Legal nature of Trusts

Legal personality
The true legal nature of the trust has for many years been the terrain for some intense legal debate (see the South African Law Commission’s Report on the Review of the Law of Trusts Project 9 June 1987, and Wiechers (De Waal) 25) and Du Toit (2nd edition) 16 et seq.

Neither the inter vivos nor the mortis causa or testamentary trust possesses legal personality (CIR v MacNeillie’s Estate 1961 3 SA 833 (A) 840; Braun v Blann and Botha 1984 2 SA 850 (A), Kohlberg v Burnett 1986 3 SA 12 (A) 25C, CIR v Friedman NNO 1993 1 SA 353 (A) 370I and Land and Agricultural Bank of South Africa v Parker 2005 2 SA 77 (SCA) 83F–I). Although the common law does not recognise the trust as a legal person, the trustee in his official capacity is, for several purposes, regarded as a separate entity (Cameron 70 et seq and Du Toit 2.5). The trustee ex officio is regarded in civil procedure as different from the trustee in his private capacity (Erlich v Rand Cold Storage & Supply 1911 TPD 170, Zinn NO v Westminster Bank NO 1936 AD 89 98, and see B17 infra).
For insolvency purposes, the trust estate is a “debtor” but not a “body corporate” (Magnum Financial Holdings v Summerly NO 1984 1 SA 160 (W) 163) which means that a trust is to be sequestrated and not liquidated. Section 12 of the Trust Property Control Act stipulates that trust property does not form part of the personal estate of the trustee, except in so far as he is entitled to it as a trust beneficiary.
For purposes of the National Credit Act 34 of 2005 a “juristic person” is defined in section 1 as including:
“a trust if – (a) there are three or more individual trustees; or (b) the trustee is itself a juristic person”.
The said National Credit Act “applies to every credit agreement between parties dealing at arm’s length and made within, or having an effect within the Republic, except – (a) a credit agreement in terms of which the consumer is – (i) a juristic person whose asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons, at the time the agreement is made, equals or exceeds the threshold value determined by the Minister in terms of section 7(1)” (which is currently R1 million).
For purposes of the Firearms Control Act 60 of 2000 a “juristic person” now also includes “a trust” (s 1 of the Firearms Control Amendment Act 28 of 2006 amends s 1 of the 2000 Act).
Since the decision in Joubert v Van Rensburg 2001 1 SA 753 (W) and the subsequent judgment in Mkangeli v Joubert 2002 4 SA 36 (SCA), the Deeds Registries Act 47 of 1937 was amended by inserting in section 102 of the Act a definition of “person” which includes a trust.
For the purposes of the new Companies Act 71 of 2008 which was published on 9 April 2009, but which will come into operation only apparently during the middle of 2010, a trust is included in its definition in section 1 of the term “juristic person”. The significance of this is that it does not impose upon the trust a general legal personality but that for purposes of the Companies Act and all corporate structures where trusts and companies are involved and where they are “related” as defined in section 1 of the Act, the implications are significant. Some of the relevant sections in the new Companies Act are as follows:

Section 1:  In this Act, unless the context indicates otherwise—
“juristic person” includes—
(a) a foreign company; and
(b) a trust, irrespective of whether or not it was established within or outside the Republic;

The term ‘‘related’’, is defined as "when used in respect of two persons, means persons who are connected to one another in any manner contemplated in section 2(1)(a) to (c);
Section 2(1):  For all purposes of this Act—
. . .
. . .
a juristic person is related to another juristic person if—
either of them directly or indirectly controls the other, or the business of the other, as determined in accordance with subsection (2);
either is a subsidiary of the other; or
a person directly or indirectly controls each of them, or the business of each of them, as determined in accordance with subsection (2).
Section 2(2):  For the purpose of subsection (1), a person controls a juristic person, or its business, if—
. . .
. . .
in the case of a juristic person that is a trust, that first person has the ability to control the majority of the votes of the trustees or to appoint the majority of the trustees, or to appoint or change the majority of the beneficiaries of the trust; or

that first person has the ability to materially influence the policy of the juristic person in a manner comparable to a person who, in ordinary commercial practice, would be able to exercise an element of control referred to in paragraph (a), (b) or (c).
One of the implications of the trust being a juristic person for the purposes of the Companies Act is that where for instance a trust controls a company by holding its majority shareholding, to declare such trustees who are also directors of the related company to be delinquent or under probation in terms of the Companies Act and to regulate such delinquency as follows:
Application to declare director delinquent or under probation
162.   (1)  In this section, “legislation” means any national or provincial legislation—
relating to the promotion, formation or management of a juristic person;
regulating an industry or sector of an industry; or
imposing obligations on, prohibiting any conduct by, or otherwise regulating the activities of, a juristic person.
(2)  A company, a shareholder, director, company secretary or prescribed officer of a company, a registered trade union that represents employees of the company or another representative of the employees of a company may apply to a court for a order declaring a person delinquent or under probation if—
the person is a director of that company or, within the 24 months immediately preceding the application, was a director of that company; and
any of the circumstances contemplated in—
subsection (5) (a) to (c) apply, in the case of an application for a declaration of delinquency; or
subsections (7) (a) and (8) apply, in the case of an application for probation.
. . .
(5)  A court must make an order declaring a person to be a delinquent director if the person—
. . .
. . .
while a director—
grossly abused the position of director;
took personal advantage of information or an opportunity, contrary to section 76 (2) (a);
intentionally, or by gross negligence, inflicted harm upon the company or a subsidiary of the company, contrary to section 76 (2) (a);
acted in a manner—
that amounted to gross negligence, wilful misconduct or breach of trust in relation to the performance of the director’s functions within, and duties to, the company; or
contemplated in section 77 (3) (a), (b) or (c);
. . .
(f )
within a period of five years, was a director of one or more companies or a managing member of one or more close corporations, or controlled or participated in the control of a juristic person, irrespective whether concurrently, sequentially or at unrelated times, that were convicted of an offence, or subjected to an administrative fine or similar penalty, in terms of any legislation, and—
the person was a director of each such company, or a managing member of each such close corporation or was responsible for the management of each such juristic person, at the time of the contravention that resulted in the conviction, administrative fine or other penalty; and
the court is satisfied that the declaration of delinquency is justified, having regard to the nature of the contraventions, and the person’s conduct in relation to the management, business or property of any company, close corporation or juristic person at the time.
(6)  A declaration of delinquency in terms of—
subsection (5) (a) or (b) is unconditional, and subsists for the lifetime of the person declared delinquent; or
subsection (5) (c) to (f )—
may be made subject to any conditions the court considers appropriate, including conditions limiting the application of the declaration to one or more particular categories of companies; and
subsists for seven years from the date of the order, or such longer period as determined by the court at the time of making the declaration, subject to subsections (11) and (12);
. . .
(10)  Without limiting the powers of the court, a court may order, as conditions applicable or ancillary to a declaration of delinquency or probation, that the person concerned—
undertake a designated programme of remedial education relevant to the nature of the person’s conduct as director;
carry out a designated programme of community service;
pay compensation to any person adversely affected by the person’s conduct as a director, to the extent that such a victim does not otherwise have a legal basis to claim compensation; or
in the case of an order of probation—
be supervised by a mentor in any future participation as a director while the order remains in force; or
be limited to serving as a director of a private company, or of a company of which that person is the sole shareholder.
be limited to serving as a director of a private company, or of a company of which that person is the sole shareholder.
As the new Companies Act is being implemented, only time will tell what all the implications and effects will be of the trust’s newly acquired legal personality in terms of the said Act especially in its corporate structure application.
According to Honoré 56 and Cameron 71 where they cite Shahmahomed v Hendriks 1920 AD 151 as authority, the trustee may in his private capacity make a gift to the trust, namely to himself in his official capacity, or as Honoré puts it at 485 “it is even possible for the trustee in his private capacity to transfer assets to himself in his official capacity”. The position is, however, not that clear in our law. Honoré is of the view that for the formation of a trust by means of a contract, the founder cannot set up a trust by transferring assets to himself as sole trustee, though he may do so by a transfer in trust to himself and another (Honoré 4). Cameron at 6 and 146 takes the view that no unilateral segregation of assets is possible, and a landowner who wishes to transfer his or her land into a trust should do so by agreement with at least one fellow trustee. Olivier takes a different view, based on his criticism on the equation of the inter vivos trust with the stipulatio alteri, that it is actually the founder who acts unilaterally and that there is no consensus ad idem between the founder and trustee as to the contract of the trust deed (Olivier 19 and 29 et seq).
It was held in Vaal Reefs Exploration and Mining Co Ltd v Burger 1999 4 SA 1161 (SCA) and confirmed in Van der Merwe v Nedcor Bank Bpk 2003 1 SA 169 (SCA) that the proposition, that a contract that a person as a representative of another had concluded with himself was legally impermissible, was not a correct reflection of South African law. The position of the founder of a trust, concluding, in his personal capacity an agreement with himself in his capacity as trustee and not being capable of representing the trust (because of its lack of legal personality), is however still not clear. Firstly, because when concluding the founding agreement, he does not possess the capacity as trustee in terms of the Trust Property Control Act unless it is “by virtue of an authorisation under section 6” of the said Act (see definition of “trustee” in s 1) which authorisation can only be obtained after the founding agreement had been concluded. Secondly, because of the absence of representation, either as himself as trustee or the trust the latter because of the trust’s lack of legal personality (see also par B6.2.1). Until this uncertainty is clarified, it is advisable from a practical point of view that the founder refrains from being the sole trustee when the trust is formed.

A bequest to an existing trust is valid and can be construed as a bequest to the trustees for the purposes of the trust and it is not necessary to attach the trust instrument to the will and to incorporate it into the will as a testamentary writing (Burnett v Kohlberg 1984 2 SA 137 (E) and Kohlberg v Burnett 1986 3 SA 12 (A), see also B11). Such a bequest to an existing inter vivos trust does not change the trust into a testamentary trust. Similarly can a bequest be made to an existing testamentary trust provided the trust stipulations allow the trustees of such a testamentary trust to be able to receive and accept such a bequest. An example will be where a testamentary trust was created in the will of a first dying spouse and subsequently the surviving spouse upon his/her demise bequeaths to such an existing testamentary trust.
The fact that a trust, though a legal entity for some purposes, does not possess juristic personality outside statute, does not, in practice, create too many difficulties, since the relevant assets and liabilities are vested in the trustee, who is either a natural or juristic person and who possesses all the capacities needed for the proper administration of the trust (Cameron 72; Olivier 66; Oosthuizen 599).

Stipulatio alteri
Under Roman-Dutch law influence, the South African trust created by means of an agreement between the founder and the trustees (the inter vivos trust or trust in the narrow sense) has the structure of a contract for the benefit of a third party (stipulatio alteri) (see Crookes NO v Watson 1956 1 SA 277 (A) and reconfirmed in Hofer v Kevitt 1998 1 SA 382 (SCA)). For a true stipulatio alteri to exist, A should enter into an agreement with B for the benefit of C. Until such time as C has accepted the benefits, the agreement only exists between A and B. After C has accepted the benefits, B drops out of the picture and the agreement exists between A and C. In the case of an inter vivos trust, although an agreement is entered into between the founder and the trustees for the benefit of the beneficiaries, it never happens that after the beneficiaries have accepted the benefits, that the trustees drop out of the picture. It can, therefore, be seen that the inter vivos trust is not a true stipulatio alteri but merely a species of the said Roman-Dutch law figure.
The question has been asked, in previous service issues of this publication, whether the time has not arrived for the inter vivos trust to be described as having a legal nature sui generis as in the case of the testamentary trust. In Badenhorst v Badenhorst 2006 2 SA 255 (SCA) at paragraph 8 Combrinck AJA now refers to Braun v Blann and Botha NNO 1984 2 SA 850 (A) at 859E–H with approval in identifying also the inter vivos trust as an institution sui generis. Basically, the inter vivos trust is an agreement and all the rules of the law of contract, therefore, find application (B9.2 infra). Du Toit at draws an important distinction between the creation of an inter vivos trust and related matters such as the acceptance of benefits by the beneficiaries and the rules pertaining to the interpretation of trust deeds on the one hand and the trust itself, the office of trustee and the trustee’s fiduciary duty, on the other hand. The former is regulated by contractual principles which do not render the trust itself a contract. Unilateral actions by a founder to merely create a trust without divesting himself of the proprietary rights over the trust property to the trustees or where the trust deed is signed only by the founder is, therefore, invalid (Cameron 6, 144; Olivier 66; Oosthuizen 591; Du Toit 3.5.2).

Institution sui generis
In Estate Kemp v McDonald’s Trustees 1915 AD 491, Innes CJ at 494 accepted the testamentary trust in South Africa, but identified it with a fideicommissum and equated a trustee with a fiduciary, and after years of equating the testamentary trust with a fideicommissum, it was finally decided to term it as a legal institution sui generis in 1984 (see Braun v Blann and Botha NNO 1984 2 SA 850 (A) 859E). It is, however, still not clear whether the testamentary trust is regulated by the trust law or by the law of succession, especially when it comes to the rules of interpretation and the amendment of the trust document (Olivier 20, 38). As was indicated supra at 5.2, the inter vivos trust is now also described as an institution sui generis in the Badenhorst case. (See also Du Toit and fn 82).
It is still an open question what legal nature the trust has which is created by means of a court order or by means of a statute or where the trust is created for an impersonal object. It is submitted that a trust created by court order is merely an obligation imposed by court on the trustees to administer property on behalf of the beneficiaries. Usually, the beneficiaries are given vested rights, but there is no reason why a court order cannot create a typical trust in the narrow sense where ownership is vested in the trustees qua trustees and full discretionary powers are given to the trustees with regard to the distribution of income and/or capital amongst one or more beneficiaries. The non-vesting combined with certain suspensive conditions imposed by the court can render an even greater form of protection to beneficiaries (Honoré 96, 111, 166 and B7.1.3 infra).
The trust for an impersonal object can be valid if the object is charitable or, at least, sufficiently defined. The origin for its validity lies in late Roman law which recognised the pious disposition by a testator (Honoré 129, 134 and 139).

Ownership and control
The ownership, control and management of the trust property and the vesting of it, will depend on the trust structure applicable and the powers given to the trustees. If the structure corresponds with that of the bewind, ie where contributing beneficiaries are involved, as is the case in certain business trusts, the ownership of the trust property is vested in the beneficiaries. The same does not apply to control and management. The fact that the whole body of beneficiaries hold all the shares, and, therefore, the ownership, does not of necessity mean that the full control also vests in them. Here the trustees are only administrators of the trust and in that capacity they also have control (Olivier 108 et seq; Cameron 6– 9; 106, 272 et seq).
In some testamentary trusts, ownership is vested in the beneficiaries deprived by the testator only of their control and management, because the testator perceives them, for some or other reason, as incapable of managing or controlling such trusts themselves. In such a case, the structure also corresponds with that of a bewind trust.
If the structure corresponds with that of the trust in the narrow sense, as is the case in most discretionary family trusts, ownership and management of the trust property are vested in the trustees for purposes of administration, but qua trustees they have no beneficial interest in it (Estate Kemp v McDonald’s Trustee 1915 AD 491; SIR v Rosen 1971 1 SA 172 (A) and Cameron 141, 579 to 580). The English conception of an equitable ownership distinct from but co-existing with the legal ownership is foreign to the South African law (Braun case supra; Cameron 22, 56; Olivier 60 et seq).
In the case of a trust in the narrow sense, depending on any conditions imposed or rights reserved by the founder, control will normally vest with the trustees. In Land and Agricultural Bank of South Africa v Parker 2005 2 SA 77 (SCA) 88A–B Cameron JA refers to certain types of business trusts which have developed in which functional separation between control and enjoyment is entirely lacking. (See also Du Toit
Where ownership and control vest with the trustees, the beneficiaries only have a right in persona against the trustees to claim the income or capital due to them under the trust. What is due to them will depend on whether they have vested rights or not. In most of the private business trusts of this kind, the beneficiaries will have vested rights. It is, however, possible to create a trading or business trust where the rights of beneficiaries are not vested but merely contingent, for example where the trustees have discretionary powers to decide not only how, but also whether to pay income or distribute capital to the beneficiaries (cf B4.2.2 supra and B24.5 infra).


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