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Bulletin

Amending an 'inter vivos' trust deed without the consent of the underlying beneficiaries: Unpacking some of the grey areas

Fasken
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Overview

The question as to whether an inter vivos trust may be amended without the consent of the underlying beneficiaries is not always straightforward. This can be particularly challenging in the context of an underlying corporate transaction where there are numerous beneficiaries (e.g. for a community trust or employee trust) who have accepted the benefits reserved for them and whose consent cannot be obtained within the timing requirements of such corporate transaction. In this bulletin, we seek to unpack some of the grey areas of our law on amending a trust deed in these circumstances.

In South Africa, a trust’s constitutional document is its trust deed. The trust deed provides the framework within which a trust functions. This includes the purpose of the trust, the powers of the trustees and any limitations to those powers.

It is generally accepted in our trust law that a trust deed can be amended in two ways without the interference of the courts. The first way is in terms of the common law and the second way is in terms of a variation clause in the trust deed itself.

In terms of the common law, a trust deed has been characterised as a contract for the benefit of a third party or what is termed as a stipulatio alteri. A trust deed ‘contract’ is between a founder and the trustees for the ultimate benefit of the beneficiaries. For this reason the basic rules of interpretation apply in determining whether the consent of one or more of the parties is required for an amendment of that contract.

Generally the consent of all parties who have signed a contract is required for the amendment of that contract, in the absence of specific provisions to the contrary. In the case of a trust, beneficiaries are very seldom signatories to the trust deed, particularly in cases where there could be numerous beneficiaries coming and going.

The common law rule on amending trust deeds was confirmed in Potgieter v Potgieter 2012 1 SA 637 (SCA) that trust deeds can be amended by the founder and trustees alone. However, once a beneficiary has accepted the benefits conferred on him or her by the trust deed, the trust deed can only be amended with the beneficiary’s consent.

This rule creates a hurdle to amending a trust deed, particularly where the trust has a large number of beneficiaries who are all required to consent to the amendment. A variation clause in the trust deed can come to the rescue though.

Once a beneficiary has accepted trust benefits, the beneficiary becomes a party to the trust deed and is bound to its terms. Therefore, if the trust deed expressly excludes the involvement of the beneficiaries in any amendment of the trust deed, the consent of the beneficiaries who have vested rights will not be required.

The position is less clear where the trust deed has a variation clause but the clause does not expressly exclude the consent of the beneficiaries as a requirement for amendment.

The question then is whether the express inclusion of certain parties whose consent is required excludes all other parties by implication, including the beneficiaries.

The absence of case law addressing this specific scenario has created a proverbial ‘grey area’ in our law. There are however a number of legal scholars who hold the view that the trust deed must be read in light of the intention of the parties to it. The intention could not be that beneficiary consent is required in the case of a trust deed with a non-exclusive variation clause. Notwithstanding the grey area, we agree with this view and the courts have reiterated that the terms of an agreement must always be interpreted in light of the intentions of the contracting parties.

It is also not inconceivable that a beneficiary seeking to challenge the validity of proposed amendments to a trust deed might approach a court to set aside those amendments. Depending on the drafting of the underlying variation provision, trustees may be able to justify a failure to obtain the consent of the beneficiaries.

To avoid any ambiguities arising in the above circumstances, we recommend that when drafting a trust deed, the variation clause should expressly exclude a requirement for the consent of the beneficiaries to be obtained, assuming that this is the intention of the parties.

This article was co-authored with candidate attorney Wesley Fletcher.

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