The Fiduciary Institute of Southern Africa (Fisa) and prominent trust law experts have expressed serious reservations about amendments to the Trust Property Control Act.
The amendments will impose unclear, arduous, and unrealistic burdens on the trustees of trusts and may make criminals of ordinary citizens who are simply trying to do their duty.
The amendments form part of the General Laws (Anti-Money Laundering and Combating of Terrorism Finance) Amendment Bill aimed at keeping South Africa off the Financial Action Task Force’s grey list. The amendments have now been signed into law by President Cyril Ramaphosa.
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The institute and professors Francois du Toit from the University of Cape Town and Bradley Smith from the University of the Free State expressed their disappointment about the changes – which “fly in the face” of existing trust law and the South African law of property in certain crucial respects.
“They are manifestly undesirable,” warn the parties in a submission made to parliament in November last year.
Despite these warnings the changes were “ramrodded” through parliament and signed into law.
Fisa and the trust law professors say they are not denying the fact that trusts can be abused, including used for money laundering and the financing of terrorism.
However, trusts have a vital role in SA, particularly where assets are held and managed for the benefit of vulnerable people such as mentally or legally incapacitated persons, minor children, victims of road accidents and medical negligence, and children from previous marriages who should be protected against the whims of a current or future spouse.
Fisa says the changes confirm its impression that the drafters of the amendments seriously lack understanding of the legal nature of trusts in South African law.
A major concern relates to the inclusion of trustees into the definition of “beneficial owner”.
In our law a trustee, simply by virtue of being a trustee, cannot be a beneficial owner of the trust property.
“The core idea of a trust in South African law is the separation of control and the enjoyment of the trust property. While it is possible in some legal systems that one person can be founder, sole trustee, and sole beneficiary of a trust, this is not possible in South African law,” according to Fisa.
Furthermore, the definition of beneficial owner in the General Laws Amendment Act conflicts with Section 9 of the Trust Act. The section in the latter provides that a trustee “shall act with the care, diligence and skill expected of a person managing the affairs of another”.
Fisa CEO Lois Van Vuren says the duty of a trustee is not to act in their own interest, but in the interest of the beneficiaries.
“This amendment now introduces a totally strange concept – of beneficial owner – into the South African law and includes a trustee in the definition of beneficial ownership.”
It is incompatible with the fiduciary duty required of a trustee, he says.
Another concern raised by Fisa and trust experts is the identification of beneficiaries by name in a trust instrument.
If a beneficiary learns from the disclosure that they are a beneficiary, they can then notify trustees in writing that they accept the benefit.
The consequence is that they can never be removed as beneficiary without their consent.
“This is an undesirable outcome that not only potentially encroaches on the independent discretion required from trustees … but also infringes on the rights of citizens to manage their own affairs in the manner that they choose,” says Van Vuren.
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He explains that beneficiaries do not necessarily know that they are beneficiaries of a trust. Furthermore, beneficiaries of a discretionary trust do not have vested rights in the trust property and may be removed as beneficiaries if such powers have been extended to the trustees by the trust instrument.
However, in terms of the new disclosure requirements people can access public records and learn that they are beneficiaries and notify the trustees that they accept the benefits of the trust. This means they cannot be removed as beneficiary without their agreement.
It appears that the amendments accept that a trust has a legal personality. In the definition of beneficial owner there is reference to “someone who controls the votes of the trustees”. “A trustee in South African law cannot legally be controlled by another person. Any attempt at such control is null and void.”
Better oversight options
Van Vuren says there are alternative ways to achieve the desired oversight without jeopardising the legal position and fiduciary duties of trustees.
The first is not to include a trustee in the definition of beneficial owner. In fact, there is no place for the concept ‘beneficial owner’ in SA trust law.
“The inclusion of the definition seems a convenient and thoughtless solution with no due observance of the nature of the trust form in SA law.”
Fisa says a far better way for law enforcement agencies to understand who the parties that are controlling or benefitting from a trust are is to place appropriate duties of disclosure on the trustee. However, these duties should not place unfair and impractical burdens on trustees.
The institute concludes that with the enactment of the changes there is a risk that they may be overturned by the courts on the basis of irrationality.
Van Vuren says the passing of the legislation saddles “good, honest people with unfair, irrational, and impossible compliance burdens”.