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Looking to form a trust? Ensure you know its limitations!

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 his own. The courts have recognised some limitations of a trust.

The donor – trust relationship

limitations of a trustTrusts 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, 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.

A case showing the limitations of a trust

In one 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.

This case shows the limitations of a trust. That is, 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 and furthermore it reveals the pitfalls if a trust is not managed effectively and for the sole benefit of the beneficiaries.

There are many advantages for 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 be administered for the benefit of the beneficiaries.

Images courtesy of Greenleaf Designs and cooldesign at FreeDigitalPhotos.net.

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