Unit 7

INTRODUCTION TO
TRUSTS: PART 2
 Outcome
• Subcategories of a trust
• Difference between income beneficiaries and capital
beneficiaries
• Identify and explain the key features of trusts in SA
• Discuss the influence of English law on SA trust law

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 Subcategories of Trusts
Under both inter- vivos and testamentary trusts,
there are different types of trusts, including:
1.Ordinary Trusts:
• Also known as simple or standard trusts.
• Trustees have the responsibility of managing
the trust assets and distributing income or
capital to the beneficiaries as per the trust
deed.

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 2. Bewind Trust (Second sub-category of Trusts)
• What is a bewind trust?
The term "bewind" is derived from Dutch and
translates to "management" or "administration" in
English.
 it typically refers to a form of trust management
where a trustee has the legal responsibility to
administer the assets of the trust on behalf of a
beneficiary who does not have the full legal capacity
to manage those assets independently.
set up for individuals who may be minors or
mentally incapacitated

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 To note…..
In a trust structure, the roles of income beneficiaries and capital beneficiaries
are distinct, each receiving different benefits from the trust assets:
Income Beneficiaries
• Income beneficiaries are entitled to receive income generated from the trust
assets during the term of the trust. This income can come from interest,
dividends, rents, or other earnings produced by the trust assets.
• Often, the distributions to income beneficiaries are made annually, quarterly,
or monthly, depending on the terms of the trust.

Capital Beneficiaries
• Capital beneficiaries have rights to the principal or capital of the trust, usually
after certain conditions are met, such as the expiration of the trust term or
the death of the income beneficiaries.
 does not typically receive regular income distributions but is entitled to
the remaining assets or the "remainder" once all other obligations of the
trust have been fulfilled

NB!!!!!!In some trusts, a person can be both an income and a capital

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 Example 1: Family Trust

• Scenario: A grandfather establishes a trust with his stock portfolio

valued at $1 million. He designates his children as income
beneficiaries and his grandchildren as capital beneficiaries.
• Income Beneficiaries (Children): The children receive all
dividends generated from the stocks. If the stocks earn $50,000 in
dividends annually, this amount is distributed among the children
either equally or according to a specified formula in the trust deed.
• Capital Beneficiaries (Grandchildren): Upon the grandfather's
passing, or after a specific time period designated in the trust deed
(e.g., 20 years from its establishment), the stocks themselves (the
capital) are distributed to the grandchildren, either by transferring
the shares directly to them or by selling the shares and distributing
the proceeds.
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 Example 2: Charitable Trust

• Scenario: A wealthy individual sets up a charitable trust to

support environmental causes, with an NGO as the income
beneficiary and a university as the capital beneficiary.
• Income Beneficiaries (NGO): The trust generates income
through investments in green bonds and eco-friendly stocks.
The annual income from these investments is used to fund
the NGO’s projects, like reforestation and wildlife conservation
annually.
• Capital Beneficiaries (University): After a defined period,
say 30 years, the principal amount of the trust is given to the
university to establish a scholarship fund for students
studying environmental science.
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 Example 3: Real Estate family
Trust
• Scenario: A parent establishes a trust with several
rental properties to manage and distribute the benefits
among their children differently.
• Income Beneficiaries (Younger Children): The net
rental income from these properties, after expenses, is
distributed monthly to the younger children who are still
in college and need regular financial support.
• Capital Beneficiaries (Older Children): Once the
younger children have graduated, or after a set period
such as 10 years, the properties are either sold or
transferred to the older children who are established
and
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Special features of trusts in South
Africa
• The founder/settlor must either:
a. Have handed over control of the trust property to the trustee, or
the founder of the trust has directly transferred the control and
management of the trust property to the designated trustee. This is a
straightforward method of establishing a trust.

b. Have bound him/herself or some other person (eg. executor) to

hand over control, or
 in some cases, the founder may not have physically handed over
control of the trust property to the trustee yet but has made a legally
binding commitment to do so. This can be achieved through a trust
document, will, or any other legal instrument.

c. Must be bound in some other way (eg. court order, statute) to hand
over control.
In certain situations, the founder may be legally obligated to transfer
control of the trust property to the trustee due to external factors,
such as a court order or a statute governing the establishment and
administration of trusts.
 To note…
• The founder must take the necessary legal steps to
ensure that control over the trust property is appropriately
handed over to the trustee, whether it's through:
a. direct transfer,
b. binding commitments, or
c. legal obligations.
(trust deed/ trust document)
• This helps establish the trustee's authority and fiduciary
duty to manage the trust assets in the best interest of the
beneficiaries.

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Transfer of ownership….
• If the founder is the owner of the property that is intended
to be transferred to the trustee, there are several ways in
which the transfer of ownership can take place:
a. Complete Transfer of Ownership
The founder can choose to transfer full ownership of the
property to the trustee.
In this scenario, the trustee becomes the sole owner of the
property, and the founder no longer has any ownership
rights over it.
This type of transfer is typical in irrevocable trusts, where
the founder relinquishes control and ownership permanently.
 b. Partial Transfer of Ownership
The founder may also decide to transfer partial ownership
of the property to the trustee.
This means that both the founder and the trustee become
co-owners of the property.
The extent of ownership for each party is usually specified
in the trust document or deed.
This method is more common in revocable trusts, where
the founder retains some level of control over the trust
assets during their lifetime.

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 c. Retaining Ownership with Beneficial Interest
In some cases, the founder may choose to keep full
ownership of the property but establish a trust where the
trustee holds the property for the benefit of specified
beneficiaries.
In this situation, the trustee manages the property and
ensures that the beneficiaries' interests are protected, but
legal ownership remains with the founder.
This arrangement is more commonly seen in certain types
of trusts like asset protection trusts.

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 In the case of a bewind trust, ownership must be
transferred to the beneficiary, with control transferred to
the trustee.

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 To note…
• The choice between these options depends on the specific
objectives of the trust, the nature of the assets involved,
and the preferences of the founder.
• Each approach has its advantages and disadvantages in
terms of control, taxation, and asset protection, so it's
essential for the founder to consider their individual
circumstances and consult with legal and financial
advisors to determine the most appropriate method of
transfer for their needs

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 The trustee….
• The trustee must hold and administer the trust
property for the benefit of some person or object
other than him/her/itself. ie. separation of
ownership/management from enjoyment of the
assets.
• the trustee may be a beneficiary, but not the sole
beneficiary.
(the founder cannot be a beneficiary)
• The trustee may be held to account for the
exercise of his/her/its duties.
• The trustee cannot be a ‘puppet’. He/ she/it must have
some independence of both the founder and the
beneficiary.
• In a properly structured trust, the trustee should not be
a mere puppet or under the complete control of either
the founder (also known as the settlor or grantor) or the
beneficiary.
• The trustee's role is to act as a fiduciary and carry out
their duties with a high level of independence, loyalty,
and impartiality to all parties involved.
• The trustee's independence is essential to ensure the
proper administration of the trust and the protection of
the beneficiaries' interests.
 Key aspects of the trustee's independence:

1. Fiduciary Duty
 The trustee has a fiduciary duty to act in the best interests of the beneficiaries and
to manage the trust assets diligently.
 This duty requires the trustee to act impartially, avoiding conflicts of interest, and
making decisions solely for the benefit of the beneficiaries.

2. Discretionary Powers
 Many trusts grant the trustee discretionary powers, allowing them to make
judgment calls on certain matters affecting the trust.
 This discretion enables the trustee to adapt to changing circumstances and varying
needs of the beneficiaries while remaining independent in their decision-making.

3. Legal Obligations
 Trustees are bound by the laws and regulations governing trusts in their jurisdiction.
 These legal obligations help ensure the trustee operates within defined boundaries
and acts independently, following the guidelines set forth by the law.

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 4. No Self-Dealing
A trustee should not engage in self-dealing, meaning they cannot use the trust
assets for their personal benefit or gain.
This prohibition ensures the trustee remains independent and avoids conflicts of
interest.

5. No Undue Influence
A trustee should not be unduly influenced or controlled by either the founder or
the beneficiary.
Their decisions should be based on objective factors and considerations rather
than external pressure.

6. Record Keeping and Reporting

The trustee is responsible for keeping accurate records of trust transactions and
providing regular and transparent reports to the beneficiaries.
This practice ensures accountability and reinforces the trustee's independence.

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 Trusts in SA are part of public law….
• In South Africa, a trust is an institution of public law,
subject to the control of the courts and of the Master of
the High Court. (Note that South Africa is unusual in this
respect).
• in South Africa, trusts are regarded as institutions of public
law and are subject to the control of the courts and the
Master of the High Court.
This means that the state exercises some level of control and
oversight over trusts, and the Master of the High Court plays a
significant role in supervising the administration of trusts.
• This makes the trust administration in South Africa
somewhat unique if not unusual compared to other
jurisdictions.
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 • In most common law jurisdictions, including the United
States, the United Kingdom, Canada, Australia,
Singapore, Hong Kong, New Zealand, and many
others, trusts are considered part of private law.
 trusts are typically seen as private arrangements
between the settlor (founder), the trustee, and the
beneficiaries.
The courts play a role in resolving disputes related
to trusts, but the overall administration and control
of trusts are not under significant public law
regulation.
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Raath v Nel 2012 (5) SA 273
(SCA)

• At para [13]: “... a trust estate, comprising of an

accumulation of assets and liabilities, is a separate
entity, albeit bereft of legal personality. ... the core
concept of a trust is the separation of ownership or
control from enjoyment...”
• [14]: ... “the separateness of the trust estate must
be recognised and emphasised, however
inconvenient and adverse to the respondent it
may be.”
SA Trusts and English Trusts
 The comparison
• SA trust law is a ‘child’ of English trust law, but
has developed significant unique features.
(Beware of using English cases as authority in
South Africa.)
a. The legal position of the beneficiary:
• An English-law beneficiary has an ‘equitable
interest’ in the trust property – a type of
ownership that allows vindication of the
property from someone to whom the trustee
has improperly transferred it.
• At best, a South African beneficiary has only a
delictual claim against a trustee who has
b. The oversight of the Master:

• All SA trusts are required to be registered

with the Master of the High Court and are
subject to the Master’s control and
oversight.

• English trusts (except charitable trusts) are

entirely private instruments, with no official
oversight.
c. Irrevocability

• For a SA trust to become irrevocable, the

beneficiary must know that s/he is a
beneficiary and must accept the
(potential) benefit.
• In English law, an irrevocable trust can
be created without the beneficiary
having any knowledge of it.
d. Position of trusteeship upon death of a trustee

• English trustees are ‘joint tenants’ of the trust

property, so if one dies the trusteeship (and the
trust property) passes automatically to the
surviving trustee(s).
This concept is called the right of survivorship
The surviving trustee(s) continue to hold and
manage the trust property without the need for
probate or any formal transfer of ownership.
 • In SA, the trusteeship dies with the individual
trustee, and the executor is then bound to
transfer ownership of the trust property to the
remaining trustee(s).
 there is a separate administration process
involving the deceased trustee's estate, and
the transfer of their portion of ownership in
the trust property to the surviving trustee(s) is
subject to the usual probate or estate
administration procedures.
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e. Liability to creditors

• In English law, trustees can be held

personally liable for the trust's debts and
obligations.
If the trust becomes insolvent or fails to
meet its financial obligations, creditors
have the option to sue the trustee
personally.
This means that the trustee's personal
assets are at risk of being used to satisfy
the trust's debts.
However, the trustee has the right to
 • In South Africa, a trust is treated as a separate
legal entity from the trustees.
As a result, the trust's creditors must sue the
trustee in their capacity as a trustee, not
personally.
The trust assets are considered the primary
source for satisfying the trust's debts and
obligations.
Creditors can execute against the trust assets
to recover what they are owed.
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 Question...
• In your opinion, which legal framework
better protects the interests of
beneficiaries in trust matters: the
equitable interest approach in English
law or the delictual claim in South
African law? Consider the fairness,
effectiveness, and efficiency of each
system.
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