Fundamental Rules to Watch When Dealing Through and with Trusts

Fundamental Rules to Watch When Dealing Through and with Trusts

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Trusts are being used progressively more in concluding a variety of business transactions.  Trusts are often preferred as a means of “legacy protection”.  However, there are certain fundamental rules relating to trusts which, if not observed, could render the protection sought in the use of a trust useless and may even result in serious personal liabilities for trustees.  The following are the fundamental rules which trustees and parties that transact with trusts should be wary of.

Ensure the trust is properly established

The law requires that there should be separation between the control and ownership of the trust assets on the one hand and, on the other hand, the enjoyment of all benefits of the trust assets.  As such,  one of the basic yet crucial elements in the establishment of trusts is that one person (the founder / donor) transfers from himself property (the trust assets) and place such property in sole and exclusive control and ownership of the trustees (in their capacity as such) to be administered by them for the benefit of other persons (the beneficiaries).

Most often, trusts (especially family trusts) are structured in such a way that all trustees are the also beneficiaries.  In such instances, the trust concerned would not meet the basic legal element as noted above.  Therefore, the validity of such a trust may be open to challenges by third parties and, most certainly will not withstand close scrutiny by the courts.

In order to guard against breach of the rule noted above, which is a common oversight in many family trusts, the Supreme Court of Appeal has in previous cases recommended that trust deeds should always provide for the appointment of at least one independent trustee.

Ensure trustees who act have letters of authority

Section 6(1) of the Trust Property Control Act, 1988 requires that trustees appointed after 1 March 1989 act as trustees only if authorised by the Master of the High Court (i.e. after the Master issued that trustee with a letter of authority).  It follows that if a trustee acts without the letter of authority, such acts would be invalid.

Guard against the rule of subminimum number of trustees

Most often, trust deeds set out a rule of minimum number of trustees required to be in office at any given time.  This rule requires caution for trustees and third parties alike because if the trustees are fewer than required, then unless the trust deed provides otherwise, the trust will be deemed to be legally incapacitated and thus any transactions or agreements it purports to conclude will be invalid.  In this regard, the trustees may only act for purposes of appointing an additional trustee but they will be in breach of their duties if they continue to act in any other way while they are fewer than required.

Ensure correct decision-making process was followed

It is important to ensure that decisions of a trust are taken in accordance with due process required by law and the trust deed.  A trustee may not make decisions as an individual and without regard to the input of other trustees.  This is a serious breach of the rules of the trust law and if such decisions are later challenged in court, the trust might not be bound by such decisions and the errant trustee may be held personally liable to the beneficiaries and /or the third parties for losses suffered as a result of such individual decision.

In this regard, the following rules should always be borne in mind when trustees make decisions:

  • Meetings must be properly called and qourated

All trustees must be given due notice of all trust meetings.  If one of the trustees is deliberately excluded from a meeting, the decision taken at that meeting will be open to challenge.  It is a different case if a trustee who was given notice of a meeting fails to attend a meeting.  In this regard, the requirements regarding the minimum number of trustees that should be present before a meeting can take place (the quorum requirement), as set out in the trust deed, must always be observed.

  • Round robin resolutions

If decisions are taken by way of written resolutions without a need for attendance of meetings (the so-called round robin resolutions), care should be taken to ensure that the passing of such resolutions is permitted in the trust deed and that such resolutions are taken strictly in accordance with the provisions of that trust deed.

  • Decision by majority or all trustees

Trust deeds often provide a threshold for approval of various decisions.  Some decisions may require approval by a simple majority whereas some may require the unanimous approval of all trustees.  Accordingly, trustees (and third parties dealing with trusts) should always consider the nature of the decision and the level of approval required by the relevant trust deed in order for the decision to be valid.

  • Trustees act jointly

The law requires that whenever trustees act on behalf of a trust, they should do so jointly (except if a trust deed expressly provides otherwise).  This means that although the decisions of the trust must be approved by the majority of the trustees, when implementing those decisions the trustees must act as a collective.

Put simply, resolutions for the implementation of decisions of the trust must be signed by all trustees (including those who voted against the decision).  A resolution signed by only the majority of the trustees would not be consistent with the principle of acting “jointly”.  Of course the trustees may nominate one of them as an agent of the trust in implementing a particular decision, but again such nomination must be made jointly.

Isaac Fenyane
Isaac Fenyane is an attorney practicing as a senior associate at Edward Nathan Sonnenbergs Inc (ENS). He specialises in corporate law, mergers and acquisitions, corporate finance and general commercial law. He has extensive experience in project managing transactions and commercial projects, negotiating and drafting various commercial agreements and advising clients on a wide range of corporate and commercial law issues. For more information visit www.ens.co.za