WHEN BUSINESS INTERESTS ARE HELD IN TRUSTS: KEY LEGAL ISSUES TO WATCH

Trusts are often used as part of broader wealth structuring and succession planning. In many cases, business owners hold shares in companies, members’ interests, or other commercial assets through a trust rather than in their personal names. While this can be a legitimate and useful structure, it is not a simple “set and forget” solution.

Where business interests are held in a trust, the legal and practical implications can become complex very quickly. Trustees, founders, beneficiaries and business partners should all understand that the trust structure brings with it real obligations, governance requirements and potential risks.

A trust is not the same as a company

One of the first issues to appreciate is that a trust is not a separate legal person in the same way that a company is. A trust functions through its trustees, who must act in accordance with the trust deed and the law. Under the Trust Property Control Act, trustees may not assume control of trust property unless properly authorised, and they must perform their duties with the care, diligence and skill that can reasonably be expected of a person managing the affairs of another. The Act also requires trust property to be clearly identified in the trust’s bookkeeping and records. (Justice)

This becomes especially important where a trust holds business interests. The trust itself does not “run” the business in a practical sense. People do. If those people blur the line between trust property, personal affairs and company operations, problems are likely to follow.

The danger of treating the trust as an alter ego

A common difficulty arises where a founder or dominant trustee continues to treat trust-owned business interests as though they remain his or her personal assets. South African courts have repeatedly warned against the misuse of trusts as an “alter ego”, particularly where there is no real separation between control, ownership and administration. Recent appellate decisions have continued to refer to the abuse of the trust form where assets are transferred into trusts but managed dishonestly or as a device to frustrate third parties. (SAFLII)

In practice, this means that a trust cannot simply be used as a label on paper while one individual continues to make unilateral decisions, ignore trustee processes, disregard the trust deed, or use trust-held business assets as if they were personally owned. Where that happens, the integrity of the structure may be challenged.

Trustee decision-making matters

If a trust holds shares in a company, those shares are trust property. The trustees must therefore deal with them in their representative capacities and in accordance with the trust deed and the law. That includes decisions relating to voting rights, shareholder resolutions, major commercial transactions, distributions, and in some cases even the appointment or removal of directors.

Too often, the commercial side of the structure is treated carefully while the trust side is neglected. Shareholder agreements may be signed, board meetings may be held, and company resolutions may be prepared — but the trustees themselves may never have properly resolved to take the relevant action. That creates a weak point in the structure.

A trust cannot act informally merely because the underlying asset is commercial in nature. Internal trust governance remains essential.

Beneficial ownership and disclosure are now a major compliance issue

Another important development is the increased focus on beneficial ownership transparency in South Africa. Amendments introduced through the General Laws (Anti-Money Laundering and Combatting Terrorism Financing) Amendment Act, 2022 inserted definitions of “beneficial owner” into trust legislation and introduced broader transparency mechanisms. In relation to trusts, the legislation recognises beneficial owners in connection with ultimate ownership, effective control, founders and other relevant persons within the trust structure.

On the corporate side, the CIPC’s beneficial ownership regime requires companies and close corporations to submit beneficial ownership information. CIPC states that the register launched on 1 April 2023, that beneficial ownership filing became effective from 24 May 2023, and that from 1 July 2024 entities have been subject to a hard-stop system linking annual returns to beneficial ownership compliance. Newly incorporated entities must file within 10 business days, and amended declarations must be filed within 10 business days of changes. Non-compliance can result in penalties, enforcement action and even deregistration. (CIPC)

This is highly relevant where company shares are held by a trust. The structure must be understood properly, recorded accurately, and maintained on an ongoing basis.

Business succession planning can be helped — or hindered

One reason business interests are often placed in trusts is succession planning. In principle, a trust can provide continuity, protect against disruption on death, and assist with intergenerational planning. It may also offer a useful vehicle for holding family business interests in a structured way.

However, these advantages only exist where the trust deed is carefully drafted, the trustees are functional and independent in their conduct, and the broader commercial documentation aligns with the trust structure. A mismatch between the trust deed, shareholders’ agreement, MOI, loan accounts and succession intentions can create disputes rather than prevent them.

A trust may hold the shares, but that does not mean the succession plan is automatically coherent.

Financing, security and commercial transactions can become more complex

Where business interests are trust-held, commercial counterparties often want to know exactly who is authorised to act, whether proper trustee resolutions have been passed, and whether the trust deed permits the transaction in question. Banks, purchasers, investors and creditors are generally cautious when dealing with trusts for this reason.

If the paperwork is incomplete or the trustees are not properly authorised, transactions can be delayed, disputed or challenged. This is particularly relevant in:

• sales of shares or business assets,

• suretyships and guarantees,

• borrowing and security arrangements,

• business rescue or restructuring contexts, and

• disputes between shareholders or family members.

The more valuable or contentious the underlying business interest, the more important proper trust administration becomes.

Practical points to keep in mind

Where business interests are held in trust, it is wise to ensure that:

• the trustees are properly appointed and authorised;

• the trust deed clearly permits the relevant commercial activities;

• trustee resolutions are passed for significant decisions;

• trust records and company records are aligned;

• beneficial ownership information is up to date;

• personal and trust affairs are kept separate; and

• the structure is reviewed regularly rather than only when a dispute arises.

These are not merely administrative niceties. They go to the heart of whether the trust structure will withstand scrutiny when it matters.

Conclusion

Holding business interests in a trust can be effective and commercially sensible, but only where the structure is respected in substance and not just in form. A trust should never be treated as a convenient extension of a founder or business owner’s personal estate. It must be administered properly, with real trustee oversight, proper records and ongoing compliance.

In a commercial environment that increasingly demands transparency, accountability and documentary accuracy, the risks of a poorly run trust structure are simply too significant to ignore.

Businesses and families using trusts to hold commercial assets should therefore ensure that their trust administration, company governance and succession planning all speak to one another. That is where the true value of the structure lies.