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Testamentary Trusts: the importance of careful and concise wording

30 April 2020 Deepa Singh, Attorney at Sentinel International Advisory Services

A recent High Court matter which pitted well-meaning siblings against one another highlights the importance of stating the clauses of a testamentary trust clearly and unambiguously. Deepa Singh, our resident legal expert, recounts the sorry tale…

FREEDOM OF TESTATION SEEMS EASY TO APPLY

In terms of South African law, the freedom of testation principle is applied and upheld with great importance. Unlike some jurisdictions, South Africa has no forced heirship rules. Freedom of testation means that a person is fully entitled to bequeath their assets to whomever he or she wishes – provided the person making the bequest (referred to as the testator / testatrix) is of sound mind.

Freedom of testation is, however, not absolute and both legislative and common law limitations exist. For example, a testator has the common law duty to support his minor and financially dependent children and therefore may not disinherit them. A court may also remove clauses which go against the provisions of the Constitution of the Republic of South Africa, such as clauses which discriminate on the grounds of race or religion.

BUT TESTAMENTARY TRUSTS COMPLICATE MATTERS

While the law of succession prescribes the rules which determine the transfer of a deceased’s estate, the terms and conditions of a testamentary trust must be considered on a case by case basis.

Testamentary trusts are created when the deceased estate is wound up and there is a specific direction in the deceased’s last Will that such a trust must be set up. The directions and conditions relating to the creation of a testamentary trust in the deceased’s Will are equivalent to a trust deed.

The testator/testatrix serves as the founder of the trust and appoints the trustees in his/her last Will. The role of a trustee usually ends on the occurrence of a certain event, or at a determinable date – such as when a minor attains majority or upon the death of an income beneficiary.

In terms of the provisions of Section 6 of the Trust Property Control Act, No. 57 of 1988, any person appointed as a Trustee after the commencement of the Act may only act as such after obtaining written authorization by the Master of the High Court. It follows that a Trustee has no authority to act in such capacity prior to the date of authorization on the Letters of Authority.

The nominated trustees of the testamentary trust must apply for Letters of Authority at the office of the Master of the High Court at which the estate has been reported.

While this clears up when Trustees’ powers come into effect it does not clarify when their powers terminate. Does the term of office end upon the termination event stipulated in the Will?

When a trustee resigns or dies during his or her term of office, his or her office of trusteeship comes to an end. But what happens to the trustees’ offices on the termination of a testamentary trust?

There is no cut and dried answer to this question. The wording of the termination clause in the trust deed and the directions to the trustees are of utmost importance as these can have far reaching consequences.

HOW DOES IT WORK IN PRACTICE?

The case of Van Rensburg v Van Rensburg N.O and Others [2020] provides a good introduction to the complexities involved. The facts of the matter are:

D and V made a joint Will which created the “D Trust” in the event of D dying first. V (the surviving spouse) was to be the only income beneficiary of the trust.

The will provided that:

“With the death of my wife, the trust is to terminate and the capital, which includes capital gains thereon and additions thereto, together with any unpaid income, is to be paid in equal shares to my children R…, U…, C… and T…, or the survivors of them…”.

R, U, C, and T (the children) were appointed as the trustees of the trust.

After V’s death, R sent an email to the other three trustees. The email contained a resolution authorizing him to pay out the trust capital to R, U, C and T and a request for their banking details.

U duly supplied her details to R but, unbeknownst to either of them, her email account had been hacked. The hacker(s) supplied false banking details to R, who paid an amount of R934 913.16 into this account.

When she found out what had happened, U tried to resolve the issue with her siblings. But they contested that the fact that she did not receive her portion was unfortunate but could not be regarded as fraud perpetrated against the trust.

U brought an application to have all the trustees removed. She asked for new trustees to be appointed to deal with her situation, on the basis that the original trustees all suffered from a conflict of interest as they were all beneficiaries of the trust.

R, C, and T opposed the application on several grounds. For the purposes of this article we will only examine the core questions they raised. Did the trust cease to exist upon the death of the income beneficiary V? And did the office of trusteeship thus similarly cease?

WHAT DID THE COURTS DECIDE?

Mfenyana AJ of the Grahamstown High Court held the following:

“There can be no doubt that the Trust was created for the benefit of the testatrix. What appears to be in dispute is whether the Trust did in fact terminate upon the death of the Testatrix.

If one considers the strict terms of the trust deed, it must be accepted that it did.

What the applicant contends is that this defence has been raised by the respondents ex post facto and is bad in law, as contemporaneous documentation shows that the respondents all along believed that the Trust still existed after their mother’s death.

These consist of the email that was sent by the first respondent calling on the applicant and the other respondents to sign a resolution terminating the trust and making payment of the capital held in the Trust to the “beneficiaries”, being the applicant and the respondents.

From this, the applicant contends that the trust did not and could not terminate upon the death of the Testatrix as the relevant assets were made over and transferred from the estate to the Trust upon the death of the Testator.”

The respondents on the other hand aver that the termination of the Trust did not occur only as a result of the object of the Trust having been fulfilled, but also because it was specifically so directed in terms of the will.”

The final decision was that the trust ceased to exist upon the death of V and that, therefore, the four siblings ceased to be trustees at that moment (my emphasis). In other words, the four siblings were never beneficiaries of the trust, but became entitled to the trust capital under the provisions of the will.

What it means for you

This judgement clearly emphasizes the necessity for clear and concise wording in testamentary trust clauses. As with all trusts, beneficiaries should be clearly defined, and their rights and entitlements should be unambiguously stated.

Clearly stating the Trustees’ duties upon the termination of the trust and stipulating when exactly the trust must terminate is of crucial importance.

Fiduciary practitioners must take great care and caution in ensuring that the above is adhered to in all trust deeds.

References:
Southern African Legal Information Institute (SAFLII)
Van Rensburg v Van Rensburg N.O and Others (1458/2019) [2020] ZAECGHC 29 (24 March 2020)
The Fiduciary Institute of Southern Africa (FISA)
Mondaq Limited

 

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