a transaction has to take place. A “transaction” is defined in the Transfer Duty Act as, “in relation to a discretionary trust, the substitution or addition of one or more beneficiaries with a contingent right to any property of that trust, which constitutes residential property or shares or member’s interest” in a residential property entity. The transaction has to be in relation to “property”.
Property includes “a contingent right to any residential property or share or member’s interest… held by a discretionary trust (other than a special trust… ), the acquisition of which is:
a consequence of, or attendant upon, the conclusion of any agreement for consideration with regard to property held by that trust;
accompanied by the substitution or variation of that trust’s loan creditors, or by the substitution or addition of any mortgage bond or mortgage bond creditor; or
accompanied by the change of any trustee of that trust.”
Therefore, transfer duty is applicable if any of the three conditions are met, plus there is a change in the discretionary beneficiary.
“Residential property” means “any dwelling-house, holiday home, apartment or similar abode, improved or unimproved land zoned for residential use (including any real right thereto), other than:
an apartment complex, hotel, guesthouse or similar structure consisting of five or more units held by a person which has been used for renting to five or more persons, who are not connected persons, as defined in the Income Tax Act, in relation to that person; or
any ‘fixed property’ of a ‘vendor’ forming part of an ‘enterprise’ as defined in the Value-added Tax Act”.
Although the Transfer Duty Act does not define “acquire”, the courts have provided some guidance and held that “acquire” meant the acquisition “of a right to acquire the ownership of property” (CIR v Freddies Consolidated Mines Ltd, 1957), or by a person of a personal right to obtain dominium (ownership and control) in immovable property (SIR v Hartzenberg, 1966).
Obviously, the transfer of a vested right in a fixed property held in trust will trigger transfer duty in the normal way, because ownership of the property vests in the beneficiary concerned.
Make sure you keep the above considerations in mind when you have a trust deed drafted, and anticipate any possible negative consequences relating to beneficiaries and their rights.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa and the founder of Trusteeze, which specialises in trust administration.