It is trite that the following requirements must be met before a trust is established in South African law:
- The founder of the trust must intend to create a trust;
- The founder’s intention must be expressed in a manner appropriate to create an obligation;
- The property subject to the trust must be defined with reasonable certainty;
- the trust object, which may be either personal or impersonal, must be defined with reasonable certainty; and
- The trust object must be lawful.
These requirements are not contained in the Trust Property Control Act, 57 of 1977, and it is accordingly possible to register a trust with the Master’s office which does not meet the above requirements. How a court should go about determining in which circumstances the above requirements have not been adhered to and a valid trust had not been created has been the subject of substantial academic debate, as the financial effect of a trust being deemed to have never been created could be severe.
In Humansdorp Co-operative Limited v Wait and Others (unreported case number: 2896/2012) ("Wait") the Eastern Cape Division of the High Court had the opportunity to provide some clarity on the above ambiguities. The plaintiff obtained judgment against Mr CF Wait, a founder and discretionary income beneficiary of the Wait & Wait Family Trust (the "Wait Trust"), for an amount of R619 982.36. When the plaintiff failed to obtain payment of the judgment amount, the plaintiff instituted action to declare the assets of the Wait Trust liable for attachment to satisfy the judgment obtained against Mr CF Wait.
The plaintiff argued that the Wait Trust never came into being de jure, based on the Trust deed and the applicable law, and the assets held by the Wait Trust were still held by Mr CF Wait. The Trust Deed provided that the trust must at all times have two trustees. At the relevant times, the Wait Trust had three trustees, Mr CF Wait, his wife and an independent trustee. The Trust Deed however provided that any decision of the trust must be a decision of the majority of the trust, provided that Mr CF Wait is part of said majority.
Van Papendorp AJ in reaching the decision of the court confirmed that a failure to meet any of the requirements for a valid trust, results therein that no trust is established. She then explained that the measure of independence of a trustee is part of the persuasive means to determine whether a valid trust had been created. If the founder of a trust does not relinquish control of the trust property or fails to clothe the trustees with the required level of independence in the trust deed, the trust will be declared a sham and the assets will remain part of the founder’s estate. The founder of a trust must accordingly at minimum divest himself of the trust property and any control of the trust property that he retains must be to the benefit of the beneficiaries of the trust.
Based on the courts construction of the Trust deed, the court concluded that the Wait Trust is an example of the newer types of trusts described in Nieuwoudt NO and Another v Vrystaat Mielies (Edms) Bpk. 1 All SA 396 (SCA) as follows:
this case is typical of a newer type of trust where someone, probably for estate planning purposes or to escape the constraints imposed by corporate law, forms a trust while everything else remains as before.
As Mr CF Wait, despite creating the trust, retained effective sole control over the trust assets, the court concluded that no valid trust had been created and the trust assets remained part of Mr CF Wait’s estate. The trust assets were therefore liable for attachment in order to satisfy the judgment debt of the plaintiff.
This case should be seen as a warning, that the failure to relinquish enough control over trust assets could lead to a court finding that no trust has been created, and the founder or another person could be deemed to be the owner of the assets with the attaching financial and other consequences. Care should therefore be taken when creating a trust and drafting a trust deed to ensure that the trustees have the requisite independence and freedom to act in the best interest of the beneficiaries of the trust and that control over the trust assets are relinquished by the founder, to ensure that a valid trust is created.