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Settlor Control and Trustee Liability: an Analysis of English and Offshore Trust Law with Indicators for the Development of South African Trust Law

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Settlor Control and Trustee Liability: an Analysis of English and Offshore Trust Law with Indicators for the Development of South African Trust Law SETTLOR CONTROL AND TRUSTEE LIABILITY: AN ANALYSIS OF ENGLISH AND OFFSHORE TRUST LAW WITH INDICATORS FOR THE DEVELOPMENT OF SOUTH AFRICAN TRUST LAW ELIZABETH BRUWER Dissertation presented for the degree of Doctor of Laws in the Faculty of Law at Stellenbosch University SUPERVISOR: PROF MJ DE WAAL DECEMBER 2018 Stellenbosch University https://scholar.sun.ac.za DECLARATION By submitting this dissertation electronically, I declare that the entirety of the work contained therein is my own, original work, that I am the sole author thereof (save to the extent explicitly otherwise stated), that reproduction and publication thereof by Stellenbosch University will not infringe any third party rights and that I have not previously in its entirety or in part submitted it for obtaining any qualification. Date: December 2018 Copyright © 2018 Stellenbosch University All rights reserved i Stellenbosch University https://scholar.sun.ac.za OPSOMMING Die trust, ‘n regsverskynsel vanuit die Engelse reg wat vandag deel is van talle ander regstelsels, is bekend as ‘n effektiewe instrument vir belasting- en boedelbeplanningsdoeleindes. Transnasionale bewegings ter bevordering van belastingdeursigtigheid en -nakoming het gedurende die laaste dekade of twee druk geplaas op die gebruik van trusts, veral die gebruik van sogenaamde “offshore” trusts. Daarbenewens, as gevolg van ekonomiese, finansiële en sosio-ekonomiese veranderinge oor die afgelope 50 jaar, het die wyse waarop en redes waarvoor trusts gebruik word ook verander. Dit kom voor asof die fokus verskuif het van voorsiening vir en beskerming van begunstigdes na ‘n belastingdoeltreffende voertuig om die oprigter se beleggings te hou. Teen hierdie agtergrond ondersoek die proefskrif hoe die Suid Afrikaanse trustreg met twee spesifieke kwessies omgaan: die toenemende behoefte van oprigters aan beheer oor trustbates, asook die moontlikheid dat trustees aanspreeklikheid vir trustbreuk kan uitsluit. Die vraag is of so ‘n verhouding nogsteeds as ‘n trust geklassifiseer kan word. Die posisie in die Suid Afrikaanse reg word vergelyk met die posisie in Engeland en Jersey deur middel van ‘n studie van, onder andere, wetgewing en regspraak. Die proefskrif begin met ‘n ontleding van die geskiedenis en huidige stand van die trustreg in die drie relevante jurisdiksies en beklemtoon ‘n aantal kernwaardes wat in al drie jurisdiksies teenwoordig is. Die volgende hoofstuk ondersoek die verpligtinge van trustees in die drie jurisdiksies, insluitende die vraag of, en indien wel, tot watter mate, aanspreeklikheid vir trustbreuk in die trustakte uitgesluit kan word. Verskille tussen die drie jurisdiksies word uitgelig. Vervolgens word die verskynsel van oormatige beheer deur die oprigter ondersoek, asook die omstandighede waarin dit kan lei tot ongeldigheid van die trust, of tot ‘n uitspraak dat die normale gevolge van die trust geïgnoreer moet word (bekend in Engels as “going behind the trust”). Die proefskrif kom tot die gevolgtrekking dat, in sekere omstandighede, buitensporige beheer deur ‘n oprigter (veral in kombinasie met ‘n oprigter wat ook ‘n begunstigde is) en ‘n gebrek aan toerekenbaarheid van die trustee kan lei tot ‘n besluit dat ‘n trust ongeldig is of dat die gevolge van ‘n geldige trust geïgnoreer moet word. Alhoewel howe in die algemeen onwillig is om geldige trusts te ignoreer, word dit nou aanvaar dat billikheid en regverdigheid so ‘n stap kan vereis. Dit is duidelik dat trustee-onafhanklikheid so ‘n besluit kan verhoed, en die proefskrif kom tot die gevolgtrekking dat trustee onafhanklikheid ‘n gebied is waar die Suid Afrikaanse trustreg voordeel sal trek uit verdere ontwikkeling. ii Stellenbosch University https://scholar.sun.ac.za ABSTRACT The trust, a creature of English law that has found its way into many other legal systems, is well known as a useful succession and tax planning tool for wealthy individuals. In recent years, globalised moves towards increased tax transparency and compliance have put pressure on the use of trusts, particularly on so-called “offshore trusts”. In addition, due to economic, financial and socio-economic changes over the last 50 years, the ways in which and reasons why trusts are used have also changed. The focus has, in some cases at least, shifted from providing for and protecting beneficiaries to providing a tax efficient vehicle for holding the settlor’s investments. Against this background, this dissertation examines how South African trust law deals with two main issues: the increased demand for settlor control over trust assets, as well as the possibility for trustees to exclude liability for breach of trust. The question arises whether, in such circumstances, a proper trust remains. The position under South African law is compared to that under English law and the law of the Channel Island of Jersey, by way of a study of legal sources including legislation and case law. The dissertation starts with an analysis of the history and state of trust law in the three relevant jurisdictions and highlights a number of core values that are present in all three jurisdictions. It then continues to examine the duties and obligations of trustees under the law of these jurisdictions, including the possibility to exclude liability for breach of trust in the trust deed. Differences between the three jurisdictions are highlighted. The next chapter investigates the phenomenon of excessive settlor control and the circumstances in which this can lead to either invalidity of the trust or to a court “going behind the trust”, thereby ignoring the normal consequences of the trust, and applying the trust assets in favour of someone other than the beneficiaries. The dissertation concludes that, in certain circumstances, excessive settlor control (particularly where powers and entitlements are combined) and a lack of trustee accountability can result in either invalidity or a court going behind the trust. Courts appear reluctant to ignore validly constituted trusts, but it is now accepted that circumstances may exist where justice and fairness would require such a step. The virtue of trustee independence emerges as an important counter to the argument of settlor control, and the dissertation proposes that this is an area where South African trust law would benefit from further development. iii Stellenbosch University https://scholar.sun.ac.za ACKNOWLEDGEMENTS I would like to use this opportunity to thank my supervisor, Prof Marius de Waal, for his continued support and guidance and his very valuable input throughout this long process. The fact that I moved abroad shortly after commencing work on the dissertation did not deter him at all. I am very grateful to have been able to work with such a great academic mind. I should also mention Pieter du Plessis from the Stellenbosch University Library who never ran out of patience with my requests for obscure articles and law reports. Thank you very much. To my immediate family, my wonderful husband André Bruwer and our equally wonderful children, Hannah and Frederick, thank you for supporting me, believing in me, and for numerous cups of tea. I could not have done this without André’s help and encouragement. Thank you for all your patience. To my children, I hope this will encourage you to believe that, with hard work, you can achieve anything you set your mind to. I am also very grateful to my mother (and my late father) for always encouraging me in my academic and other pursuits, and to my wider circle of family, friends and colleagues for your love, friendship and support. iv Stellenbosch University https://scholar.sun.ac.za TABLE OF CONTENTS CHAPTER 1: INTRODUCTION 1 1 Introduction to the research question 1 2 Contextualising the research question 1 2 1 Uses of trusts 2 2 2 Offshore trusts 4 2 2 1 Background to the use of offshore trusts 4 2 2 2 Current attitudes towards offshore trusts 6 3 Chapter 2: jurisdictions used in the comparative study 8 3 1 England 8 3 2 Offshore jurisdictions: Jersey 9 3 3 South Africa 10 4 The two core issues to be analysed 11 5 Chapter 3: trustee obligations and liability for breach of trust 11 5 1 Fundamental trustee duties 12 5 2 Breaches of trust 12 5 3 Hastings-Bass rule 12 5 4 Extent of trustee exoneration clauses 12 6 Chapter 4: excessive settlor control: invalidity, sham and going behind the trust form 13 6 1 Traditional role of the settlor and requirement for certainty of intention 13 6 2 Settlor control 15 6 3 Consequences of excessive control: review of case law 15 7 Chapter 5: conclusion 16 8 The research methodology 17 CHAPTER 2: THE HISTORICAL DEVELOPMENT AND CURRENT STATE OF TRUST LAW IN ENGLAND, JERSEY AND SOUTH AFRICA 19 1 Introduction 19 2 England 21 2 1 Introduction 21 2 2 Introduction to equity 22 2 2 1 Development of equity as a body of law 22 2 2 2 Relationship between equity and common law 23 2 3 The trust as equity’s greatest contribution to English law 24 2 4 Definition of a trust 26 2 4 1 Property definition and obligation definition 26 2 4 2 Distinction between legal and equitable ownership 28 2 4 3 Legal and equitable interests and the “fusion” argument 30 2 5 Classifications of trust 32 2 5 1 Express trusts and trusts arising by operation of law 32 2 5 2 Fixed and discretionary trusts 33 2 6 Characteristics of an English law trust 34 2 6 1 The trust 34 2 6 2 The trust property 34 2 6 3 The trustee 35 2 6 4 The settlor 37 2 6 5 The beneficiaries 38 2 6 6 Trusts and powers 38 v Stellenbosch University https://scholar.sun.ac.za 2 7 Substantive requirements for the creation
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