In our article “can a trust hold the membership of a close corporation? we stated that a trust can be a member of a Close Corporation. We further advised that is better if the membership is being held in a trust.
We stand by the information given, but complications may arise if a trust is a member of a Close Corporation and care was not taken in the setting up of the trust and the drafting of the Trust Deed. We discuss those potential complications in this article.
The beneficiaries of the trust
If there are any juristic persons (for example a company) that is a beneficiary of the trust and this trust wants to hold the membership of a Close Corporation, then that beneficiary will disqualify the trust from being able to hold the membership in a Close Corporation. This is because the Close Corporation Act states that although an inter vivos trust may hold the membership of a Close Corporation, the trust may not have a juristic person as a beneficiary. The trust deed can be amended to remove the juristic persons from the trust, which will then make it viable to hold the membership of the close corporation.
Therefore, before you transfer the membership of the close corporation to an inter vivos trust, consult with us first so that we can assist you to determine whether the trust deed is in order or whether we must amend it so that the trust can hold membership of a close corporation.
The number of beneficiaries of the trust
The Close Corporation Act (Section 29(1)) says that the number of members of a Close Corporation is determined by counting how many natural persons qualify as beneficiaries of the trust that holds the membership. If the number of persons is under ten, then the trust may hold the membership of the Close Corporation. If the number exceeds ten, then trust cannot hold the membership of the trust.
As stated above, if a juristic person is a beneficiary of the trust and the trust wants to hold the membership of a Close Corporation, the trust deed can be amended. In the case where there are more than ten natural persons who are beneficiaries of the trust, the trust cannot hold the membership of a Close Corporation, even if the trust deed is amended so that the number of beneficiaries is reduced to under ten natural persons.
If the trust becomes a member of a Close Corporation and the beneficiaries remain under the number of ten persons, then the trust can be a member of the Close Corporation. If, during the time that the trust holds the membership the number of beneficiaries increases to more than ten natural persons, then the trust can no longer hold the membership of the Close Corporation.
What complications can arise? If the trust is not the only member (for example if the trust holds 50% membership and a natural person holds the other 50% membership) and the trust is disqualified because of the above reasons, then the trust membership will fall away and the remaining 50% member will become a 100% member. If there are no other members and the trust falls away, then the trust has no members and that is a problem because the Close Corporations Act states that there must be at least one member. The creation of a legal anomaly where there are no members left in the cc.
The Close Corporation can then not function properly. Further, the Companies Office may deregister the Close Corporation once there is no member of the Corporation.
When it comes to trusts, prevention is better than cure
Contact us so that we can assist you before you transfer membership of your Close Corporation to your existing trust. We will make sure that the wording of the trust deed is in order and that there are no complications. If there are, we can assist to amend the Trust Deed. If you want us to register a new trust for you, we can assist with that as well.