Gordon Stuart presented to the Discovery financial advisors. The topic under discussion was “10 common errors in drafting a trust deed”.

1. WELCOME

3. TRUSTS: COMMON MISTAKES IN
DRAFTING A TRUST DEED

4. LEGAL NATURE OF A TRUST
 A Trust is NOT similar to a company or cc.
 A Trust does not possess a separate legal
personality.
 A trustee, in his legal capacity, is regarded as a
separate entity. Trustee has the structure of the
owner of the bare dominium.
 Trust has the structure of a stipulatio Alterii.
 Inter vivos trust is an agreement and the rules of
the law of contract apply.

5. THE TRUST CONSTITUTION

6. THE TRUST DEED
1. The Deed of Trust is the trustees’ constitution and if
a responsibility, duty or power is not expressly stated
then it cannot be implied by the trustees. The
trustees have no authority to ‘assume’ that they may
carry out a particular duty or power and if they do so
then they are acting ultra vires.
2. It is a dynamic document that must be reviewed
regularly. Tax and trust laws change!
3. Experience has shown that at least 9 out of 10 trusts
either have wrong clauses or are missing clauses.

7. THE TRUST DEED
Main reasons for bad clauses in trust
deeds in South Africa:-
Bad drafting;
 Ignorance of unique trust law system
in the RSA;
 Using precedents foreign to RSA
trust law.

8. THE TRUST DEED
Bad drafting;
 Trust templates are regularly plagiarised
by different companies;
 This plagiarism was recently referred to
in Potgieter v Potgieter (629/2010)
[2011] ZA SCA 181 (30 September
2011) where the attorney who prepared
the deed stated in Court;

9. THE TRUST DEED
“It unintentionally found its way into the draft,
because I slavishly copied a precedent
without realising that the statement was
inapposite to the deed that I prepared.”
Same template is never updated to changes
in trust case law or tax law.
Same template is not customised to meet the
individual requirements of the client.

10. THE TRUST DEED
NOTE:
There is no finite list of problem clauses. For the
rest of this presentation we will be looking at
some of the problematic clauses found in
standard inter vivos trusts. This is not the A to Z
of all the problem clauses that are to be found.
There are literally thousands of trust deeds in
circulation and how well it has been written all
depends on the skills of the drafter. Each trust
deed must be analysed in isolation to determine
whether it is compliant or not.
.

11. 1. FOUNDER/SETTLOR/DONOR
 Common misconception between Founder and
Funder. Incorrect belief that if a grandparent is
the Founder then none of the attribution rules
apply (i.e. section 7(3) and paragraph 70).
Income Tax Act looks to Funder.
 Distant Founder is difficult to trace if trust deed
to be varied by agreement between Founder and
trustees.
 Section 9(4) of the Transfer Duty Act.

12. 2. ANALYSIS OF TRUST DEED CLAUSES -
BENEFICIARIES
 Father and/or mother not included as income and/or
capital beneficiaries.
 Only children are defined as beneficiaries and not
descendants. This limits the extent of the
beneficiaries and reduces the ability to distribute
income to multiple beneficiaries.
 Grandchildren can only benefit by representation per
stirpes. Grandchildren can only benefit if a parent
predeceases them.
 Only trusts established by the trustees qualifying as
beneficiaries. This excludes existing trusts.

13. ANALYSIS OF TRUST DEED CLAUSES - BENEFICIARIES
 Only beneficiary is a trust. CGT will be incurred in
the second trust at the effective trust rate of 27%.
 The class of beneficiary is defined as the ‘spouse’ of
John Smith. Should be the spouse / widow of John
Smith.
 Trustees have the power to appoint beneficiaries of
their choice i.e. “general” and “specific” (also
referred to as “special”) power of appointment. Only
specific power of appointment accepted in our trust
law Braun v Blann & A 1984 2 SA 850 (A).

14. ANALYSIS OF TRUST DEED CLAUSES - BENEFICIARIES
 Beneficiaries must benefit in equal shares.
 Definition of beneficiary is too broad ie
ascendants, descendants, spouses of descendants,
related by blood and affinity etc.

15. 3. ANALYSIS OF TRUST DEED CLAUSES – TRUST FUND
“Income of the trust not allocated by the trustees within six
months following the financial year end, shall form part of
the trust fund”.
 This wording is in contradiction of the Income Tax Act
and case law.

16. 4. ANALYSIS OF TRUST DEED CLAUSES – VESTING
DATE
The vesting date is subject to pre-emptive conditions. Some
examples of these are;
a) The date of death of the Donor, or
b) terminate 90 (NINETY) days after the death of the
survivor of the Donor and his spouse, or
c) The date of the Donee’s 30th
birthday, or
d) The 8th
June 2001.
The vesting date should be left entirely at the discretion of the
trustees.

17. 5. ANALYSIS OF TRUST DEED CLAUSES – TRUSTEES
 Should the number of trustees fall below the minimum number
specified then all their powers are suspended. Only power being
the power of assumption. This will create liquidity issues for the
beneficiaries.
“There shall at all times be a minimum of THREE (3) and a
maximum of FIVE (5) Trustees in office, provided that if there is
only one trustee as a result of the resignation or death of a co-
trustee, the remaining trustee will only be authorised to exercise
all the powers of trustees for the maintenance and administration
of the trust fund until such time as another trustee has been
appointed”.
Does maintenance and administration also include making
distributions?

18. ANALYSIS OF TRUST DEED CLAUSES – TRUSTEES
 Too much power is placed in the hands of one trustee i.e.
“Notwithstanding anything to the contrary herein contained, for
as long as Mr B acts as a trustee he shall be entitled to veto any
resolution proposed by the trustees”.
“Mr B has the right to act alone in all matters concerning the trust
without consulting the other trustees”.
“Notwithstanding anything to the contrary herein contained, for so long
as Mr B is a trustee he shall be entitled to both a deliberative and
a casting vote in respect of any decision to be made by the
trustees”.

19. ANALYSIS OF TRUST DEED CLAUSES – TRUSTEES
Where the veto right is structured positively in the sense that one of the
trustees (who is also a beneficiary) can overrule the rest then this will
have negative implications with regards to income tax, capital gains tax
and estate duty tax.
Trustees are not afforded the right, or right is limited, to appoint an
alternate trustee in the event of a them being temporarily unable to fulfill
their responsibilities. Where they are afforded this right most trust deeds
are silent on the alternates remuneration.
Trustees are not given the power of assumption i.e. the ability to appoint
additional trustees. Often the deed is worded in such a way that they can
only replace a vacating trustee thereby never being able to add additional
trustees.

20. ANALYSIS OF TRUST DEED CLAUSES – TRUSTEES
 The trustees are also all beneficiaries. In terms of Cameron’s
judgement in Land and Agricultural Bank of South Africa v
Parker the independent outsider;
 No power for the majority of the trustees to remove a trustee.
 No clause allowing a trustee to contract with the trust.
 A trustee immediately ceases to act as a trustee once he/she
has handed in her resignation. Soekoe NO v Le Roux
(Unreported OFSPD case no 898/2007 §28 & 50).
 Actions of a Trustee ratified before the trust came into
existence.
 One trustee has the power to remove trustees from office.

21. 6. ANALYSIS OF TRUST DEED CLAUSES –
ADMINISTRATIVE MATTERS
 Clarity on whether majority decision or
unanimous consent. If silent then it is
unanimous.
 Clarity on what constitutes a quorum. Problems
may arise if the quorum is stipulated in the deed
as a number ie a quorum for meetings of the
trustees shall be two trustees.
 Decisions of the trustees shall be taken on the
vote of the majority of the trustees present at a
meeting at which a quorum is present.

22. 7. ANALYSIS OF TRUST DEED CLAUSES –
DISTRIBUTION OF INCOME DURING EXISTANCE OF
TRUST
 Trustees must have the power to credit
distributed income / capital against a loan
account.
 Trustees must have the power to differentiate
between different classes of income.

23. 8. ANALYSIS OF TRUST DEED CLAUSES –
TESTAMENTARY RESERVATION
The core idea of a trust is the separation of
Ownership from enjoyment. Although a trustee may
be a beneficiary, the central notion is that the person
entrusted with control exercises it on behalf of and in
the interests of another. Therefore the essential
notion of trust law is that enjoyment and control
must be functionally separate. Where the trust form
is employed and there is no separation of beneficial
interest from control and everything is permitted to
remain “as before”, the core idea of the trust is
debased and this may invite abuses of the trust form.

24. SUMMARY OF COMMONLY
FOUND PROBLEM CLAUSES
1. Key terms used throughout the trust deed are not
adequately defined or are incorrectly worded.
2. Incorrect Beneficiaries.
3. Mistakes dealing with the power and authority of
trustees.
4. Insufficient clarity when dealing with administrative
matters.
5. Manner in which income and capital are allocated.
6. Termination date of trust. Pre-emptorary clauses.
7. Control clauses granted to one trustee.

25. QUESTIONS
GORDON STUART
gordons@sentineltrust.co.za
083 650 8613
011 656 2722