Covert sales and donations

It is a generally accepted legal principle of common law that the key essence of every last will and testament is to express the last wishes of a testator, and that therefore any transactional dispensations and estate administration pertinent thereto may not deviate widely from the provisions of the relevant testament, irrespective of any standing agreement between the interested parties: De Wet v De Wet 1951 (4) SA 212 (CPD).

However the foregoing principle is quite frequently infringed, as there may be various circumstances, often unpredicted by the testator, that present stumbling blocks in a particular deceased estate administration, for example:

  • The cases provided for under Section 14(1)(b) of the Deeds Registries Act 47 of 1937.
  • The prohibitions of certain transfers including more than one transferee in agricultural land as prescribed under the Subdivision of Agricultural Land Act, 70 of 1970.
  • Prohibitions orchestrated by certain unfavourable Municipal legislation regarding subdivisions of land, etc.
The above circumstances and more may justifiably sway the beneficiaries more towards a redistribution agreement to surmount these hindrances.

There are various formative requirements that a re-distribution agreement must comply with; however, for the purposes of this article only the aspect of covert sale and covert donation are discussed:

In Klerk No v Registrar of Deeds 1950 (1) SA 626 (T), it was decided as follows: " … that in every redistribution there must be involved a sale, exchange or donation … but the mere fact that a sale between two heirs or between an heir and the surviving spouse is entered into does not necessarily mean that a redistribution is brought about by that sale."

Therefore quite clearly, the above quote admonishes against manipulating the redistribution agreements by using the latter as a safe bastion for covert sales and donations. In the face of the foregoing quote from the case, one begins to ponder as to how to establish whether a certain donation or sale in the redistribution agreement is covert or otherwise.

Although the test is provided by Lubbe v Commissioner for Inland Revenue 1962 (2) SA 503 (O), namely that if one were to ignore the redistribution agreement, would there be a proper allocation of the estate assets irrespective of the introduced movables?

Whereupon, if the answer is in the affirmative that the agreement is forthcoming, the above test is on its own susceptible to uniform interpretation and application.

The Master of The High Court, on the other hand, applies a more conceptualistic approach in testing if re-distribution agreements do not contain covert sales or donations, namely:
  • The presence of all the elements of a sale in a transaction.
  • In the case of a donation, the presence of all the elements thereof.
For example, in a certain will (X), the testator had directed that his farm Rolling Hills No. 2370 be subdivided and the portions thereof be allocated to his two children respectively.

Whereas it appeared that such a bequest could not be granted, as it was tantamount to the infringement of the provisos of Section 2 of The Subdivision of Agricultural Land Act 70 of 1970, the heirs had to enter into a re-distribution agreement whereby (Y), the eldest daughter, was allocated ownership of the entire farm, but had to pay an amount of R10 000.00 to the other heir.

Due to the terminology used in the said distribution agreement, the latter looked more like an agreement of sale than a re-distribution agreement as it read as follows:
"Whereas the parties hereto have agreed that Y will receive ownership of the whole property, while Z will receive an amount of R10 000.00 from Y in consideration of his waived share in the bequest."

Relying on the conceptualistic approach, the Master ordered that the parties enter into a new agreement, as the words " … R10 000.00 in consideration of were indicative of a covert sale.

The Master advised that the following wording be used "… An amount of R10 000.00 is paid into the estate by Y and Z who will receive an award of R10 000.00 from the estate … it should not read in consideration of."

In simple terms, the words "in consideration for must not appear in any redistribution agreement as they imply the presence of a purchase price and thereby point more to a sale than a re-distribution agreement.

Instead the words "x amount was awarded to Z must be used.

It is proposed that the examiners take cognizance of the above.

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