A trust is a legal structure which exists when a person(s) hold and administer property for the benefit of someone else. In South Africa a trust is not a legal entity such as a Company or Close Corporation, but it is treated similarly in many instances.

The founder

Any person can donate property to a trust or bequeath property to a trust in their will. This person is known as the founder. The donation or bequest may be the full extent of the founder’s involvement in the trust, or the founder may be further involved, should the Trustdeed so stipulate. Key here is that the founder relinquishes ownership of the property, therefore beware of a Sham trust or an alter ego trust.

The trustees

The trustees are entrusted with control over the property of the trust. The full extent of their control, their rights and obligations are set out in the Trustdeed or the will, which document operates as their constitution/rulebook.

The beneficiaries

The beneficiaries are the persons in whose favour the trust property is administered. They will typically be the ones entitled to income and/or capital from the trust.

1. Any natural or juristic person may be appointed as trustee, but the following persons are automatically disqualified:
   • a person of unsound mind
   • a person (or his/her spouse) who writes, signs or witnesses a will in which he has been appointed as trustee
   • a person who is directly disqualified by the trust deed
   • a company may appoint any person as trustee for the holders of the company’s debt instruments except a director prescribed officer of the company.
   • the Master itself in his official capacity
2. You must be lawfully nominated by the founder or trustees in accordance with the trustdeed
3. You must accept the appointment
4. Before you can act in the capacity as trustee, your appointment must also be authorised by the Master of the High Court, by means of a Letter of appointment. Any legal actions prior to being properly authorised by the Master may be void and invalid.

1. By vacation of office

• Death of trustee
• In accordance with trust deed
• When the Trust terminates
• When a trustee is appointed ex officio and such office ceases to exist. (for example the CEO of Sanlam is a nominated trustee of a Trust. Should Sanlam no longer have a CEO position altogether or if Sanlam closes down, then the position of this trustee also ceases to exist.)

2. Resignation

Whether or not the trust deed provides for the trustee’s resignation, a trustee can resign at any time, by notice in writing to the Master, other Trustees and beneficiaries. The resignation becomes effective when the Master removes a trustee’s name from the letter of authority. A trustee must resign if he/she becomes disqualified or unfit to act as trustee after appointment.

3. Forced removal

• Removed by Court Order if its in the best interests of the trust and its beneficiaries
• Removed by the Master of the High Court if:
• If convicted of any offence of which dishonesty is an element or any other offence for which the trustee has been sentenced to imprisonment without the option of a fine
• If the trustee fails to provide security to the Master, when required or requested to do so
• If the trustee’s personal estate is sequestrated or liquidated or placed under judicial management
• If mentally ill or incapable of managing own affairs
• If the trustee fails to perform satisfactorily any duty imposed upon him by the Act or the Master
• Removal by fellow trustees by a trustees’ special resolution on the basis of breach of trust.

1. The Master may insist that an “Independent Trustee” be appointed for all new trusts being registered, where it is clear from the trust deed that the trust is a “family business trust”. An independent trustee is more likely to ensure compliance with common law, legislation and the Trust Deed.
2. A family business trust is a trust with the following combined characteristics:

• The trustees are all beneficiaries themselves; and
• The beneficiaries are all related to one another; and
• The trustees have the power to contract with independent third parties thereby creating trust creditors.

3. Who can be an independent Trustee:

• An independent outsider with proper realisation of the responsibilities of trusteeship, who accepts office in order to ensure that the trust functions properly and that the provisions of the trust deed is observed.
• Typically, but does not have to be, a professional accountant, admitted attorney, advocate who is affiliated to the relevant professional body, trust companies, boards of executors or fiduciary practitioners who are members of FISA.
• There must be no family relation or connection, blood or otherwise to any of the founder, beneficiaries or trustees.
• Must be competent to scrutinise and check the conduct of the other appointed trustees, who may themselves not be independent enough to observe the substantive and procedural requirements incumbent on them.

4. Nomination of an independent Trustee by means of the trust deed, and where it does not make such a provision, the founder, trustees and beneficiaries must nominate someone.
5. The Master may forego the requirement if good cause is given as to why it must be dispensed with, security is given and the trust’s financial statements are audited annually

1. Comply with the duties as imposed by and in accordance with the trust deed, Common Law and Legislation such as the Trust Property Control Act.
2. Trustees must act in good faith, be independent, impartial and objective and exercise powers for the purpose for which they were given
3. The trustee must act with the care diligence and skill, which can reasonably be expected from a person who manages the affairs of others.
   • Trustees should not act negligently. Trustees can be sued by beneficiaries even if they acted in good faith
   • Trustees should not make any profit, directly or indirectly from the administration of the trust, apart from normal trustee remuneration. If so, such action must be in the interests of the trust and be declared beforehand.
   • Trustees should avoid situations where their private interests conflicts with their duty as trustee
   • Trustees should avoid risks, Invest productively, wisely and in accordance with sound principals
4. Trustees have a fiduciary duty toward the beneficiaries to act in the best interests of the beneficiaries as a whole. Trustees cannot act in the interests of one class of beneficiary to the detriment of another class of beneficiary. For example, risking and depleting the trust capital, to solely maximise returns for the Income Beneficiaries.
5. Trustees must take control of the trust assets and keep these clearly separate from his or her personal property, by opening a separate bank account for the trust and disclosing that property is trust property.
6. Trustees must keep accurate trust records of minutes of meetings, resolutions passed, a proper account of trust funds and assets etc. The records must be available for inspection by the Master, any trustee or beneficiary and be kept for an indefinite period.
7. Notify the Master of her/his address and of subsequent changes thereto.
8. Trustees may not abdicate their responsibility for administering the trust. Although a division of the workload is permissible, they remain responsible.
9. A trustee is entitled to reasonable remuneration or remuneration as provided for in the trust deed.

1. Civil claims

A trustee who intentionally or negligently fails to carry out their duties properly can be liable. Those who have suffered damages can sue, such as beneficiaries, co-trustees or trustee successors on behalf of the trust. The trustee will be liable for damages in his/her personal capacity, which is to be paid from his/her own pocket and not out of the trust moneys.

2. Criminal offences

The misappropriation of trust moneys by a trustee is theft. Trustees can also be found guilty of fraud.  There are many statutory offences which are applicable to trustees.

3. Administrative repercussions

Administrative remedies may be applied against professionals such as legal practitioners who can be struck off the roll of attorneys for unprofessional conduct.

1. Sham trust or an alter ego trust

The issue:

Many Trusts are established by a founder, who, in order to obtain some sort of tax relief, will happily declare to SARS that he/she is no longer owner of these assets. The founder however then continues to control the asset with no input by the trustees, as if the assets is still owned by him/her. This is an indication of a sham trust or an alter ego trust and could result in the trust being invalid and the particular trust assets can be treated as the personal property of one or more of its trustees.

Rectify this:

By opening a trust bank account, keeping trust assets separate, make decisions by formal trustee meetings, appoint an independent trustee and scrutinise and rectify trust deeds that may incorrectly confer upon the founder, improper or sole control over trust property.

2. Puppet trustees

The issue:

Many trusts are properly established and run as a trust, but some of the trustees merely follow instructions from the founder or one dominant trustee who dictates how decisions are to be made. Trustees acting as puppets can also constitute an alter ego trust and can be held personally liable. There is no such thing as a “silent trustee”. All appointed trustees have a duty to act and cannot relinquish or delegate their responsibilities.

Rectify this:

By appointing Trustees who act independently and who take a firm stand against interference by the founder or anybody else.

3. Procedural irregularities

The issue:

Many trustees do not follow the procedural requirements set down by the Trust deed such as the minimum number of trustees to be appointed. The trust will lack the capacity to act until further trustees are appointed or, in other instances of procedural non-compliance, the trustees may be incapable of binding the trust.

Rectify this:

By following the procedural requirements set down by the Trust deed.

4. Outdated Trust deeds

The issue:

Many trust deeds have provisions that are outdated or out of touch with the current state of affairs and does not allow the trustees to do what is needed to protect the interests of beneficiaries adequately or to the full extent. Trustees are obliged to follow current legislation and where the trust deed provisions are incompatible with current legislation, such actions by Trustees will remain valid. Unfortunately, any other trustee actions, contrary to the Trust deed, will be invalid. For example, a Trust deed prohibits the Trustees from selling immovable property, but the property is now a dilapidated, vandalised property in a rundown neighbourhood, which expenditure and risk outweighs the capital benefit. Selling it would be in the best interest of all beneficiaries, yet trustees are not permitted to do so.

Rectify this:

By scrutinising the Trust deed and have it amended where necessary. Obtain the written consent of any beneficiary who has already obtained a vested right and follow the Trust deed’s provisions regarding the amendment thereof. What if the trust deed prohibits you from making the necessary amendments? If the founder is still alive, you can bypass the provision entirely by obtaining the consent of the founder, all the trustees and the beneficiaries.

Please contact us for any other queries you may have.