TRUSTS – A SEPARATION OF POWER

 A trust is defined as “A relationship created at the direction of an individual, in which one or more persons hold the individual's property but subject to certain duties to use and protect it for the benefit of others.” 

In Agricultural Bank of SA v Parker 2005 2 SA 77 SCA, the court held that:

“The core idea of the trust is the separation of ownership (or control) from the enjoyment. Though a trustee can also be a beneficiary, the central notion is that the person entrusted with control exercises it on behalf of and in the interests of another. This is why the sole trustee cannot also be the sole beneficiary. Such a situation would embody an identity of interests that is inimical to the trust idea, and no trust would come into existence.”

A trust is established by the founder who donates their assets to the trust. Trustees administer the trust assets for the benefit of a third party beneficiary.

The very core of the trust concept is that the powers and function of the founder are separated from the trustees and the beneficiaries.

Trusts are administered according to the provisions of the Trust Property Control Act 57 of 1988.

Separation of power

There have been recent cases in which the trust instruments (ie, the founder, the trustees or the beneficiaries) are not separate, which is the intention of the trust concept. In the extreme, trustees could also be the sole beneficiaries; or the founder is also a beneficiary that holds administrative decision-making powers like a trustee. These are often referred to as modern or family trusts.

Although these cases do exist, this structure is fundamentally opposite to the principles of a trust.

If the trustees are beneficiaries or the founder has direct or indirect control over the trust assets, the trust could be deemed invalid. When this happens, the assets form part of the founder’s estate and the trustees are unable to administer the assets for the benefit of the beneficiaries.

Conclusion

In the Thorpe v Trittenwein 2007 2 SA 172 SCA case, the court stated the following:

“Those who choose to conduct business through the medium of this [ie where there is no separation] do so doubt to gain advantage, whether it be in estate planning or otherwise. But they cannot enjoy the advantage of a trust when it suits them to cry foul when it does not.”

In other words, when there is no separation of powers in a trust, the trust can be invalid. The trustees can be held personally liable for breach of trust and/or good faith. They can be held personally accountable for these breaches.

To avoid this contradiction, we recommend that trust deeds should be drafted so they comply with the provisions of the Trust Property Control Act. Trust deeds should be tailor-made to suit the founder and also the needs of the beneficiaries.

Here is a practical example that illustrates a legally valid family trust for estate planning purposes:

Sylvia and Randolph are the founders of their family trust and they donate a fixed property to it. The couple’s three sons John, James and Joseph are the trustees. Sylvia and Randolph’s granddaughters, Sarah, Nellie and Lilly are the beneficiaries of the trust in equal shares. In this way, separation of powers has been achieved. The trust is created in line with the trust idea and the Trust Property Control Act.

Nicolene Schoeman, Schoeman Attorneys (Cape Town)

Tel: +27 (0) 21 425 5604
Email : This email address is being protected from spambots. You need JavaScript enabled to view it.
Website: http://www.schoemanlaw.co.za
Facebook: https://www.facebook.com/pages/Schoeman-Attorneys-Cape-Town/125007317531885  
Twitter: @NicoleneS_Att and Schoeman_Att