Anthea Stephens, Senior Associate, based in Cape Town discusses whether a trust can be a beneficiary of another trust. This article was first published in the attorneys’ magazine, Without Prejudice.
The practice has evolved in the drafting of deeds, wills and conveyancing documentation to treat a trust as a person. The question as to whether or not this is correct in law gives rise to a number of other questions that need first to be considered before we can reach a conclusion. First, who is eligible to qualify as a beneficiary of a trust, and what are the qualifying characteristics of a trust beneficiary? In order to answer this, we need to examine the essential elements that must be in place in order for a valid trust to have been constituted. Understanding and applying the trust form correctly is important because of the legal consequences that may flow from the nature of a transaction under which property is received or disposed of.
One of the essential ingredients for the formation of a valid trust, is certainty of objects. “Objects” in this context means beneficiaries. Thus, a trust other than a charitable trust, has to have a person as a beneficiary in order to have certainty of “objects”. This is supported by the Trust Property Control Act 57 of 1988, which defines a trust as an “arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed … to the beneficiaries designated in the trust instrument, which property is placed under the control of another person, the trustee, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument.”
In order to understand whether a trust could be a beneficiary, it is therefore necessary to understand the nature of a trust.
What is it?
A trust is simply a legal arrangement through which someone (a person or persons, juristic or otherwise) holds or administers property separately from his own for the benefit of another person or persons, the beneficiaries, or for the furtherance of a charitable or other purpose. A trust has no legal personality of its own.
Although the definition of a person contained in the Income Tax Act 58 of 1962 includes a trust, this merely affords it legal personality for the purposes of this Act. In the absence of statutory definition, a trust does not have a separate legal identity.
The South African courts have confused matters even more. Crookes v Watson established the legal principles for the inter vivos trust in South African law. In this case the Appellate Division held an inter vivos trust to be a contract between the founder and the trustee in favour of the beneficiary, otherwise known as a stipulatio alteri or contract in favour of a third party. Although this judgment has been widely criticised, this is accepted as the current legal position in South Africa. The court in this case reduced the trustees’ fiduciary duty to a contractual relationship between the trustees and the potential beneficiaries. The case turned on the relationship between trustees and beneficiaries, and collateral damage arising from the judgement was the unfortunate cramming of the trust form into a mould that was not properly shaped for it.
Corbett took the first step towards emphasizing the distinctiveness of a trust as something unique in the case of Braun v Blann & Botha. In this judgment he held a trust to be a unique legal institution which is sui generis and distinct from any other entity in South African law. Although this judgment was made in relation to testamentary trusts, it carried with it a ray of hope for the recognition of the trust form as a unique entity. Thirty five years later, we are still holding out for a satisfactory categorisation. Be that as it may, under any characterisation, a trust is not a person
Trust deeds often include as a beneficiary, any trust of which one or more of the beneficiaries of the trust is a beneficiary. This is not possible, as a trust is not a person. A trust that has been formed purely for the purpose of benefiting another trust and in which the beneficiary was defined as a trust, would therefore lack one of the essential elements of a trust, being certainty of the object of a trust, namely the beneficiaries. A trust cannot come into being without a valid beneficiary.
Where there are other named beneficiaries, the trust would still be valid (provided the other essential elements were in place). Strictly speaking one would not, however, be able to make distributions to a trust that is included as a beneficiary in a trust deed.
In order for a trust to make a “distribution” of its assets to another trust, a “pour-over” provision would need to be included in the trust deed. This provision would give the trustees the power to appoint trust assets to another trust, usually of which at least one of the beneficiaries of the original trust is a beneficiary of the new trust. It is important to note that in the absence of such power of appointment, which is carefully worded, a trustee cannot simply appoint trust property to another trust that is named as a “beneficiary” of the trust.
Similarly, and perhaps even more importantly, when assets are bequeathed under a will to a testamentary or existing inter vivos trust, the bequest must be made not to the trust, but to the trustees in their capacity as trustees. If a bequest to a trust (as opposed to the trustees) were challenged, it could very well result in being found to be an invalid bequest. The danger is that if this situation were to arise, in the absence of any other named beneficiaries, the estate would devolve on the intestate heirs.
While it is probably likely that a court would try its best to give effect to the intention of the testator of a will, or settlor of a trust, it is not worth taking this risk. It is all in the drafting, and in this case “all” could very well mean one’s entire estate!
 Crookes and Another v Watson and Another 1956 (1) SA 277 (A)
 Braun v Blann & Botha 1984 (2) SA 850 A