OPINION: Be careful when defining beneficiaries
It is not the Master of the High Court’s duty to test and investigate the validity of a trust. The validity of a trust is usually challenged only by creditors, the South African Revenue Service, a soon-to-be-ex-spouse, and so forth, when it might seem beneficial to such individuals or entities to disregard the trust.
Many family trusts in South Africa are designed to be controlled by the founder, the beneficiaries, or one or more trustees, which is not allowed. This might compromise your estate plan.
We often find that estate planners deliberately define beneficiaries broadly or loosely so they can manipulate later on whom they want to benefit from the trust. It might sound like a good strategy, but very few people are aware of the risks of doing that.
The creation of a trust during your lifetime (inter vivos trust) is regulated by the law of contracts, as opposed to a testamentary trust, which is governed by the law of succession. Therefore, the principles that apply to the execution of a valid contract also apply to the execution of a valid trust deed of an inter vivos trust.
For a contract to be considered valid and binding in South Africa, the following requirements must be met:
* There must be consensus between the contracting parties.
* The parties must have seriously intended the agreement to result in terms that can be enforced.
* The parties must have the capacity to contract. Under South African law, when you turn 18, you are free to contract and conduct your own affairs without your parent or guardian’s assistance.
* The agreement must have certain and definite terms. It is therefore important to ensure that the terms covered in the trust deed are explicit.
* The agreement must be lawful.
* It must be possible to perform the contractual obligations.
* The content of the agreement must be certain. All aspects that you need to cover and that you can enforce should be contained in the trust deed.
In Estate Richards versus Nichol (1996), the court confirmed the essential elements for the creation of a valid trust. If any one of the elements is missing, it is important to understand that a trust has not been created. Although the parties might have termed what they created a “trust”, it does not infer that it is a trust in the legal sense of the word. One of the requirements is that beneficiaries (also known as the trust object) must be clearly identified or readily ascertainable.
The Trust Property Control Act defines a trust as “the arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed:
* To another person, the trustee, in whole or in part, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument; or
* To the beneficiaries designated in the trust instrument, which property is placed under the control of another person, the trustee, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument.
The first part of the definition deals with typical discretionary family trusts. The second refers to vested trusts, a more uncommon type where the assets belong to the beneficiaries, but are managed by the trustees.
Although the term “beneficiaries” is not defined in the Trust Property Control Act, the definition of a trust in the act sets out the requirements for a valid trust. The essence of a trust is that trustees hold trust assets on behalf of beneficiaries, or on behalf of some object, such as a charity.
A trust is therefore formed to benefit some persons or some object. As such, there should be a “person”, identified by name and preferably an identity number, or “class of persons”, identifiable through the description of such a class, such as “the descendants of”.
The Trust Property Control Act does not allow for a vague definition of beneficiaries, something that is problematic for many trusts in existence. A trust without identified or identifiable beneficiaries is invalid.
The test for identifiable beneficiaries in the trust deed:
* In the case of a personal trust (such as a family trust), the trust object relates to how the benefits of the beneficiaries are defined. In order to meet this requirement, it should be possible to identify the beneficiaries in the trust deed. Beneficiaries should therefore be listed by name, or consist of a class of persons such as “the descendants of”
* The trustees should not have the power to appoint any beneficiaries. The trust object (the beneficiaries) in such a trust should be defined with reasonable certainty and be determined or determinable from objective criteria such as “the children of X”. The trust object cannot be vague. Phrases such as “those beneficiaries which the trustees will select as they see fit from no defined class” are not permitted.
* In the case of an impersonal trust (such as a charitable trust), the trust object relates to the way in which persons who are to benefit from such a trust (the beneficiaries) are typically described as a class of persons in such a way that they can be objectively determinable, such as “students meeting the following criteria”.
Under certain circumstances - such as when the founder has died - it might be impossible to change the provisions in the trust deed. It is therefore important to review current trust deeds to ensure that the requirement is met and to make changes, if necessary.
However, any changes need to be done in consultation with a professional trust practitioner, as amending the beneficiaries might create a new trust and have unintended tax consequences.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa, a Master Tax Practitioner (SA), Trust and Estate Practitioner and the founder of Trusteeze, a professional trust practitioner.