Business Trust

Question 1

What is a trust?

Answer 1

It is a legal relationship that has been created in a trust deed.

The Trust Property Control Act 57 of 1988 defines trust as:
- an arrangement
- through the ownership in property of one person
- is by virtue of a trust instrument ‘made over’
- to another person, the trustees
- to be administered or disposed of according to the provisions of the trust instrument
- for the benefit of the beneficiaries or
- to the beneficiaries designated in the trust instrument, which property is placed under the control of the trustee, to be administered or disposed of according to the trust instrument for the benefit of the beneficiaries.

Question 2

Does a trust have a juristic personality?

Answer 2

No, I’m trust law it is not defined as such but in the Companies Act it is a juristic person but just in the case of the act.

Question 3

Can a trustee of a trust be a member of a closed corporation?

Answer 3

Yes they are in the capacity of a trustee

Question 4

Business trust or trading trust

Answer 4

This is an ordinary trust, however the difference is that the trustees are given the authority to carry on the business and incur debt.

This is not allowed in a non trading trust as trustees are not allowed to place the trust asset at risk.

Beneficiaries in a trust are allowed to sell their interest in the trust the same way shareholders are able to sell their shares in a company.

Question 5

Power and duties of trustees:

Answer 5

Principal duty: to act with care, skill and diligence.

• duty to take possession of the original trust document(s) and to lodge certified copies with the Master for the district in which the trustees are resident, or where the administration of the trust takes place.

The trustees have the duty to take possession of the trust property, but can exercise discretion in cases where taking possession of the property would not be in the best interest of the beneficiary.

Question 6

Rights of beneficiaries

Answer 6

• should be identified or identifiable
• founder of a trust can be a beneficiary
• trustee can also be a beneficiary

Question 7

Land and Agricultural Development Bank of South Africa v Parker

Answer 7

The separation between control and ownership (by trustees) and on the other hand, enjoyment of trust assets (by beneficiaries) is at the core of trust law.

Based on separation and control.

Question 8

Limited liability of trust:

Answer 8

• a trust can through a trustee borrow money and creditors look to the trust property alone for the performance of their claims.
• advantage of trading a trust is that it offers limited liability without the complexities of forming a company.
• HOWEVER, it can be regarded as a partnership as it originates from an agreement.

Question 9

Standard Bank of South African Ltd v Swanepoel No 2015
Facts

Answer 9

Facts:
Standard Bank concluded a contract with Swanepoel who was acting on behalf of the trust, opened a business banking account with Std Bank.

Std Bank then undertook to lend and advance moneys on the overdraft facility granted.

Swanepoel in his personal capacity, signed a deed of suretyship guaranteeing the trust’s duty to the bank. This meant that liability for the loan taken would have been covered.

The trust failed to repay the loan capital and interest and subsequently was overdrawn on the business account. The bank instituted action against the Swanepoel, in his capacity as the sole trustee of the trust and against him personally as surety.

Question 10

Standard Bank of South African Ltd v Swanepoel No 2015
Issue

Answer 10

The issue before the court was whether a valid cause of action existed against Swanepoel.

Question 11

Standard Bank of South African Ltd v Swanepoel No 2015
Principle

Answer 11

A trust is a legal entity although it does not have a legal personality.

A trust not having a legal personality, does not render the contract entered into with it invalid.

Question 12

Standard Bank of South African Ltd v Swanepoel No 2015
Decision

Answer 12

The court held that a valid cause of action existed against Swanepoel as the trustee as such he was liable to repay the loan.

Question 13

3 main parties of a trust:

Answer 13

• founder
• trustees
• beneficiaries

Question 14

Four types of trusts:

Answer 14

1. Jnter vivos trust or living trust
2. Testamentary or ‘will’ trust
3. Ordinary trust
4. Bewind Trust

Question 15

Formation of trust:

Answer 15

Founder must intend to create a trust

The founder’s intention must be expressed such that an obligation is created.

The property subject to the trust must be defined with reasonable certainty.

The trust object must be lawful.

Question 16

Consequences of Trusts

Answer 16

A trust offers limited liability without the complexities linked in trading through a company or CC.

Question 17

A trust deed usually contains the following:

Answer 17

• clauses that are necessary to allow trustees to achieve the business objectives of the parties of the trust.
• clauses that confer wide powers on trustees, such as the power to carry on a business.
• clauses that confer extensive borrowing and lending powers of trustees.

Question 18

Define the 4 types of trusts:

Answer 18

1. inter vivos: a trust created during the lifetime of the founder.
2. testamentary or will: assets are given to trustees in terms of the last will and testament of the founder.
3. ordinary trust: a trust where the ownership and control of trust assets lies with the trustees.
4. bewind trust: a trust where the beneficiaries have ownership of trust assets, but these are under the control of the trustees.

Question 19

Define the requirements and conditions necessary for a trustee to become a member of a company:

Answer 19

• a juristic person cannot be a beneficiary of the trust.
• the corporation is not obliged to observe any clauses in the trust deed.
• if at any time the number of beneficiaries of a trust who are entitled to receive any benefit from the trust exceeds 10, the membership of the trustee shall cease. Once membership ceases in terms of this condition, no trustee of that trust will ever again be eligible for membership of the trust even though the number becomes 10 or less.

Question 20

Business or trading trust

Answer 20

It is an ordinary trust but has one difference, the trustees in a business trust are given the power to carry on business, incur debts, and trade. In a ‘non-trading’ trust, trustees should not put trust assets at risk in any way.

Question 21

Rights of beneficiaries:

Answer 21

• In terms of a business, trust deed can also be such as to allow beneficiaries to sell, trade or otherwise deal with their interests in the trust, in the same way that a shareholder can deal with shares.
• Trustees can take on most of the responsibilities of directors and beneficiaries can be given rights similar to that of shareholders.
• In a business trust, beneficiaries are often issued with a certificate of interest in the trust, giving details of the rights of beneficiaries.
• Have limited liability and are not exposed to business risk or failures. But the same cannot be said about trustees, because they are not immune to personal liability if they are reckless or fail to exercise the required duty of care and skill.

Question 22

Land and Agricultural Bank of South Africa v Parker

Answer 22

the court stated that there was nothing inherently wrong with using as flexible an instrument as a trust for business purposes, but the court stressed that the separation between control and ownership (by trustees) and on the other hand enjoyment of trust assets (by beneficiaries) is at the very core of trust law.

Question 23

Define a family business trust:

Answer 23

It has the following characteristics:
- trustees have the power to contract with independent third parties, thereby creating trust creditors
- the trustees are all beneficiaries
- the beneficiaries are related to one another.

Question 23

Define a family business trust:

Answer 23

It has the following characteristics:
- trustees have the power to contract with independent third parties, thereby creating trust creditors
- the trustees are all beneficiaries
- the beneficiaries are related to one another.

This usually means that an independent trustee will be entrusted to provide security.