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Legal Capacity Of Trusts – A Must Read For Trust Practitioners

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248 Legal Capacity Of Trusts–A Must Read For Trust PractitionersAs we are aware, a trust is created when a settlor transfers assets to a trustee to hold for the benefit of one or more beneficiaries. The term ‘trust’ simply describes the fiduciary arrangement or relationship between those parties. It is not a legal entity, and does not have juristic personality. It is therefore incapable of holding assets, entering contracts or undertaking any other legal formalities in its own name. Indeed, as Adderly J commented in Tenesheles Trust & ors v BDO Mann Judd (Supreme Court of the Bahamas, 16 November 2009), ‘it is trite law that a trust lacks legal capacity…a trust is an arrangement, not an entity’. 

In a trust arrangement, the appointed trustee is the person or entity with capacity to undertake these legal formalities. In assuming this function, the trustee acts as representative of the trust. The manner in which the trustee exercises this function is governed by the terms of the trust agreement and relevant local trust law.

Holding Of Assets

It is a common misconception amongst practitioners that the assets in a trust fund are owned by the trust. As mentioned above, a trust simply does not have capacity to hold assets in its own name. Legal title to assets is vested in the trustee (or its nominee). As the legal owner, the trustee may enforce all property rights relating to trust assets against any third party.

Entering Into Contracts Or Agreements

As a matter of convenience, trusts are often named by practitioners as parties to agreements. However, a trust, as a ‘non-entity’, does not have legal capacity to contract in its own right. 

In their 2006 discussion paper on the nature and constitution of trusts, the Scottish Law Reform Commission confirmed that a trust has no legal or juristic personality and therefore no active capacity and so cannot be bound by a contract.

The practice of treating trusts as if they have a legal personality is theoretically incorrect and contracts entered into by the trust in its own name may not be legally enforceable by or against the parties thereto. As a matter of ‘best practice’, the trustee should always be named as the contracting party in formal agreements. However, it should be clear from the face of the document that that the trustee is acting as trustee of the specific trust. 

Issuing Or Accepting Legal Proceedings

As a trust is not a legal entity, it cannot issue or accept legal proceedings. The trustee is the party with standing to sue and defend for and on behalf of the trust. A claim based on a contract entered into by a trustee in its representative capacity may be asserted against the trust only by proceeding against the trustee.

Where actions are taken by or against the trust, courts may be amenable to amending the proceedings to refer to the trustee unless this would cause hardship to the other party.   

By way of example, in the South African case Rosner v Lydia Swanepoel Trust [1998 (2) SA 123], it was held that unless the application to amend the summons or pleading is done in bad faith or would cause injustice or prejudice to the other side, it should be allowed. The court stated that such an amendment merely gives ‘linguistic effect to the legal rule that a trust lacks legal personality’. 

Seek Advice

The law in this regard is relatively straightforward. A trust is not a legal entity and therefore lacks legal capacity. The trustee must undertake all legal formalities pertaining to the trust arrangement. Where in doubt, the trustee should seek professional advice. 

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