When transferring assets to a trust, tax savings is not the only consideration.
It is also about a strategy to protect your assets, to create continuity and liquidity on your death, as well as other considerations - such as a contingency plan if you develop a mental illness such as Alzheimer’s or senile dementia.
Registering a trust, in which you build wealth, acts as “insurance” if something goes wrong with your mental health. If you have created a trust during your lifetime and become afflicted by one of these dreadful conditions, your financial affairs would continue as before, with people you chose to be trustees of the trust. Therefore, the appointment of trustees should be carefully considered in anticipation of these circumstances.
Another risk that you should mitigate against during your lifetime is that you may be removed as a trustee of the trust you have created - either by the Master, if you have been declared by a court to be mentally ill or incapable of managing your own affairs, or if you are, by virtue of the Mental Health Act, detained as a patient in an institution or as a State patient (in terms of the Trust Property Control Act), or in terms of an express provision in the trust deed.
The automatic removal of a trustee in terms of the trust deed was confirmed in the 2005 case of Land and Agricultural Bank of South Africa v Parker, where a person kept acting as trustee, even though the trust deed determined that the position of trustee would be automatically regarded as being vacated if a trustee’s personal estate was sequestrated. The court held that the person had no authority to act on behalf of the trust.
Therefore, you need to be mindful of stipulations in the trust deed concerning the automatic removal of a trustee as a result of diminished mental capacity.
Diminished mental capacity may result from mental illness, intellectual disability, brain injury or disease, or incapacity related to ageing in general.
Under our common law, the general principle is if a person is not able to fully understand or interpret all the consequences of his or her actions due to a mental illness, it is said that such a person lacks capacity to perform a specific act, and the act is therefore null and void.
It makes no difference whether the person has not been declared mentally ill and a curator appointed, or that the other party to the transaction was unaware of the person’s mental condition (Molyneux v Natal Land & Colonization Co Ltd, 1905).
The ability to enter into legal transactions and to litigate independently is closely related to a person’s mental condition. The parties must be able to understand the nature, purpose and consequences of their actions for a legal transaction to be valid.
It is, however, important to note that the mere fact that a person has been declared mentally ill and that a curator has been appointed to administer his or her estate does not mean that such a person loses all capacity to act (Pienaar v Pienaar’s Curator, 1930). Someone who has been placed under curatorship because of a mental illness can enter into a valid legal transaction with its normal consequences if, at that particular moment, he or she was physically and mentally capable of doing so. Therefore, such a person may make a will, enter into a contract, and litigate.
However, the party who alleges that the person under curatorship had full capacity to enter into the legal transaction must prove that fact. If it is found that the person lacked the capacity to understand the nature or consequences of the transaction when he or she entered into it, it is not legally binding.
The United Nations Convention on the Rights of Persons with Disabilities (CRPD) is a groundbreaking treaty that promotes and protects the rights and dignity of disabled people.
South Africa signed and ratified the CRPD in 2007, and is obligated under this convention to fulfil its commitments in terms of its implementation and reporting. This treaty guarantees disabled people the right to enjoy legal capacity, including both the capacity to have rights and the capacity to act (to exercise rights and responsibilities and make decisions in everyday life).
Although the law protects the right of people to make decisions, it may be questionable if a person who cannot manage his or her own affairs owing to a mental disease such as Alzheimer’s can manage the affairs of another in terms of section 9(1) of the Trust Property Control Act, which requires a trustee to act with the necessary care, diligence and skill which can reasonably be expected of a person who manages the affairs of another. Therefore, even though people have this protection, they will still be at risk of removal as trustees in terms of the Trust Property Control Act.
What should you do?
* Include an automatic trustee removal clause in the trust deed to prevent a challenge of trustee decisions taken, should a trustee develop a mental illness. Instead of requiring a court to declare a person mentally ill or incapable of managing his or her affairs, rather stipulate that such a person has to be certified as such by a neurologist or psychiatrist to be removed as trustee.
* Choose well the trustees who have to act in your interest if you are a beneficiary of the trust and may no longer participate in trust decisions due to your removal as trustee.
* If you are also a beneficiary, it is recommended that a proactive provision is made for your replacement, such as a trustee resolution appointing a person who you know will act in your best interest.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa, a Master Tax Practitioner (SA), a Trust and Estate Practitioner and the founder of Trusteeze, a professional trust practitioner.