Checklist when forming an inter vivos trust

Although the trust deed can be standardised to a great extent, it is important to keep in mind that it remains a “creature of document” compared to the company in terms of the 1973 Companies Act (in terms of the new 2008 Act companies will to a great extent also become “creatures of document” because of the flexibility of its memorandum of incorporation) and close corporation which can be termed “creatures of statute”. A trust can, therefore, only be as good as the document creating it, allows it to be. One of the advantages of utilising a trust is its adaptability as well as its flexibility depending on the circumstances and the needs of the parties. For instance the discretionary powers given to the trustees can be extended or limited depending on the circumstances. The tax and/or limited liability consequences should, however, always be taken into consideration. When forming an inter vivos trust, it is advisable that the following are properly attended to in the trust deed:

(a) The proper identification and description of the parties involved in creating the trust and a proper description of their capacities as founder, trustees and beneficiaries ensuring that they possess the necessary contractual capacity. Beware of the unrelated or too distant founder. A clear distinction should preferably be made between income and capital beneficiaries and to prevent unnecessary conflicts of interest for the trustees between the interests (distribution of income) of the income beneficiaries versus those of the capital beneficiaries (capital growth), the persons described as such should be the same in both groups. Also allow for enough flexibility in the description of the beneficiaries within the scope of the specific power of appointment (see also B7.1 and B15.2 as to whether the beneficiaries are to be parties to the agreement). Where all the beneficiaries are related, an independent outsider has to be appointed as a co-trustee. As was indicated in B6.2.3 supra, the independent outsider can come from the other relatives in a family trust, as long as such a trustee, although related to the beneficiaries, does not qualify as a beneficiary him-/herself. (See also Land and Agricultural Bank of South Africa v Parker 2005 2 SA 77 (SCA) and the doubt expressed in B6.2.2 and B6.2.3 supra about the effectiveness of this measure to separate control from enjoyment.)

(b) Definitions of words such as children, spouse, trust fund, trust capital, trust income, trust property, vesting date (if any), beneficiary, trustee, or any other word or phrase used in the deed of trust that might need a clearer description. Also assure that the meaning of these defined terms always corresponds with its intended meaning in clauses dealing with, for example, the appointment of trustees or the amendment of the deed. If, for example, the term “beneficiary” is defined to include “all those persons related by blood or affinity to them” and, if the beneficiaries are required for an appointment of a trustee or the variation of the deed, it may become a tedious task to trace and involve the said persons in such an appointment or variation.

(c) Name of the trust. There are no requirements, as there are for companies or close corporations whereby the name of the company or close corporation must be approved before the company is incorporated. The only limitation on the name of a trust is perhaps found in the Business Names Act 27 of 1960. However, the Act only applies to a business which is defined in section 1 as “any business of trade established for the acquisition of gain and carried on by any person, company, association, syndicate or partnership or by the individual members of any company, association, syndicate or partnership”. Because the trust is none of the aforementioned entities (CIR v Friedman 1993 1 SA 353 (A)), it is submitted that the definition of business does not apply (Oosthuizen 610–611). Cameron (177) is of the view that the statutes’ definition of “business” seems ample to extend to business trusts and the courts may well hold that a business trust is a “business carried on by any person”, the trustee or trustees rather than the trust itself for this purpose being the “person” referred to in the definition. It is recommended that the said Act should unequivocally be made applicable to trusts to ensure that at least the name and number of the trust, its business address as well as the full names and surnames of the trustees be printed on letterheads.
When the trust deed is lodged with the Master of the High Court, a number is allocated to it such as “IT 1/95” for the first inter vivos trust registered for 1995 (see Master’s Circular 12 of 1994) and this is sufficient identification of the trust.
The name of a trust can be changed and the normal rules pertaining to the variation of a trust deed shall apply. See in this regard B18 infra The Chief Master’s Directive 1 of 2009 dated 30 March 2009 which came into effect on the same day, stipulates as follows:
“Amendment of a Trust Name
When an application is received, requesting that a Trust Name be amended, the following procedure should be followed:

(i) The application must be supported by the founder, trustees and beneficiaries and the Trust Deed must not prohibit such a change, expressly;
(ii) A Proper Deed of Amendment should be lodged with the Master, reflecting the old and new name;
(iii) The Original Appointment Letter of the Trustees, on which the old name is indicated, must be lodged with the Master;
(iv) If the Master is satisfied that all requirements for a valid amendment have been met, an amended Letter of Appointment may be issued indicating all previous Trust names in sequence, as well as the new trust name;
(v) The new Trust Name should be mentioned last.
Example: The A trust, then known as The B Trust, now known as The C Trust.
(vi) It is the obligation of the Trustees to inform third parties of such name change and have the Title Deeds of fixed property endorsed accordingly.”

(d) The trust object must be clearly defined. Failure to do so may render the trust invalid. In view of the fact that the benefit of the beneficiaries constitutes the object of the personal trust (in contrast with an impersonal trust such as a charitable trust), it would entail that the beneficiaries be described in such a way that they can be objectively determined (cf B8.4).

(e) The appointment of trustees including provisions concerning the minimum number of trustees must be dealt with in the trust deed (cf B6.2). Where all the beneficiaries are related, an independent outsider has to be appointed as a co-trustee. As was indicated in B6.2.3 supra, the independent outsider can come from the other relatives in a family trust, as long as such a trustee, although related to the beneficiaries, does not qualify as a beneficiary him-/herself. (See also Land and Agricultural Bank of South Africa v Parker 2005 2 SA 77 (SCA) and the doubt expressed in B6.2.2 and B6.2.3 supra about the effectiveness of this measure to separate control from enjoyment.).

(f ) The grounds for the termination of trustees’ office must be indicated (cf B6.2). In the trust deed provision should be made for the resignation of a trustee and to whom notice shall be given, the removal of mentally deranged trustees and a sequestrated and not yet rehabilitated trustee, and also that the majority of trustees are given the power to terminate the services of a trustee.

(g) The trustees’ powers, competencies and obligations, including a clear description of the trustees’ discretionary powers and duties as well as their remuneration must be dealt with. It must be remembered that the trust is a “creature of document” and the powers given to the trustees in the deed are the only powers that they have. There are, therefore, no inherent powers, as in the case of a company (see B6.2 and B16.2).

(h) The trustees’ exemption from security must specifically be dealt with in the deed (s 6(3) of Act 57 of 1988 and see B6.2).

(i) The utilisation of income and/or capital. Specific powers to deal with income (as opposed to net income) and/or capital (including any capital gain) must be given to the trustees. Full discretionary powers given to the trustees will cause no vesting to take place in any beneficiary which has definite tax and limited liability benefits as discussed elsewhere.

(j) The creation of further trusts. Because future circumstances may require unbundling the interests of beneficiaries in a single trust, provision can be made for the trustees to have the power to create further trusts if they should deem it necessary. The warning by Olivier that it may be wise to follow the guideline for testamentary trusts given in Braun v Blann and Botha (1984 2 SA 850 (A) 866–867) also in the case of inter vivos trusts can be heeded to obviate the failure of the provision to create new or further trusts in an inter vivos trust deed on the grounds of vagueness or the rules concerning the power of appointment. He suggests that the empowering provision should be detailed enough to prevent any doubt as to the salient features of the potential new trust (Olivier 115 and 263). Joubert JA in Braun v Blann & A 1984 2 SA 850 (A) at 867D–F, made it clear, that where a person in a will leaves it to the trustees to create a new trust for certain beneficiaries, but leaves the appointment of trustees of such a “roll-over” trust and the vital terms in respect of payment of income and/or capital, entirely to the discretion of the trustees, that this amounts to “a delegation of will-making power which exceeds the scope of a mere power of appointment of income and/or capital beneficiaries from a specified group of persons” and decided such a proviso in the will to be invalid.
Wunsh, however, strikes a cautionary note (1986 De Rebus 436. See also his and Jaffe’s comments in 1982 De Rebus 529) in the light of the Braun case, that if the discretions granted to trustees of a beneficiary inter vivos trust (and in the example below, also the testamentary trust) go wider than the guidelines laid down in the Braun case, it may well be, that the granting of such wide discretions to trustees will afford a ground for invalidating the appointment of the trust as a beneficiary. However, if the beneficiaries of the inter vivos trust (and, in the example, also those of the testamentary trust) are clearly defined and the discretion given to the trustees is limited to selecting from amongst the defined group or class of beneficiaries the specific capital beneficiary, the bequest will be valid (Olivier 162). Therefore if the power to create such a new trust is given to the trustees to create such new trust with terms similar to the existing trust deed or not as is stipulated in many trust deeds in South Africa, the power of choosing given to the trustees in the words “or not” will cause the general power of appointment to find application.
It is important to note that often the potential beneficiaries are extended in this clause and that such an extension is in line with the needs of the founder:

Precedent 7 (Creating of further trusts)
Whenever the trustees consider any payment of income or any allotment of or out of trust capital, they are authorised, subject to the stipulations hereinafter mentioned, to create such further trust or trusts for the exclusive benefit of such beneficiary and/or any spouse or surviving spouse and/or child or children of such beneficiary and pay or transfer such income or allotments out of the trust capital to such further trust or trusts. The following stipulations shall apply:

The date of termination of such trust or trusts shall be the date which the trustees of that trust or those trusts in their absolute discretion may determine as the termination date thereof.
• At least one of the trustees of this trust then in office shall be appointed as one of the first trustees of such further trust or trusts.
• With the exclusion of the name of the trust and of the parties to and beneficiaries under this deed, the contents of the deed or deeds of foundation of such further trust or trusts shall mutatis mutandis be the same as the provisions of this deed.

(k) Administrative procedures, such as the calling for and conducting of trustees’ meetings, voting rights, decision-making and dispute-resolution procedures, and any veto rights, should be clearly provided for in the deed (Cameron 320 et seq). When drafting any trust deed containing these voting and/or any veto rights, heed should be taken of what has been said about these rights in Badenhorst v Badenhorst 2006 2 SA 255 (SCA) as well as in paragraph B15.1.6 infra. Any excessive powers given to a specific trustee can amount to control of the trust;

(l) Any restrictions on beneficiaries, for example as far as the inclusion or exclusion of in community estates or the accrual system, are concerned;

(m) Provisions relating to payment of taxes should the founder or donor become liable;

(n) That any additions to the trust fund is permissible and how it can be done;

(o) The testamentary reservation is a stipulation which, if required, can be included with caution in an inter vivos trust deed in terms whereof the founder, or any other person nominated, will have the power to prescribe the formula for the distribution of income and capital amongst a predefined group or class of trust beneficiaries. This is basically a contractual right given to one or more named persons to amend the trust deed unilaterally by using a will for that purpose (see B18.2.1 infra). It is important that the person or persons to whom the testamentary reservation is given, is or are fully aware of the tax and practical implications of such a reserved power. All the anti-tax/duty avoidance stipulations, such as section 3(3)(d) of the Estate Duty Act 45 of 1955 as well as section 7 and Part X of the Eighth Schedule to the Income Tax Act can find application (see B21 and B23.1 and B27 infra). If the testamentary reservation is utilised incorrectly in a fully discretionary trust, it can also cause the vesting of certain rights in a beneficiary, thus causing the protective nature of a trust as well as its flexibility to be lost. It is for these reasons that the testamentary reservation should not be used but if someone has the need to give some guideline to successor trustees, it should rather be done by way of a mere indication of a wish in a properly drafted letter of wishes, clearly indicating that no legally binding obligation can flow from such a mere wish.

(p) Termination of the trust (chapter VI infra);

(q) Amendment of the trust deed (chapter VI infra);

(r) Acceptance by the trustees of the donation and their trusteeship (see B12).


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