LEARNING UNIT 4:

BUSINESS TRUSTS
 INTRODUCTORY NOTICE

Please read:
❖Unless otherwise stated in these lecture slides, these lecture slides have
been prepared using the materials referred to in the Module Outline for
LAES7411, particularly the prescribed textbook, Dennis Davis, et al
Companies and Other Business Structures in South Africa 5rd ed.
Oxford (‘PM’ or ‘Davis’)
❖These lecture slides have been prepared specifically for the lecturer’s use
for purposes of presenting the class lectures and are not intended to be
used by students as a substitute for studying the full content of the PM and
the other materials (including the cases) referred to in the Module Outline,
as well as the content of VC Learn, all of which need to be fully studied by
students.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Davis Chapter 18 – para 18.1, 18.4, 18.5, 18.6, 18.7, 18.8, 18.9,
18.10,18.12, 18.13.
Cases as per Module Outline
Trust Property Control Act 57 of 1988
Use of a trust:
• Succession
• Estate and financial planning;
• To protect assets (‘ring-fencing assets’);
• As a form of business entity to trade with (i.e. a business trust)
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

What is a trust?
• A trust is a legal relationship that is created in terms of a trust
deed.
• Trust deed is in essence a ‘contract’ between the donor and
trustees entered into for the benefit of the beneficiaries.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Key characteristics of a trust:

❖Formed by a person, known as the founder (aka donor or settlor);
❖Assets are placed under control of a person/s known as trustee/s;
❖To be administered for the benefit of third persons, known as
beneficiaries (must be at least one for a valid trust);
❖ Formed during the founder’s lifetime in terms of a contract between the
founder and trustees (inter vivos trust aka living trust) or on his death
in terms of his last will and testament (testamentary trust).
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Legal regulation
Trusts are regulated by the:
• Trust Property Control Act 57 of 1988 (“Act”);
• common law; and
• case law.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Four types of trusts:

➢Inter vivos trust (see above);
➢Testamentary trust (see above);
➢Ordinary trust (‘ownership’ and control of trust assets lies with
trustees. Trustees’ ownership is, however, non-beneficial); and
➢Bewind trusts (ownership of trust assets lies with beneficiaries, but
control thereof lies with trustees. E.g. a person donates or bequeaths
assets to his minor child, but these assets are placed under the control of
trustees until the child reaches majority. In such a trust, the child has
ownership of the trust assets, but the assets are controlled by the
trustees).
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

‘Ownership’ of trust assets by trustees (ordinary

trusts)
• It is non-beneficial ownership (bare dominium).
• Trust assets do not form part of trustees’ estate.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Business or trading trusts

An ordinary trust in which, in terms of the trust deed:
❖the trustees are granted powers to carry on
business, incur debts and to trade. In other words, to
expose the trust assets to the ordinary risks
associated with business (unlike in a non-trading
trust); and
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

❖the beneficiaries are usually granted the right to sell their

trust interest in the trust if and when they may wish to.
Can be public or private. In the latter instance, the trust deed
imposes restrictions on transfer of trust interests (e.g.
through pre-emptive rights or with the approval by the
trustees).
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Power of trustees in a business trust

• The trust deed can expressly give trustees the power to
carry on business using the trust assets, thereby exposing
those assets to the ordinary risks associated with business.
For example, to commercially develop a property owned
by the trust into a shopping centre and then to lease the
shops to third parties.
• The trustees are given powers similar to those of directors
in a company.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Rights of beneficiaries in a business trust

• The trust deed can expressly give beneficiaries the right to
sell, cede or otherwise deal with their interests in the trust,
in the same way that a shareholder can deal with shares.
• Beneficiaries enjoy limited liability and are not personally
liable for the debts of the trust. Trustees can however be
personally liable for the trust’s debts, but only if they are
reckless or fail to exercise the required duty of care and
skill.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

• According to the terms of the trust deed, beneficiaries

could have vested rights or discretionary rights (or a
combination of thereof) to the income and/or capital of the
trust. Trusts are thus sometimes described as being either
discretionary trusts or vested trusts, depending on
the aforementioned nature of the beneficiaries’ rights. The
terms of the trust deed will thus determine whether a
trust falls into the category of discretionary trust or a
vested trust.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

❖Discretionary Trust: A discretionary trust is

characterized by the trustees having the discretion to
determine which beneficiaries will receive distributions
from the trust and how much each beneficiary will receive.
In this type of trust, the beneficiaries do not have a fixed or
guaranteed entitlement to receive distributions from the
trust (i.e. capital or income). Instead, the trustees have the
power to make decisions based on the beneficiaries' needs
and circumstances, as outlined in the trust deed.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

❖Vested Trust: A vested trust, on the other hand,

grants beneficiaries a fixed and enforceable
entitlement to specific distributions from the trust (i.e.
capital and/or income), although the distribution may
in terms of the trust deed be postponed to a later
date or dependent on a specific condition. The
trustees’ role in relation to distributions is thus more
limited compared to a discretionary trust, as the
beneficiaries' rights are predefined in the trust deed.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Separation of the control and ‘ownership’ and

the enjoyment of the trust assets
• Core to the law of trusts is the separation between,
on the one hand, control and ‘ownership’ (by trustees)
and, on the other hand, enjoyment of the trust assets
(by beneficiaries)
[Land and Agricultural Bank of South Africa v Parker]
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

• Although there is no legislative requirement, the

Master often requires, to give effect to this separation
requirement, the appointment of an independent
trustee (that is, someone who is not a beneficiary or
related to a beneficiary or any other trustee) and/or
insists that the trust be independently audited.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Trusts and limited liability

• Creditors can only look to the trust’s property for
the satisfaction of their claims.
• Trust therefore provides limited liability for the
trustees and beneficiaries.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

• Risk is that it could be regarded by a court as being a

partnership because all elements of a partnership may
be present – therefore important to have independent
trustees.
• It is important to make sure that the trust deed
makes it clear that the ownership of the trust assets
does not vest in the beneficiaries or else creditors
may argue that it’s a bewind trust or a partnership.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Parties to a trust
❑Founder
• This is the person that forms the trust.
❑ Trustees
• There must be at least one. If not one, Master will appoint one.
• They administer and control the trust’s property.
• Must comply with provisions of the trust deed.
• Must comply with provision of Trust Property Control Act.
• May also be a beneficiary of the trust.
❑Beneficiaries – they are the persons that benefit in terms of the trust deed.
There must be at least one.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

The trust deed

• A trust is created either by a contract (inter vivos
trust) or a will (testamentary trust).
• Whatever form that instrument takes, its
provisions perform the role of the trust deed.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Types of trusts
Different ways of classifying trusts, including:
❖How formed: Inter vivos trust vs. testamentary
trust
❖Purpose: Family trust vs. business trust. (Family
trust is to preserve assets for future generations and
often to avoid estate duty. Business trust is to
conduct a business).
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

❖Ownership of trust assets – ordinary trust vs.

bewind trust (see earlier slides)
❖Powers of trustees/rights of beneficiaries:
Discretionary trust vs. vested trust (see earlier
slides).
❖Other types – e.g. charitable trust, offshore
trust, court order trust (e.g. to settle a divorce).
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Consequences of forming a trust

• Trustees acquire certain powers and duties in terms
of the trust deed, as well as the Trust Property
Control Act and the common law.
• Beneficiaries acquire certain rights in terms of the
trust deed, as well as the Trust Property Control Act
and the common law. (Rights are either vested or
discretionary according to the trust deed – see
earlier).
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

How to form a valid trust

• Intention by founder to form a trust.
• Object of trust must be lawful.
• Trust property must be defined with reasonable
certainty.
• Trust object must be stated with sufficient
certainty.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

• beneficiaries must be ascertained (e.g ‘Gerald Ramsden’)

or ascertainable (e.g ‘Gerald Ramsden’s descendants’).
Trust without a beneficiary is a nullity.
• must have at least one trustee, who must have capacity to
act as a trustee (i.e. not a minor, for example) and cannot
be disqualified (e.g. insolvent person). If no trustee
appointed or able to act, Master will appoint one.
• obligation must be placed on the trustee to administer
and control the trust property for the benefit of the
beneficiaries.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

• before trustee can validly act in that capacity, he

or she must get written authorisiation from the
Master (Letters of Trusteeship) in terms of
the Trust Property Control Act. [NB. See Davis
p 475-476 for consequences if trustees act
without Letters of Trusteeship].
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

❑ Duties of Trustees
• Statutory and common law duties.
• Duties are onerous.
• Statutory duties of trustees in terms of the Trust Property
Control Act, include:
➢to act with the care, skill and diligence that can reasonably
expected of a person that manages the affairs of another;
➢must open a separate trust account at a bank;
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

➢must keep records of trust property;

➢must identify bank or investment account as a
trust account;
➢must, at request of Master, make full account to
Master for the trustee’s administration and
disposal of trust property;
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

➢must keep trust’s records for at least 5 years;

➢must give effect to terms of trust deed;
➢must act with utmost good faith;
➢must exercise independent discretion;
➢must not expose trust property to undue risk;
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

➢must invest trust property productively (balance the

need for income against capital growth);
➢must account to beneficiaries;
➢must act within power granted by trust deed. (If a
power is not expressly stipulated it will not be inferred.
E.g if given power to sell property, not inferred that
trustee may mortgage it. Therefore important that
trustees’ powers are fully spelt out in the trust deed).
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

❑ Rights of beneficiaries
❖beneficiaries must be identified or identifiable in trust
deed.
❖there must be at least one beneficiary.
❖rights of a beneficiary (even if discretionary) may be
ceded, unless prohibited by the trust deed. In a
business trust, the right to cede or dispose of
beneficiary interests is usually expressly provided for
in the trust deed.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

❑ Advantages & disadvantages of business

trusts
❖Advantages:
▪Limited liability for trustees and beneficeries;
▪Perpetual succession;
▪Ring-fencing of assets;
▪Estate planning.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

❑ Disadvantages:
▪ loss of control of trust assets by founder and beneficiaries;
▪ regulatory oversight (viz. the Master);
▪ cumbersome to administer (trustee meetings, audit,
reporting etc);
▪ Perception – not always fully understood by financiers,
suppliers etc, unlike more commonly used business
entities like partnerships, companies and CCs.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

Take Note:
❖Use the table on pp 32-36 of Davis for a
summary of trust’s legal features - use column
entitled “Business trust”.
❖This should also be done for each of the other
types of business entities, using their respective
columns in the table.
 THEME 1(LO1 – 4): INTRODUCTION TO TRUSTS

❖The aforesaid table also provides a useful basis for

comparing the different types of business entities with
each other.
❖Also familiarise yourself with the provisions of the
Trust Property Control Act, particularly the sections
discussed in these slides and in the relevant paragraphs
of Davis.
❖Finally, don’t forget to read cases listed in the Module
Outline and the other case summaries discussed in the
relevant paragraphs of Davis.