Failure to review a trust deed from time to time can cause serious legal and financial problems, disputes, and adverse consequences for beneficiaries.

The key players in a trust are the founder, the trustees, and the beneficiaries. When examining a trust deed, it is important to first determine the purpose of the trust and to look at the provisions of the trust deed in light of this.

The Founder

The founder enters into a contract with the trustees for the benefit of the beneficiaries. The founder may be anyone, but it is recommended that the founder be the person for whose family’s benefit the trust is established. The founder may also simultaneously be a trustee and/or a beneficiary.

It is important to analyse the powers granted to the founder in the trust deed. If it appears from the trust deed that any individual has control over the assets and administration of the trust, it can lead to the argument that the trust is merely the alter ego of that person and the protection offered by the trust is lost. In particular, the following powers should be avoided:

• The right to appoint and dismiss trustees at will.
• The right to amend the trust deed without the consent of the trustees or anyone else.
• A second or casting vote in the event of a deadlock among trustees.
• A testamentary reservation clause allows the founder to dispose of trust assets in their will.

Because the founder cannot be changed after the registration of the trust, a founder with whom contact is lost can also cause problems in the future:

• If the trust deed stipulates that the founder must be part of the amendment process, and they cannot be located.
• The founder must also, in terms of current legislation, regularly provide proof of identity and address to financial institutions.
• Furthermore, the exemption from transfer duty according to Section 9(4)(b) of the Transfer Duty Act will be lost if the founder is not within three degrees of consanguinity and immovable property is transferred to a beneficiary.

The Trustees

The full management and control of the trust and its assets rest with the trustees.

The trust deed usually specifies a minimum number of trustees who must be in office for any valid act. If the deed, for example, requires three trustees and allows a majority decision, there must still be three trustees in office before a majority can legally decide, and all trustees must be involved in all decisions.

Trustees must read the trust deed thoroughly and understand their powers, duties, and responsibilities. They must pay attention to clauses regarding their removal, and whether decisions must be taken unanimously or by majority.

A common, but problematic clause allows a majority of trustees to request a co-trustee to resign. The Du Plessis case found that this is merely a request that can be refused. For actual removal, especially against the trustee’s will, the remaining trustees must approach the High Court or, in certain cases, the Master, in terms of Section 20 of the Trust Property Control Act. Even if the deed authorises co-trustees to remove someone, this can only occur on the grounds and procedures as set out in Section 20 and not without reasonable cause.

It is now required that every family trust must have an independent trustee. The purpose is to protect outsiders who do business with the trust.

Beneficiaries
The purpose of a trust is to administer assets for beneficiaries. They must be identifiable or ascertainable, either by name or by a class description (e.g., “the descendants of X”).
A distinction should be made, if needed, between who can receive income and who can receive capital.
Clauses such as “the relatives of the capital beneficiaries related to them by blood or affinity” as income beneficiaries can vastly expand the circle of potential beneficiaries (e.g., extended family and in-laws). This creates practical problems, especially if the trust deed requires beneficiaries to be involved in amendments – it can be an impossible task to locate everyone and obtain their consent.
Trusts often span generations and must therefore provide for future beneficiaries. Planners should be wary of clauses prohibiting the amendment of beneficiaries after the founder’s death. If such a clause exists, the initial list of beneficiaries must be correctly worded.

Amendment of Trust Deeds

Amendments may be necessary to add powers, correct poor wording, or change beneficiaries.

It is important that the trust deed allows for amendment and specifies the procedure to be followed.

If the founder is alive, the trust deed may be amended by agreement between the founder, trustees, and beneficiaries who have already accepted benefits from the trust, notwithstanding the provisions of the trust deed.

Testamentary Reservation

This clause allows the founder (usually) to determine certain aspects of the trust (e.g., vesting, distribution of assets/income, termination) in their will. It is a contractual right to unilaterally amend the trust deed via a will.

This conflicts with the core principle that trust assets must be administered separately from the founder’s personal estate and can lead to the argument that the trust is merely the alter ego of the founder, and the protection offered by the trust is lost. This clause is assessed together with other control-retaining clauses (e.g., appointment/dismissal of trustees). It is strongly recommended to avoid this clause or remove it from existing deeds.

Arbitration

Many trust deeds contain clauses for the settlement of disputes or deadlocks by referral to arbitration (e.g., a retired judge or senior advocate). Although dispute resolution mechanisms are beneficial, it is recommended to first prescribe mediation as a more informal and cost-effective option. Arbitration costs can also be limited by appointing specific experts (e.g., an attorney for legal matters, an accountant for financial issues) rather than more expensive senior legal professionals.

Tax Registration

Once a trust is registered with the Master, it must be registered with SARS (South African Revenue Service) for income tax, regardless of whether it has assets or conducts transactions. Annual tax returns are mandatory.

Beneficial Ownership

Amendments to the Trust Property Control Act have introduced the concept of “Beneficial Owner”. This refers to the natural persons who ultimately benefit from or have ownership of trust assets. It always includes the founder, all trustees, and all identified beneficiaries.

Trustees must now:

• Establish and record the beneficial ownership of the trust.
• Keep updated records of all beneficiaries and their vesting/distributions, and electronically file this information with the Master’s office.
• Disclose their capacity as trustees to accountable institutions (e.g., banks) with which they transact and record details of these accountable institutions.

Conclusion and Recommendations

Legislation and personal circumstances change constantly, making regular review of a trust deed extremely important.

Establishing a trust creates obligations for trustees and rights for beneficiaries. If a founder does not want to relinquish control, the trust’s validity is questioned, and it might not be the appropriate planning tool.

Trusts are complex instruments that are often poorly drafted or managed. Regular expert advice helps ensure the trust remains valid, serves its purpose, and avoids problems.