Changes to Trust Property Control Act may be overturned by the courts

Amendments to the Trust Property Control Act that form part of the government’s efforts to remain off the Financial Action Task Force’s grey list may have unforeseen consequences.

The Fiduciary Institute of Southern Africa (Fisa) and prominent trust experts lamented the fact that fundamental changes were made without a proper consideration of the legal framework of trusts in South African law.

Read: Fisa makes urgent submission to Parliament on ‘beneficial ownership’ relating to trusts

Fisa raised its concerns about changes to the definition of “beneficial owner” in the Act and the inclusion of “each beneficiary referred to by name in the trust deed” as a beneficial owner.

Fisa believes this may infringe the rights of people involved in trusts, as one of the unforeseen consequences could be the premature acquisition of rights.

The institute expressed its “disappointment” with the changes and the fact that their concerns fell on deaf ears.

Ability to remove beneficiaries

Fisa chief executive Louis van Vuren explains that even if a beneficiary is identified by name in a trust deed, it does not necessarily mean that he can never be removed as a beneficiary.

There are instances where the trust deed provides trustees with the power to remove a beneficiary or to add another. This is possible only if the beneficiary has not notified the trustees in writing that he accepts the benefits.

The Supreme Court of Appeal (SCA) has confirmed in a case that remains standing law that once a beneficiary has accepted the benefit in writing, no changes to the trust deed are permissible without the consent of that beneficiary.

In the Potgieter v Potgieter case the children of the trust founder from his first marriage asked the courts for an order to declare changes to a trust deed without their consent to be invalid.

The original trust deed, in which their father made them beneficiaries and accepted the benefits on their behalf since they were minors, was changed substantially.

They suddenly found that they were no longer the only capital beneficiaries (their stepmom and her children were now also beneficiaries), but on top of that there was nothing preventing the trustees from excluding them altogether as beneficiaries of the trust.

The SCA found that the variation of the trust deed was invalid for “lack of consent by the beneficiaries who had previously accepted the benefits bestowed upon them in terms of the trust deed”.

Undesirable outcome

Van Vuren notes that not all beneficiaries necessarily know that they are beneficiaries to a trust – for example, potential beneficiaries of a bursary trust, or grandchildren in a trust set up by their grandparents. They could merely be identified by their membership of the class of persons – “grandchildren of XYZ” – and may or may not know that they are beneficiaries.

“Furthermore, beneficiaries of a discretionary trust do not have vested rights in the trust property and may be removed as beneficiaries by the trustees if such powers have been extended to the trustees by the trust deed.”

However, as a result of the amendment, beneficiaries must be specifically named. This means that if a beneficiary learns from the disclosure requirement that he is a beneficiary, he can notify the trustee in writing that he accepts the benefit and can then never be removed as a beneficiary without his permission.

Fisa, together with professors Francois du Toit of the University of Cape Town and Bradley Smith of Varsity College and the University of the Free State, noted in a submission to Parliament at the end of last year that this is an “undesirable outcome” that not only potentially encroaches on the independent discretion of trustees, but it also infringes on the rights of people to manage their own affairs “in a manner that they choose”.

Van Vuren gives the following example to explain the potential infringement on citizens’ rights to manage their affairs:

A grandfather may set up a family trust for “my grandchildren” to support them to achieve tertiary qualifications and remain one of the trustees. He may ask his co-trustees to remove one of his grandchildren (a beneficiary of the trust) who has failed to complete his tertiary studies.

In terms of the changes, the grandchild may now, by accessing public records, learn that he is a beneficiary and may notify the trustees that he accepts the benefits under the trust before being removed.

“The amendments will therefore have the effect that the grandfather’s right to arrange his affairs as he pleases is limited,” says Van Vuren.

Fisa adds there was a risk that the amendments may be overturned by the courts on the basis of irrationality.

The problem with trusts

ENSafrica law experts explain that the definition of beneficial owner, recognised by the Financial Action Task Force, focuses on the natural (not legal) persons who own and take advantage of capital or assets of the legal person, as well as on those who really exert effective control over it.

In their view, any commentary on the General Laws Amendment Act, and, in particular, on the changes to the Trust Property Control Act, must bear this understanding of the term “beneficial owner” in mind.

Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law and regulatory issues.

Disclaimer: The information in this article does not constitute legal or financial advice.