The considerations and formalities of a trust

by Lindsay Gough


When contemplating if you should set up a Trust, one must consider both the formalities of creating a Trust (which are valid in law) and abiding by the correct legal structure. One is also obligated to understand the nature of a Trust, including the Trustees' duties and the Beneficiaries' rights.

The following should be borne in mind when deciding on establishing a Trust or not:

  1. Consider the fact that direct control of personal assets transferred to the Trust will be handed over. This is an important concept to grasp, because if control is not handed over to the Trust, the Trust could be seen as an alter-ego.
  2. Consider what the intention of creating the Trust is, whether that be reducing tax, estate planning, provisions for minors, etc.
  3. It is also important to consider if the benefits of the Trust validate the running costs and applicable expenses. These include registration, administration fees and also any transfer fees which could arise from moving personal assets into the Trust.  

If one does opt to proceed with establishing the Trust, the formalities surrounding the creation of a valid Trust are as follows:

  1. A Trust must have a name. This name can be changed, and the Master allocates a unique registration number to each Trust. There are sure to be multiple Trusts registered with identical names, but the 'IT' (registration) number is unique and is used to identify the Trust.
  2. It is imperative to define the purpose and objectives of a Trust in clear and simple terms in the Trust deed. Stipulating the intention of a Trust as a legal requirement.
  3. The parties to a Trust must be stated – named in some instances and determinable in other instances. The 'compulsory' parties are:
    1.  The Founder, who's intent it is to create the Trust.
    2. Trustees, who have certain fiduciary duties and control over the Trust assets, which they are required to administer in the best interests of the third party.
    3. The Beneficiaries, it is a requirement that the Beneficiaries are either determined or clearly determinable.

Should a Trust Deed not contain members from all three of these parties, it does not meet the legal requirements of a valid Trust.

All actions and decisions of Trustees are required to be made with reference to the Trust Property Control Act, legal precedent and the wording as contained in the Trust Deed itself. It is therefore essential that the Trustees are familiar with the content of the Trust Deed and the applicable legislation. A Trustee cannot justify the fact that they acted in a certain manner because they were 'unaware' of the formalities and legal requirements that they were obligated to abide by.

The Trust Property Control Act itself is short and does not provide much guidance on the administration of Trusts. It is therefore important to ensure that the Trust Deed is drafted comprehensively to avoid potential conflicts and discrepancies.   

The Trust Deed should also lay out the powers that are given to the Trustees. This does not mean that the Trustees can have free range authority in all trust matters. The powers must be drafted in consideration of, and in line with any relevant legal precedent. The minimum and maximum amount of Trustees are also stipulated in the Trust Deed. Let's say for example the Trust Deed requires a minimum of three Trustees, and the Trust only has two Trustees – the Trustees would then be acting in conflict with the requirements of the Trust.

A couple of other important provisions contained in a Trust Deed are the following:

  1. the process which has to be followed when removing or appointing Trustees; and
  2. the manner in which decisions by Trustees are made.

When it comes to the former (i), the Trust Property Control Act provides for instances where a Trustee can no longer hold the office of Trustee, while the Trust Deed can include further instances and also indicate the relevant process to be followed. When it comes to the addition of Trustees, only the Master of the High Court has the authority to appoint a Trustee, the remaining Trustees merely make a recommendation or nomination to the Master.

The Master also has certain requirements when it comes to removing and appointing Trustees (the Chief Master issues Directives on a regular basis). Should the Master not be satisfied because the Trustee did not act in line with the relevant legislation, the content of the Trust Deed and their own requirements, they will refuse to issue a new letter of authority (the document which reflects the name of the Trust, the unique registration number and the current Trustees). This refusal could cause extensive time delays and could have the effect of the Trust not being able to execute certain desired actions.

With regards to the latter (ii), it is essential that the decisions of Trustees are made unanimously, prior to their execution thereof. This assists in curbing any allegations that the Trust is an alter ego and ensures that the Trustees are not acting contrary to any legal precedents. The relevant provision in the Trust should lay out the requirements of a valid trustee decision (requiring that decisions be reduced to writing, for example).

It is also important to note that decisions of Trustees cannot be made retrospectively, so should you act without the consent of the remaining Trustees (including the Independent Trustee), you are putting the entire Trust at risk of being seen as an alter ego (or a 'sham'), as mentioned before. It's a prerequisite that you relinquish control of the assets. One cannot act like you own Trust property in your personal capacity, the consequences thereof could be far reaching in the near or distant future.

Based on the above, it is clear that one should ensure that the Trust Deed is not only administered by a professional but also drafted (or amended – if the Trust Deed allows it) by one. The reason being that if the Trust Instrument / Deed does not contain all the relevant, necessary and accurate provisions, effective administration of the Trust by the Trustees is severely restricted.

To be put in touch with our trusted professional and independent Trust Administrators, contact services@wealthmastersclub.com




 
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