Article was written by Phumzile Rabula, Candidate Attorney, checked by Sean Buskin, Candidate Attorney at Schindlers Attorneys
30 June 2021
South Africa recognises three types of Trusts namely Inter Vivos Trusts or Living Trusts, Testamentary Trusts, and Bewind Trusts.
This article seeks to provide a brief overview of what a Trust is, as well as the legal rights and responsibilities of trustees and beneficiaries in a trust relationship.
It is important to note that, Trust can serve a variety of purposes and can play an important role in proper Business, Estate, and/or Financial Planning for individuals who wish to make use of the Estate Duty and Income Tax advantages as well as all of the other benefits that the mechanism of Trust offers.
What is a Trust?
A trust is a legal entity which is created to hold assets for the benefit of certain persons or entities. Assets, inclusive of movable, immovable as well as contingent interests in property, can be transferred into a trust by sale, donation, or on death in terms of your will. The rules of trusts in our country are a blend of English, Roman-Dutch, and South African law and are governed by the Trust Property Control Act No. 57 of 1988 (“the Act”).
Types of Trust
Broadly speaking, there are typically three types of Trusts, namely Inter Vivos Trusts, Testamentary Trusts, and Bewind Trusts.
Testamentary trusts are established by a trust provision in a will, in which the testator bequeaths assets to the trust as well as the trust’s rules and conditions. They hold assets on behalf of underage children and dependents who are unable to handle their own affairs. The trustee administers the assets in accordance with the will and the related terms and conditions until the trust expires after a specific period or event, such as a minor acquiring major status.
Bewind Trusts are created in instances where the founder of the trust makes a bequest to the beneficiaries and vests the administration of the assets in the trustees. The beneficiary will become the actual owner of the trust assets. The trustee/s will be empowered with administrative control over the trust assets which they will be responsible for managing for the benefit of the beneficiaries.
An Inter Vivos Trust is created during the trust founder’s lifetime, by means of a trust deed, setting out the details of the founder, trustees and beneficiaries. The trustees’ responsibilities and obligations, as well as how and when the trust is to be wound up, will be outlined in the trust deed. There are numerous types of inter vivos trusts, depending on their purpose, such as charitable trusts or corporate trusts.
Parties to the Trust:
Trustees, beneficiaries, and the trust founder comprise a trust. As part of their fiduciary duties, the trustee/s must always act in the best interests of the trust beneficiaries and the trust. The trustee, in their capacity as such, will not be personally liable for the debts of the trust and the trust assets will not form part of the trustee’s estate in the event of his/her sequestration. A trustee may however be a beneficiary in terms of the trust, however, a sole trustee may not also be a sole beneficiary of the same trust, in that same be contradictory to the obligations of the trustee of holding and administering the trust assets to the benefit of someone other than himself. The number of trustees necessary will be set by the trust instrument in most cases.
There are certain instances wherein certain persons may be disqualified from being appointed as a trustee and these include the following:
- “persons disqualified from being a trustee in terms of the Act;
- an unrehabilitated insolvent;
- persons removed from an office of trust due to misconduct;
- persons convicted of a crime involving dishonesty; and disqualified in terms of the trust deed.”
The rights of the trustees:
A trustee is entitled to payment for operating in this position, which is often paid for in the trust deed. In the absence of laws governing trustee payment, the trustee shall be compensated fairly for the services provided. In the event of a dispute, the Master of the High Court (“the Master”) may fix the trustee’s remuneration.
When action is initiated to remove a trustee from his or her position, the trustee has the opportunity to make statements about his or her dismissal. Such submissions must be heard in a duly held meeting.
The trustee will be given broad powers, as specified in the trust deed, to ensure the appropriate administration of the trust. Such powers may include, inter alia, the authority to buy and sell trust property, determining the distribution of trust assets to beneficiaries, hiring and firing professional advisors, and opening bank accounts on behalf of the trust.
In maintaining a fiduciary position to the trust, trustees are obligated to behave independently and objectively, and to always act in the best interests of the beneficiaries. When a trustee fails to act in accordance with the conditions of the trust deed, such activities are declared ultra vires, or “beyond the powers,” and are considered invalid.
The responsibilities of the trustees:
A trustee, though capable of delegating responsibilities, is expected to make judgments and use discretionary powers on their own. When delegation occurs, the trustee is still liable to the beneficiaries for the conduct of any chosen agent. In addition, the trustee may be dismissed from office if he has approved the wrongdoing of a co-trustee. A trustee, in acting in good faith, is required to avoid conflicts of interests between his personal interests and his official and fiduciary duties to the trust and beneficiaries. Furthermore, a trustee is not permitted, other than for his reasonable remuneration, to gain personally from the trust fund.
A trustee must declare any personal interests, including the nature and scope of his interest, in each agreement or prospective arrangement entered into on behalf of the trust.
A trustee is required to act with the care, diligence, and skill reasonably expected of a person in such position managing the affairs of another. A trust deed that exempts the trustee from responsibility for carelessness is ruled invalid. The trustee may be held personally accountable for damages sustained by the beneficiaries if he fails to behave in accordance with the authorized trustee standard.
The trustee shall be held accountable to the Master and the trust’s beneficiaries at all times. The trustee may be obliged to give a comprehensive account of his administration of and disposition of trust property, as well as provide specific trust records and answer any other pertinent questions by the Master if requested to do so in writing. Furthermore, if the trustee becomes aware of any acts or events that may be detrimental to the beneficiaries’ interests, action must be done.
In conclusion, various types of trusts exist, and these types or categories often overlap. The article has discussed the legal rights and responsibilities of trustees and beneficiaries in a trust relationship.
Understanding the nature of a trust, and the legal rights and responsibilities of trustees and beneficiaries in a trust relationship.