The importance of wording in trust deeds

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After the British annexation of the Cape Colony in 1806 a unique law of trust was developed which has its origins in English law and is based on Roman Dutch legal principles.

Today the Trust Property Control Act, 57 of 1988 governs some but not all of the legal aspects relating to trusts. Some aspects of trusts are still governed by our common law as will be referred to below.

This article will focus on the inter vivos trust, being a trust created during the lifetime of a person, and not the mortis causa trust which is created in terms of a person’s will and comes into existence after death.

Nature of trusts

There are many reasons why someone would prefer to create a trust. It could be for purposes of protecting or managing assets, continuity in respect of ownership of assets or tax considerations. The list goes on.

In most cases the founder (the one wishing to set up a trust) will approach a trust practitioner, such as an attorney for example, to attend to the drafting of a trust deed and the registration of the trust at the relevant office of the Master of the High Court.

The trust deed will be the founding document for the operation of the trust, and it will, in addition to the founder, also indicate the trustees who will manage the trust assets and the beneficiaries who will benefit from the trust assets. The trust deed is then signed by the founder and trustees and submitted to the Master for registration.

Trust deeds are therefore agreements, and the interpretation thereof is governed by our law of contract. Trusts can also be viewed as institutions of public law since the Master plays the role of supervisor in respect of the creation of trusts and how trustees manage trust assets.

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The Schoonhoven case

It must be emphasised that the trust deed is a written contract and as such, as in the case of all contracts, the wording thereof is of fundamental importance. The wording of the trust deed was the bone of contention in the case of Schoonhoven N.O and Others v Schoonhoven and Others.

The Schoonies Familie Trust was created in 1998 by Mr Schoonhoven, who has since passed away in 2015. At the time of bringing the court application, the trust allegedly owned assets in the vicinity of R700m to R800m.

On one side of the dispute were the trustees, being two sons and an adopted son of the deceased (the applicants) and on the other side was the other son of the deceased (the respondent). For sake of brevity, the other respondents will not be referred to in this article.

It appears that a feud had been raging in the Schoonhoven family for years and that this case had not been the first time the family members had resorted to litigation. In this case, the applicants approached the court for an order declaring that the trustees had the power to choose the capital beneficiaries from the list of beneficiaries in the trust deed at the termination of the trust.

The respondent was of course concerned that the applicants would treat him unfairly at the time of termination of the trust if the order was to be granted in the applicants’ favour.

Income beneficiaries and capital beneficiaries

Most trust deeds make a distinction between income beneficiaries and capital beneficiaries. Income beneficiaries are generally entitled to the income earned from the trust assets during the existence of the trust and capital beneficiaries are generally entitled to the trust assets either during the existence of the trust and/or at its termination.

Most trust deeds also give trustees broad powers to deal with trust assets as they deem fit. It is therefore not uncommon that trustees have wide discretionary powers in respect of the day-to-day management of the trust.

The Schoonies Familie Trust deed similarly made the distinction between income and capital beneficiaries. It also granted the trustees discretion in how the income beneficiaries could benefit from the trust, but this same discretion was not mentioned in the definition of capital beneficiaries.

It was also apparent from the clauses regarding the powers of trustees that the trustees had discretion in the utilisation of trust capital only until the termination of the trust and not upon termination of the trust.

The will

Furthermore, the trust deed stipulated that the late Mr Schoonhoven had the right to determine in his will what the date of termination (vesting date) of the trust would be and how the trust assets were to be divided upon termination of the trust.

The trust deed also made it clear that the content of the will would, in the aforesaid respect, take precedent over the content of the trust deed. The trust deed therefore had to be read together with the late Mr Schoonhoven’s will.

The will stipulated that the Schoonies Familie Trust was set to terminate in 2030, at which time the capital beneficiaries would become entitled to the trust assets. The will further directed that the capital beneficiaries were to benefit from the trust in equal shares upon its termination.

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What the High Court said

The applicants’ view was that they had the power upon termination of the trust to choose the capital beneficiaries from the possible beneficiaries listed in the trust deed.

The judge however had the following to say:

The use of the phrase in the definition of capital beneficiaries clearly shows an intention to select, appoint or elect beneficiaries from the ranks of the categories. What is not clear is who would be doing the selection.

The trust deed was clear about the trustees having the power to select income beneficiaries, but was silent on who would have the power to select the capital beneficiaries. The judge proceeded to discuss the law with regards to contractual interpretation of documents and referred to previous judgements of our courts.

It can be summarised that when interpreting documents, the point of departure is the language of the document in the light of its context and purpose.

The aforesaid approach should however not be used in a mechanical fashion since it is essential to recognise the relationship between the words, the concepts expressed by the words and where the contested provision is situated within the scheme of the agreement as a whole.

The judge was of the view that the late Mr Schoonhoven and the trustees would possibly have envisaged that the capital beneficiaries would be appointed by Schoonhoven in his will (as was his right in terms of the trust deed). It could therefore not be said whether the silence of the trust deed to indicate who could select the capital beneficiaries was an omission or a deliberate decision.

There was also no evidence presented with regards to the late Mr Schoonhoven’s intention at the time of drafting of the trust deed. The judge delivered the following blow to the applicants’ case:

It is not for me to pronounce on what the relevant clauses should be taken to mean from a vantage point not located in the text of the trust deed. I also cannot import meanings into the trust deed to make it better or more acceptable.

The view of the applicants that the “trust deed was constructed with a design in mind” did not bear any fruit as interpretation begins with the text and structure of the document.

The court concluded that there was insufficient evidence to support the applicants’ interpretation of the trust deed and the deceased’s will, and their application was accordingly dismissed.

The takeaway

The applicants furthermore erred by bringing the matter by way of an application instead of by way of action. This aspect will not be elaborated on in this article.

The point that is stressed here is the importance of the wording when drafting a trust deed. The trust deed must convey the intention of the founder clearly and correctly as the involved parties will be bound thereto. The wording must be clear and complete and there should be no uncertainties or ambiguities.

This case should therefore serve as a reminder to both clients and trust practitioners that absolute care must be taken during the consultation process and drafting of the trust deed.