In this the third part of a series on Estate Planning, Rory McFarlane of Durban attorneys Shepstone and Wylie, explains the unique legal status of trusts.
Estate planning has become important for many people who appreciate the need to protect their families and loved ones by ensuring the correct distribution of their assets upon their death and, hopefully, avoiding the often unnecessary payment of estate duty.
Trusts, whether formed during your lifetime (inter-vivos trust) or on death (testamentary trust) have been promoted as an ideal vehicle for estate planning.
Many people associate a trust with a company or close corporation but in fact trusts are unique in law.
Companies and close corporations have a separate legal personality they are regarded as a legal entity independent of their directors or members but after many years of intense legal debate, it was decided that neither the inter-vivos nor the testamentary trusts possess legal personality.
A trust is formed when a founder or settlor hands over to another person (the trustee) the control of property which is to be administered by the trustee for the benefit of a third person (the beneficiary). It is the trustee and not the trust who owns trust property. But the trustee only owns the property as a trustee for the benefit of the beneficiary and not for personal benefit.
The result is that the trustee, or trustees, who are responsible for controlling and administering trust property will enter into contracts such as the purchase and sale of property for the trust, will sue on behalf of the trust and will generally carry on any business for the trust. For example, if the trustees decide to use trust capital to purchase a property for the trust, they would negotiate the purchase and they (in their capacity as trustees) and not the trust, would be registered as the owners of the property. The fact that the trustees may change from time to time is irrelevant.
It is important to understand that the person who acts as trustee acts in two capacities at all times. As a trustee he holds an office and within the ambit of his trusteeship all his actions are related to that office.
At the same time he remains a private individual with rights, obligations and property which are unrelated to the trust which he administers. His official actions as trustee are completely separate from his private circumstances.
For example, if a trust were to become insolvent for any reason, the trust's creditors could not look to the trustee's private property to satisfy their claims they are restricted to the property owned by the trust, that is, property registered in the trustee's name in his capacity as trustee. The trust assets, provided they are registered correctly, cannot be regarded as part of a trustee's personal insolvent estate.
A trustee who allows his personal estate to become insolvent is probably not a fit person to be handling the affairs of others and for this reason, our law empowers the Master of the High Court to remove a trustee from his office if his personal estate is sequestrated, liquidated or placed under judicial management.
Although a trust does not possess a separate legal personality, in certain circumstances our law does regard a trust as a legal person! However, this is only in specific situations. For example, for income tax and transfer duty purposes, a trust is included in the definition of a "person". But these definitions are exceptions, rather than the rule.