(SELF-STUDY)
TOPIC 2.5: CLOSELY HELD UNDERTAKINGS:
BUSINESS TRUSTS
8. Introduction
Definition of a business trust
Trust Property Control Act (TPCA) defines trust as the arrangement through which:
o The ownership in the property of one person is by virtue of a trust instrument made
over or bequeathed to another person who is the trustee, in whole or in part, to be
administered or disposed of according to the provisions of the trust instrument, for the
benefit of the persons or class of persons designated in the trust instrument or for the
achievement of the objects stated in the trust instrument.
o Side notes: this is the normal definition of the trust where the ownership of a
property is through the trust instrument made over to the trustee to be held
and administered for the benefit of the beneficiaries.
o Part B of the definition also allows for the ownership of property from one person to
by virtue of a trust instrument be made over directly to the beneficiaries designated in
the trust instrument, which is simply placed under the control of the trustee to be
administered for their benefit. This is the so-called “bewindtrust”.
o Summary: So, the definition contains “A”, the definition of an ordinary trust where
the trustee becomes the owner of the asset but manage it for the benefit of the
beneficiaries and “B” the bewindtrust, ito which the trust assets are already owned
by the beneficiaries but they are managed by the trustee for the benefit of those
beneficiaries.
Creation of inter vivos trust
Trusts can be created in either one of two ways namely,
o it can be created in a will and this is called a testamentary trust.
o We are not concerned with testamentary trusts here because business will not
be created in this form.
o A trust can also be created by means of an inter vivos trust
o We will mainly focus on this type of creation. This means that a trust that is
created in life.
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o Contracts for the benefit of 3rd parties
§ That is, it is done by a contract created for the benefit of 3rd parties or
Stipulatio alteri.
• What you have here, is the founder or stipulator and the
Promittens or trustee, they conclude an agreement which
establishes a trust for the benefit of the 3rd party (and the 3rd
party in this case will be the beneficiary).
• The founder of the trust in this case is the stipulator (that is,
the person to whom the undertaking to benefit 3rd parties is
made).
o The founder itself also makes undertakings to transfer
assets to the trustee for the benefit of 3rd parties or to the
3rd parties in the case of a bewindtrust. So, he must
agree to transfer assets and the founder, or the
stipulator must have the intention to create the trust.
• Promittens (the person who makes these undertakings) in most
cases will be the trustee or at least one of the first trustees of the
trust.
o This person must undertake to manage the assets for the
benefit of the beneficiaries.
o Again, this person must have the intention to create the
trust.
o It is accepted that all the initial trustees do not have to
be parties to this agreement so, you can also (in this
initial agreement) agree that a person will become a
trustee from the outset. In that case, the acceptance of
that person will also be relevant before the person will
become a trustee.
o It is even possible that the promittens can be a person
who is “not going to be one of the first trustees”. In
other words, a person who establish a trust but also
agrees to a first trustee who is not a first trustee.
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§ In this case, the trust could already come into
being, but the person would only be become its
first trustee by acceptance.
• The 3rd party or a beneficiary will become a beneficiary on
acceptance.
o For this reason, a contract for the benefit of a 3rd party
will not give rise to the rights for this party unless they
accept those rights.
o An acceptance by the 3rd party would be required before
the party could become party to this agreement. In that
sense, the party will become a beneficiary to the trust.
§ A contract for the benefit of a 3rd party establishes the trust, but one
must be careful to not “equate the trust with a contract for the benefit
of 3rd parties”. It would seem like that because it is established by the
contract for the benefit of a 3rd party, the trust itself is much more than
a mere contract for the benefit of 3rd parties.
o Limits of the contracts for the benefit of 3rd parties
§ One of the limits for this contract is that, the founder and the trustee
cannot be the same person. That is, you cannot simply have one person
who is the founder and trustee because it is a contract. As such, a
person cannot contract with himself.
§ Secondly, one of the important principles of trust law is that “there
must be a separation (in trust law) between the trustee and the
beneficiary”.
• In Land and Agricultural Bank of South Africa v Parker 2005
(2) SA 77 (SCA)
o The court said that the core idea of a trust is the
“separation” of the “ownership or control” from
“enjoyment”.
o Though a trustee can also be a beneficiary, the central
notion is that the person “entrusted with the control”,
exercises it on behalf of and in the interest of another.
This is why a sole trustee cannot also be the sole
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beneficiary. For this reason, you cannot be a sole trustee
and sole beneficiary at the same time.
o For as long as there are other trustees or other
beneficiaries, the same person can also be a trustee or
beneficiary, but you cannot be the “only sole trustee and
beneficiary”
Elements of the definition
o Trust deed or instrument
o A trust deed must be submitted according to the TPCA S4. Section 4 provides
that it must be submitted to the master however it further says that:
§ “Except where the Master is already in possession of the trust
instrument in question or an amendment thereof, a trustee whose
appointment comes into force after the commencement of this Act
shall, before he assumes control of the trust property, upon payment of
the prescribed fee, lodge with the Master the trust instrument”.
• This must be done before the trustee takes control of the trust.
• All amendments of the trust must also be lodged with the
master.
o There is not strong enforcements mechanisms of this
provision and it would appear that the only mechanism
that the master has to enforce this is that he “may
remove” a trustee ito S21(e) or
o that he may force the trustee to submit the trust deed,
but this does not affect the validity of the trust and there
is also no criminal law sanction for not submitting a
trust.
o The TPCA requires a written instrument for purposes of a trust, in other
words, a trust deed.
§ However, for the general rule of the law of trust, a “written trust deed”
is not required. That is, a trust can also be created orally. However, if
an oral trust is created, it would not be subject to the TPCA.
§ For this reason, an oral trust is a valid trust but it is a trust outside of
the TPCA.
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