1 FUNDAMENTAL CONSIDERATIONS IN THE DRAFTING OF TRUST DEEDS IN BEE TRANSACTIONS 1.1 Introduction 1.1.1 A trust is a legal relationship whereby a person or persons (the trustee/s) hold or administer property (separately from the property of the trustee/s) for the benefit of another person or persons (the beneficiary/ies) or for the furtherance of a specified purpose. 1.1.2 A trust is an extremely flexible legal vehicle and offers a myriad of structuring options in its creation and operation. Whilst trusts may be formed orally, by way of a trust deed or in terms of a will, this summary deals with trusts formed by way of a trust deed. For trusts formed by way of a written instrument such as a trust deed it is a general rule of the law of trusts that a trustee may not carry out any act which is not authorised in terms of that instrument. 1.1.3 Most (but not all) trusts are subject to the Trust Property Control Act, 1988. Back to Top 1.2 Trustees 1.2.1 Most trust deeds provide for the appointment of named trustees and state categories of persons who will be disqualified from acting as trustees (for example insolvent persons and mentally ill persons). The deed should also provide for the circumstances under which the office of a trustee will be vacated and the trustees removed or replaced. 1.2.2 Under the Trust Property Control Act, 1988, appointed trustees may not act in that capacity if they have not been authorised to do so by the Master of the High Court. The Master issues Letters of Authority to trustees who are so authorised. The Master will not grant such authority unless the trustee furnishes security or is exempted from doing so. 1.2.3 For the purposes of BEE, the identity of the trustees of the trust is not taken into account in measuring the BEE status of the trust under the Codes of Good Practice currently in force. Back to Top 1.3 Beneficiaries 1.3.1 The primary intention of a trust is to place certain assets under the control of trustees for the benefit of the beneficiaries named or defined in the trust deed, although trusts can also be established to achieve a certain defined purpose. 1.3.2 The identity of the beneficiaries is the most critical issue in a trust deed for BEE purposes. In order for the company in which a trust holds shares to become entitled to recognise ownership points under the BEE scorecard, all or some of the beneficiaries must be "Black People" as defined in the Broad Based Black Economic Empowerment Act, 2003. 1.3.3 In some trusts, the identity of the beneficiaries is left to the discretion of the trustees. For BEE purposes, the trust deed of such trusts should stipulate that the trust is for the benefit of Black People, perhaps from a certain industry sector or area or as members of an identified group. It is preferable for a trust deed to make it clear as to how the beneficiaries are to be identified, but care should be exercised in defining the beneficiaries to ensure that the definition (and therefore the purpose of the trust itself) is capable of implementation. Example: 1 "Beneficiaries" means Black People who lived in exile in Mozambique before 1994; Example: 2 "Beneficiaries" means students as might be identified by the trustees from time to time who are registered to study law at the University of the Witwatersrand and who are Black People" 1.3.4 A trust deed which defines its beneficiaries as in example 1 above would be exceedingly difficult, if not impossible, to implement. The definition in example 2 works because the trustees have a discretion to nominate the beneficiaries subject to the proviso that they are students registered to study law at the University of the Witwatersrand and Black People. Back to Top 1.4 Object of the Trust One of the essential elements of a trust deed is that it must define the object and purpose of the trust, which may simply be to benefit the beneficiaries. The trustees should be afforded all of the necessary powers required to fulfil the object of the trust. Back to Top 1.5 Distribution of benefits A trust deed may stipulate that the trustees are not obliged to distribute or award the trust property to the beneficiaries, and that the trustees have a discretion as to distributions or awards. Such trusts are commonly known as discretionary trusts. Back to Top 1.6 Possession and ownership of assets The trust assets are possessed and owned by the trustees in their capacity as such, and the trustees are obliged to administer the trust assets for the benefit of the beneficiaries in accordance with the trust deed. Control and management of the trust and its assets vests in the trustees. Back to Top 1.7 Black economic empowerment 1.7.1 It is important for the BEE status of the trust that - 1.7.1.1 the beneficiaries (or a certain percentage of the beneficiaries) are Black People and remain so. Such requirements might be difficult to enforce where the beneficiary is a juristic person as its BEE profile can change. One solution to this difficulty is to place contractual obligations on the named beneficiary and its shareholders/members to ensure that the BEE status of the beneficiary does not change. Another (and, it is submitted, better) way to ensure that a change in the BEE status of a beneficiary does not affect the BEE status of the trust is to define the beneficiaries as Black People, or as juristic persons or other entities which have a certain BEE status, rather than naming the beneficiaries; 1.7.1.2 to the extent that the trust deed allows beneficiaries to transfer their beneficial interests to other persons, the trust deed should stipulate that the transferees are Black Persons or juristic persons or other entities which have a certain BEE status. This document is subject to copyright. ©Cliffe Dekker Inc 2006 Back to Top |