BUSINESS TRUSTS

PROF. PC OSODE
 UNIT-SPECIFIC
TERMINOLOGY
 Trust  Contingent right
 Business trust  Vested right

 Trustee
 Trust deed
 Founder/settlor
 Beneficiary
 Inter vivos trust
 Trust property/asset
 Master (of the High  Testamentary
Court) trust
Business trusts – definition/
nature of
 A trust is the legal institution/vehicle
through which an intermediate person
(the trustee) holds property as owner -
in accordance with the expressed
wishes of another person (the
settlor/founder) - for the benefit of
named or ascertainable
beneficiaries or for an impersonal
object.
Business trusts – definition/
nature of
 This trust is sometimes referred to as an
ownership trust.

 The ownership of the trust assets vests

in the trustee(s) who administers the
assets for the benefit of others.

 A business trust is an ownership trust in

which the trustees carry on a business
as a trust.
Business trusts – definition/
nature of
Form
A trust does not have to be in writing.

Accordingly, it may be oral.

However, it is advisable for a trust to be in

writing in order to avoid uncertainty and
disputes.

When it is in writing, the document is

known as a trust deed/instrument.
 Business trusts – legal
status

 As a general rule, a trust is NOT A

JURISTIC PERSON like a company
or a close corporation (cc).

 It follows that the trust does not

have legal personality like a
company/cc.
 Business trusts – legal
status
 The rights and liabilities relating
to the business do not vest in
the trust but in the trustees in
their capacity as such.

 Note that the rights and liabilities

do not vest in the trustees in their
personal capacities.
 Business trusts – legal
status

 Accordingly, if a trustee dies or

goes insolvent, the trust assets
do not fall into his personal
(deceased/insolvent) estate.
 Business trusts – legal
status
Exceptions to the general rule
(a) For the purposes of the Companies Act
71 of 2008, the trust is to be treated as a
juristic person. (See s1 of the Act.)

(b) In terms of the Deeds Registries Act 47

of 1937, a trust is deemed to be a person
for the purpose of registration of
immoveable property.
 Business trusts – legal
status
Exceptions to the general rule – cont’d

(c) Insolvency - although a trust is

not a separate legal entity, it can
be sequestrated and the trust
assets will fall into the trust’s
insolvent estate.
Law governing trusts
 The law governing trusts in SA is the
common law. Accordingly, the principles
are found in case law.

 However, the Trust Property Control Act 57 of

1988 also applies. It primarily provides for
TIGHTER CONTROL of trustees by the MASTER
of the High Court.

 However, it is by no means a codification of the

law governing trusts in SA.
 Flexibility of a trust
 A trust is a very flexible institution –
which is one of the attributes that
makes it attractive.

 The flexibility of a trust is such that:

(a) The trustee may also be a beneficiary;

(b) The founder may also be a trustee and
beneficiary.
 Flexibility of a trust
(c) The founder may be the sole
beneficiary.

Restrictions

The founder may not be the SOLE trustee

and beneficiary. This is because the trust
requires the element of holding property
for a person other than the trustee himself.
Essentials of a trust
(i) Intention to create a trust
The founder (a natural/juristic person)
must intend to create a trust.

That intention must be expressed in a

way which creates an OBLIGATION – on
the founder and the trustee(s).

 All the facts and the entire trust deed

have to be examined to determine the intention.
Essentials of a trust
 (ii) Identification/segregation of trust
property

 It is required that trust property must be

defined with sufficient certainty.

(iii) Lawfulness/legality

 The object(s)/purpose(s) of the trust must

be lawful.
Essentials of a trust
(iv) Identification of beneficiary(ies)

A trust without a beneficiary is invalid.

If the intended beneficiary is not named

or determinable, the trust will fail.
If the beneficiary is ascertainable but

cannot take (the trust benefits) or the

object of the trust is not clearly defined,
the trust fails.
Rights of beneficiaries
(i) Right to income/capital of the trust

A beneficiary may be entitled to all

or part of the income and/or capital
of the trust.

The

extent of the beneficiary’s
entitlement depends on the terms
of the trust deed.
Rights of beneficiaries
 Right to income/capital of the trust –
cont’d

 The right, which is a personal

right, is either a conditional
(contingent) or unconditional
(vested) right.
Rights of beneficiaries
 Transferability of beneficiary’s interest
in a business trust

 It should be noted that one of the

reasons why the business trust is
attractive to some entrepreneurs – is
the fact that the rights of the trust’s
beneficiaries can be structured in a
way that makes them transferable – by
way of sale, etc.
Rights of beneficiaries
 Right to proper administration of the
trust
 Beneficiaries have a personal right to
the proper administration of the trust.

 Accordingly, the right is enforceable

against the trustees.
 This principle applies even to a
beneficiary with a contingent interest in
the trust.
Who may be a beneficiary
(i) Natural/juristic persons: Any person born or
unborn, natural/juristic, may be a beneficiary of a
trust.

(ii) Non-legal entities: Associations of persons

which are not recognised as legal persons
can also be beneficiaries. Accordingly, a trust,
partnership or an unincorporated association can
be a beneficiary. However, in such cases, the
beneficiary’s entitlements would vest in the
trustees, the partners or the association’s
committee.
Who may be a beneficiary

(iii) Founder/trustee: May also be a

beneficiary under the trust.

It is possible to have more than one

founder of a trust and for the founders to
be trustees as well as beneficiaries.

This is often the case with a business

trust – which makes it look like a
partnership.
 TRUSTEES
Sources of law
The office/position of trustee is
governed by:

(a) the Trust Property Control Act 57

of 1988 (TPCA); and

(b) the principles of the common law.

 TRUSTEES
Appointment
 The first trustees of a trust are usually
appointed by the founder.

 However, the founder of a trust can

empower any person/body to appoint the
trustees.

 The law does not prescribe any qualifications for

trustees. However, the trust deed can disqualify
certain persons from acting.
 TRUSTEES
Authority
A trustee’s authority to act as such


only begins when s/he has received

written authorisation from the
Master.

If the trustee acts without the Master’s

written authorisation, her/his acts are
a nullity.
 DUTIES OF TRUSTEES
(1) Duty of care, diligence and skill

 In the performance of duties and

exercise of powers, a trustee must
act with the level of care, diligence
and skill which can reasonably be
expected of a person who
manages the affairs of another.
 DUTIES OF TRUSTEES
Duty of care, diligence and skill – cont’d

 It has been held that the standard

requires a trustee to show greater
care in administering trust
property than might be expected
of her/him when dealing with
her/his own property.
 DUTIES OF TRUSTEES
Duty of care, diligence and skill – cont’d

If the beneficiaries consented to or

confirmed the actions of the trustee, this
would be a valid defence against an
alleged breach of trust.

If a trustee acts in breach of trust,

negligently or without authority, s/he may
be liable for the loss caused to the trust.
 DUTIES OF TRUSTEES
(2) Exercise of independent judgment

Every trustee is required to

exercise an independent judgment
as to what constitutes the best
interests of the trust.
 DUTIES OF TRUSTEES
(3) Duty to keep proper accounts

By virtue of her/his fiduciary

position, a trustee has a duty to
keep proper accounts.

Also a trustee is required to

account for everything in good faith.
 DUTIES OF TRUSTEES
(4) Duty of utmost good faith

 A trustee owes the utmost good

faith towards all beneficiaries.

 This requires a trustee to keep

trust property separate from his
personal assets.
 DUTIES OF TRUSTEES
Duty of utmost good faith – cont’d

A trustee must not overlook the

difference between the rights of capital
beneficiaries on the one hand and income
beneficiaries on the other.

The two groups of beneficiaries have



conflicting interests and trustees must

strike a balance between those interests.
 ADVANTAGES OF A
BUSINESS TRUST
(i) Protection/immunity from liability:

The founder, the trustees and

beneficiaries are not exposed to
the creditors of the trust (except in
limited circumstances).

In this respect, the business trust is

identical to a company/cc.
 ADVANTAGES OF A
BUSINESS TRUST
(ii) Perpetual succession

The business trust has the

attribute of perpetual succession.

This means that a change in trustees or

beneficiaries does not affect the
continuation of the trust.
 ADVANTAGES OF A
BUSINESS TRUST
(iii) A business trust is not heavily
regulated like a company (under
the Companies Act) or close
corporation (under the CCA).

(iv) A business trust enjoys more

confidentiality than a company or
cc.
 ADVANTAGES OF A
BUSINESS TRUST

(v) A business trust is not required

by law to have an audit.

(vi) It provides estate planning

opportunities not available with the
other business vehicles.
 DISADVANTAGES OF A
BUSINESS TRUST
(i) A trust is treated as a person for
tax purposes and is taxed at a
higher rate than any other taxpayer.

(ii) The law governing trusts is still

in a state of development.
Accordingly, it is in certain respects
uncertain.