Lessons from some recent trust cases

Lessons from some recent trust cases

In the past year or so several decisions by the High Court and the Supreme Court of Appeal have been of interest in the trust field. It’s questionable whether any of them have made new law, but they are of interest.

I start with Potgieter and Another v Potgieter , familiar to all of us I’m sure, but it was cited in a couple of the cases I’ll be discussing in this article. In any event, it provides a few lessons worth repeating, not least the danger of using templates from your precedent bank without carefully reading them.

Mr Potgieter established a trust in 1999 with his two then minor children as the capital beneficiaries. The preamble to the trust deed provided that the beneficiaries (the minor children) had indicated their acceptance of the benefits conferred upon them. The trust deed empowered the trustees to amend the capital beneficiaries but only during Mr Potgieter’s lifetime and then only in favour of descendants of the children or members of Mr Potgieter’s family. Four years later the Potgieter marriage foundered and a new Mrs Potgieter entered the scene. In 2006 the trust deed was amended as a result of which the minor children, who by this time had attained majority, lost their exclusive status and were joined as potential capital beneficiaries by the three children of the new Mrs Potgieter by her previous marriage. The vesting date was amended as well, from (at the latest) the date on which the younger of the two capital beneficiaries turned 25, to a date to be determined by the trustees. Mr Potgieter died in 2008, after which it seems that his two children became aware of the amendments.

They contested the validity of the amendments on the grounds that as capital beneficiaries they had not consented to them. The respondents, being the new Mrs Potgieter, her children and the attorney who had drafted the trust deed and was also a trustee (and more about him anon) contended that at the time of the amendments the original beneficiaries had not yet accepted their benefits. The trust deed, according to this argument, was a stipulatio alteri. Consequently it was not necessary for them to consent.

The children relied on the acceptance recorded in the preamble and argued that, because they had still been minors at the time, their father, in signing the trust deed had been acting as their natural guardian and had accepted on their behalf. In answer to this the attorney deposed that the pronouncement in the preamble was no more than “a vague and loose statement” without meaning and never intended to form part of the document. It had unintentionally found its way into the document because he had slavishly copied a precedent. The court had short shrift with this submission and found that, astute businessman that Mr Potgieter was, when he initialled each page of the trust deed he must be taken to have accepted each element of the document.

The court a quo had found for the children but had then made what it called an “equitable” decision to divide the assets five ways between the respective children. The SCA found no basis for this decision and granted judgment entirely in favour of Mr Potgieter’s aggrieved children.

Lessons: Check your precedents;

A trust deed is a stipulatio alteri until the beneficiaries accept the benefits.

Grainco (Pty) Ltd v Broodryk NO en Andere offers an interesting contrast with the 2004 SCA decision in Nieuwoudt v Vrystaat Mielies (Edms) Bpk . Much of the argument revolved around whether a particular cheque was a liquid document and also whether the National Credit Act, 2005 applied. For our purposes, however, the relevant factors are that a trust owned a farm operated by one of the two trustees, the son of the other trustee, his 82-year-old mother. The son incurred a debt with the plaintiff in the name of the trust in the course of the farming operations. The plaintiff sought provisional judgment against the trust, in response to which the respondents took refuge in a provision of the trust deed that any decision of the trustees had to be unanimous, although they were empowered to authorise one or more of them to sign any document relating to the business of the trust. The mother had not expressly approved the transaction in question.

Evidence before the court indicated that the son had for many years conducted the business of the trust with the plaintiff and other entities. It would be naïve to accept that the son consulted and obtained the approval of his mother every time he transacted on behalf of the trust. The inescapable inference was that the son had a general authority from his mother to conduct the business of the trust. Judgment went for the plaintiff.

In re Heydenrych Testamentary Trust and Others produced no new law but confirmed that the courts may use their power under section 13 of the Trust Property Control Act, 1988 (TPCA) to amend provisions of trust deeds that are in conflict with the Constitution. We have, of course, several recent decisions in this area relating to funds established for students at the universities of Cape Town and Kwazulu-Natal respectively.

The first of the four charitable testamentary trusts in question was that of the late Mr B J Heydenrych. He executed his will in 1943, when according to the mores of the times it perhaps wasn’t repugnant to provide for financial assistance limited to “European boys of good character of the Protestant faith…at least one half [of whom]…shall be of British descent” to qualify for the civil service or as pharmaceutical chemist.

The second was that of Dorothy Helen Houghton, who in her will executed in 1989 provided for bursaries for two or more boys of the white population group to attend Oundle School in England followed by tertiary studies at Oxford or Cambridge, in both instances funds permitting. If it ceased to be possible to send boys to Oundle School, St Andrew’s College in Grahamstown or any other South African School with the same aims and objectives as Oundle would be acceptable.

The third trust was the George King Trust, established under the will of George King, who had executed his will in 1987. It provided for financial assistance to enable promising music students of good character in needy circumstances to study at the University of Cape Town, provided that the recipients, selected by the university, were “members of the white group of Protestant faith”.

The Women’s Legal Centre was joined as amicus curiae, and it provided evidence of research it had carried out relevant to the matters in issue. As to the Heydenrych trust, it found that women remain under-represented amongst students who qualify in chemistry, while in the civil service women are over-represented in the lower levels and under-represented in senior positions. Regarding the Houghton trust, Oundle School had been co-educational since 1990, and both Oxford and Cambridge admit women. The judgment does not refer to any comment by the Centre on the King trust, perhaps because its provisions are self-evidently unacceptable.

The court had to consider whether it had the power to vary the respective trust provisions under section 13 of TPCA, which provides that the court may delete or vary or make any order in respect of any provision if it finds that the founder:

• did not contemplate or foresee; and which

• hampers the achievement of the objects of the founder; or

• prejudices the interests of beneficiaries; or

• is in conflict with the public interest.

Evidence was led that it was scientifically impossible to differentiate any two individuals into distinct racial subspecies. Hence, there was currently no white group in South Africa. So “European” and “white” were offensive, arbitrary and an undefined and meaningless concept. Thus these references in the Heydenrych and King trusts were unacceptable. As for “British”, the SCA had already decided in Curators, Emma Smith Educational Fund v University of Kwazulu-Natal that the constitutional imperative to remove racially restrictive clauses that conflict with public policy takes precedence over freedom of testation.

As for the Houghton trust, the fact that the testatrix limited the class of beneficiaries to boys was understandable insofar as Oundle was a boys’ school at the time she executed her will. However, the fact that it had later become co-educational rendered that provision unfairly discriminatory. Finally, Mr Heydenrych could not have foreseen in 1943, firstly that women would actually enter the field of chemistry and secondly would one day comprise a major element of the civil service staff complement. Given that, following City Council of Pretoria v Walker , there is no need to prove an intention to discriminate in order to prove unfair discrimination, it followed that the innocently included provisions of the Heydenrych and Houghton trusts were discriminatory and liable to be varied.

The same arguments applied to the Heydenrych and King stipulations about the Protestant faith.

In re BOE Trust Ltd & Others BOE was appealing against a High Court decision on the Jean Pierre de Villiers Trust, created in terms of the will of the late Mrs DB de Villiers in memory of her late husband, a leading applied chemist. After providing for the care of a domestic assistant, the will stipulated that the remaining income should be used for small bursaries to assist white MSc graduates in organic chemistry from any of four nominated universities to pursue doctoral studies overseas, provided they returned to in South Africa for a period decided by the trustees. She retained this stipulation despite her sister’s written warning that it might not be given effect to because it was discriminatory. The testatrix nevertheless retained the provision. She also provided that, should it for any reason become impossible to carry out the terms, the income of the trust was to be distributed equally between a number of named charitable organisations.

Predictably, the four universities declined to participate, which led BOE to apply to the High Court for removal of the word “white”. The High Court refused to delete the word “white” on the grounds that the testatrix had, by contrast with the Emma Smith situation, foreseen the possibility that the bursary bequest might prove impossible to carry out, and had included the specific alternative bequest to the charities in this event.

On appeal to the SCA, BOE contended that “impossible” in this instance meant objectively impossible, such as an absence of qualifying candidates, not because the universities concerned would not accept the restriction to white graduates. The SCA rejected this argument, finding that the testatrix, being aware of the possibility that the universities might decline to participate, had made specific provision for that eventuality. In confirming the freedom of testation principle, the court stated that failure to do so would “fly in the face of the founding constitutional principle of human dignity”, which “allows the living, and the dying, the peace of mind of knowing that their last wishes would be respected after they have passed away”. Consequently, because the universities made it impossible to carry out the main provision, the second came into operation.

Comment: An unacceptable discriminatory provision in a trust deed does not of itself entitle the courts to amend the provision.

Pancoal & Another v Wurdeman & Others dealt with the consequences of a breakdown in relationships between trustees. Two of the trustees had paid about R508 000, partly to their own attorney and partly to the trust’s attorney. The payments were made without the blessing or at the instance of the other two trustees, who applied for an order requiring repayment of the amount into the trust’s bank account. Pending resolution of this dispute, both parties applied for orders regarding future administration of the trust. The applicants wished that, in order to be valid, all decisions be made unanimously, while the respondents strove for majority rather than unanimity. The judgment doesn’t describe what the provisions of the trust deed are, but one can infer that they differ from these blanket requests. The court found that there was before it no valid reason to make an order beyond the terms of the trust deed. For it to do so, the court would have to act in terms of section 13 of the TPCA, which was discussed above relating to the Heydenrych, Houghton and King trusts. In the absence of evidence of any of the conditions catered for in section 13, the court declined the invitation.

Comment: mere inconvenience, or a desire to achieve a particular aim, will not of themselves persuade the court to override the terms of a trust deed.

Raath v Nel illustrates the fact that when you establish a trust, ownership and enjoyment are separated, and sometimes this can have unexpected consequences. Mr Nel was a dynamic and successful businessman and game farmer. The court described him as “the quintessential self-made man”, whose business philosophy was to maintain a hands-on approach in respect of all his businesses. Small wonder, then, that his businesses, especially Koos Nel Auto, which seems to have been the core business in his interests, suffered serious setbacks as a result of his grave deterioration as a result of the negligence of Dr Raath, the anaesthetist who had attended to him during an operation on 1 May 2000. Mr Nel sued Dr Raath for compensation for future medical expenses general damages and, the crucial aspect of the case, about R1,6 million for loss of income during the period from May 2000 to March 2003, until he recovered from the serious physical and emotional deterioration that had blighted his personal and business life after the operation.

Unfortunately for Mr Nel, on 1 April 2001 Mr Nel had sold his shares and loan account in Koos Nel Auto to the Koos Nel Trust, which he had established for estate planning and estate duty considerations. The R1,5 million loss of income was based on the losses of Koos Nel Auto. However, it was the trust and not Mr Nel that had suffered the loss. The court found that Mr Nel’s loan account with the trust would have increased by some R645 000 and awarded him this amount instead of the R1,6 million he had claimed.

Comment: The fallacy of the belief that establishing a trust has only positive implications is illustrated.

The most recent decision is GP Groeschke v Trustee, Groeschke Family Trust and Others . Three questions were in issue in this case: is it necessary to apply to the Master for approval to amend a trust deed; may a trustee be a beneficiary; and what is the effect of a sole trustee becoming the sole beneficiary? Seven years after the date of a trustees’ resolution removing him as a beneficiary, and three years after the death of his father the founder of the trust, the founder’s son challenged the validity of the resolution as an amending instrument. His argument was that the resolution was no more than an expression of intent; that an amendment must be by application and must be effected in the trust deed itself.

The resolution consisted of several changes to the trust deed, only the first three of which are here relevant:

1. That a certain Benigna Offwood be appointed as alternative trustee;

2. That the applicant be removed as a beneficiary;

3. That the founder be appointed as the capital beneficiary.

The court considered the validity of the resolution by starting with the principle that a trust deed is a contract akin to a stipulatio alteri. There was nothing before the court to show that the applicant had accepted the benefit of a beneficiary under the trust. The power of the founder to amend the trust deed during his lifetime was not in dispute.

Section 4(2) of the TPCA stipulates that when a trust deed is varied, the trustee must lodge the amendment with the Master. However, this does not mean that the failure to do so or delay in doing so invalidates the amendment until it has been lodged, as contended for by the applicant. In any event, the parties agreed that in due course, the date of which is uncertain, the resolution had been lodged with the Master.

The applicant then submitted that the court should construe the paragraphs of the resolution discretely and not as part of one multifaceted amendment. Thus, if the appointment of Offwood was found to be invalid it would invalidate the rest of the paragraphs. The court rejected this submission as “entirely inappropriate”. There were further arguments involving the appointment of Offwood, who seems in due course to have been appointed as executrix of the founder’s deceased estate, but the main point that emerges from the decision is that, provided the trust deed provides for its amendment, it is not necessary for the Master to approve it, and neither does the validity of the amendment depend on its submission to the Master. Lodgement is an administrative requirement imposed by the TPCA, not a condition of validating the amendment.

The court found that, although it isn’t satisfactory for the sole trustee to be the sole beneficiary, if this happens through intervening circumstances it doesn’t invalidate the trust.

Still unresolved is how a discretionary beneficiary accepts the benefits. In Ras & Others v Van der Meulen & Another the SCA confirmed that only a beneficiary may apply for the removal of a trustee, not, as decided by the High Court, if the person has only “sufficient interest in the matter”. The dispute between the parties was whether Van der Meulen had been properly removed as a beneficiary despite her not being party to the resolution. The trustees averred that she had never accepted the benefits, which she denied, claiming that by her actions, although not by formal acceptance, she had accepted the benefits. The SCA referred back to the High Court the dispute about her status. We await the resolution of this dispute with interest. The basis on which the court decides whether or not she did accept the benefits might resolve the uncertainty.

November 2013