Abuse of trusts hit hard by court decisions

Certain High and Appeal Court cases over the years have brought home to the South African business community that the advantages of establishing a trust as a vehicle for protecting assets and for estate planning purposes can be negated if the donor treats the trust as his ‘alter ego’, i.e. as a means of continuing to maintain control over the assets and treating them as if they were still his own.

Discussing this recently, Ulrik Strandvik of Grant Gunston Attorneys said that trusts are intended to be independent of the donor (or founder) and to be run for the benefit of the beneficiaries.

“When a trust is used by the donor to try and achieve his own aims and ambitions for the beneficiaries and/or to determine how and where the money will be used, this is seen in South Africa today by the courts as unacceptable.  The donor must resign himself to the fact that in forming a trust he is handing ownership of the assets to his trustees in trust.  The donor can be a trustee, but must at all times act in the best interests of the beneficiaries and in consultation and agreement with the other trustees in terms of the Trust Deed.  If he cannot accept this he should not form a trust - and this concept has been upheld time and again by South African courts.

“As a result of this thinking,” said Strandvik, “the Master of the High Court (who administers the registration of all trusts) has gone so far as to stipulate that at least one trustee must be independent of the other trustees.  This has caused some complications in South Africa where traditionally certain donors have tried to limit trusteeships to members of their own family.”

In one case quoted by Strandvik (the Land Agricultural Bank v Parker and Others), Parker, his wife and the family attorney, Senekal, were the trustees of a trust set up in 1992 for the benefit of the Parkers and their descendants.  When Senekal resigned in 1996, it took the Parkers two years to inform the Master of the High Court of this - and he was not replaced, even though the trust’s terms had said that there should always be at least three trustees.

The Parkers were engaged in farming projects and accepted loans from the Land Agricultural Bank, with their trust as the surety and co-debtor.  When the Parkers finally appointed a third trustee, it was their son and they therefore retained full control of the trust.  This was confirmed later when the son testified that he had not been consulted on the last of the loans for the large sum of R30 million.

By 2000, the Parker estate was in financial difficulties and the Land Agricultural Bank was successful in applying to the High Court for the sequestration of Parker’s estate and the Trust. In appealing the Trusts sequestration to a full bench of the High Court, the Trust argued that the sequestration of the Trust should be reversed as the Trustees never had the authority to bind it as a surety.

The bank counter-argued that two trustees had initially had the right to commit the trust and later (after the appointment of the son) that decisions were valid as they were taken by a two-thirds majority.  The full bench of High Court ruled in favour of the Trust and held that a trust has no ‘legal personality’ but is an ‘accumulation of assets and liabilities’ which can act only through its trustees whose decisions are binding on the estate.  However, this Trust’s conditions stipulated that three trustees had to consent to the decision, any decisions taken by less than this number were null and void because initially there were only two trustees and later, when the Parkers did appoint a third trustee, they again acted beyond their powers in taking a decision without his knowledge or consent.

The Bank appealed this decision to the Supreme Court of Appeal (SCA).  The SCA confirmed the High Courts decision that the two trustees had lacked the capacity to bind the trust in favour of the bank.  However, in a twist in the tale, the court ruled that as Parker had in his capacity as a private individual been sequestrated he no longer had the right to act as a Trustee and therefore had no right to appeal the case to the full bench of the High Court on behalf of the Trust.  The matter should have, at that stage, been struck off the roll.  The appeal was therefore rejected on those grounds.

In another case, Badenhorst v Badenhorst, the husband and his brother were the trustees and the children of the marriage (or any subsequent marriage) were the designated beneficiaries.

The wife argued that the trust was the alter ego of the husband, i.e. very much under his control.  This appeared to be confirmed by the fact that he had the right to discharge his co-trustee and appoint another and he also had complete discretion as to the management of the assets and other matters.  In a credit application he had listed the trust’s assets as his own.

The wife also argued that the trust represented a very significant portion of her husband’s assets, a share of which was due to her now that she intended to divorce him.

The court ruled effectively in favour of the wife, saying that the trust’s assets were in fact part of the husband’s entire estate because he had used the trust for his own purposes and not for any beneficiaries.

In a third case, Thorpe v Trittenwein, the trustees of a Trust had agreed to the purchase of a property.  The agreement of sale was signed by one of the trustees, but his authority to act on behalf of the trust had not been put in writing in terms of a resolution.  The court held that this invalidated the sale in terms of the Alienation of Land Act, which requires all aspects of the agreement to be in writing.

Strandvik commented that all three cases in one way or another showed that if a person chooses to put a portion of his business or his estate into a trust he must accept that he has resigned control of his assets to the trustees.  Furthermore, the cases reveal the pitfalls if a trust is not managed effectively and for the sole benefit of the beneficiaries.

“There are,” said Strandvik, “many advantages to placing assets into a trust - but in doing this the donor must accept that he is relinquishing control of these assets in favour of the trustees to administer them for the benefit of the beneficiaries.”

For further information contact Ulrik Strandvik on 021 702 7763 or email ulrik@grantgunston.co.za

Article from: Ulrik Strandvik