The perception which exists that once your family trust has been registered with the Master of the High Court it is valid, is wrong! Even though the Master is considered being the ‘watch dog’ over trusts, it is not the Master’s duty to check the validity of the trust deed upon the “registration” of the trust or the validity of subsequent amendments to the deed. The validity is usually only challenged when the trust enters into a dispute with, for example, a party contracting with the trust. Furthermore, due to the fact that a trust is considered to be “a creature of document”, a trust can only be as good as the document in which it is founded, allows it to be. From the legal audits done on trust deeds at our firm, an alarming 85% plus of trust deeds from all over South Africa may not stand the test of validity. In more than 60% of trusts, the parties to the trust could have been structured better. It may be worth the while to do a DIY basic check on your own family trust deed, and if any of the following does occur, it may be more than wise to urgently seek professional advice:
The power (also called a general power of appointment) given to the trustees to select (at random) beneficiaries from outside a defined group or class of beneficiaries. This can cause the object of the trust to become too vague which is a ground for invalidity.
The power (another form of a general power of appointment) given to the trustees to create new or “roll over” trusts on terms and conditions as they (the trustees) may decide upon and without any indication who the trustees of this new or “roll over” trust should be.
A unilateral act by the founder when creating the trust or no agreement between the founder and the trustees when the trust is created.
No divesting of his/her property by the founder when the trust is created. The trust deed should explicitly state that the founder creates the trust by donating a specific amount to the trustees of the trust for the benefit of the beneficiaries.
When the trust deed is amended, it is now since a recent Supreme Court of Appeal judgment, compulsory that all beneficiaries who have accepted benefits from the trust (from its origin until the amendment) be made a party to such an amendment, otherwise the amendment will be invalid. This can cause many amendments to trust deeds where for instance beneficiaries were added or removed and where beneficiaries who have accepted benefits were not a party to the variation, to be invalid.
Excessive powers such as the power to “hire and fire” trustees, veto rights, testamentary reservation, etc. can all have negative implications with regard to tax, divorce and insolvency matters and caution should be taken when exercising these powers.
The reference in the trust deed to those “related by blood or affinity” as part of the beneficiaries can cause an amendment of the deed by agreement between the trustees and the “beneficiaries” to become impossible without a much more expensive court application.
Therefore, prevention is always better than cure. Rather establish beforehand whether your trust was indeed validly created or amended and whether it gives adequate powers and discretion to the trustees to utilise the trust effectively, than to discover the deficiencies when a dispute ensues or a specific power is needed by the trustees to act. This can be done by way of a legal audit which entails inter alia the checking of the validity of the trust, tax and other implications thereof, protection of beneficiaries against financial and other risks as well as the protection of the trust assets and beneficiaries in the event of divorce, as well as to what extent the rights of the beneficiaries may be affected by a possible amendment of the trust, to name only a few aspects.
Mosdel Parma & Cox
044 533 1101