TRUSTS

In South Africa, Trusts are governed by the Trust Property Control Act, 57 of 1988. A Trust is a legal entity consisting of a donor, trustees and beneficiaries.  Assets are transferred from the donor to the trustees, in their capacity as such, who control and protect the assets for the benefit of the beneficiaries.

The different types of Trusts in South Africa can be classified as follows:

 

• An “ownership trust”, in which the donor transfers ownership of assets to trusteesto be held for the benefit of the beneficiaries of the trust.
• A “bewind trust”, in which the donor transfers ownership of assets to beneficiaries of the trust, but control over the assets or property, is given to the trustees.
• A “curatorship trust”, under which the trustees administer the trust assets for the benefit of a beneficiary that doesn’t have the capacity to do so, for example, a curator placed in charge of a person with a disability.

The ways in which the trusts are formed:

• Inter vivostrust is created during the lifetime of a person.
• Testamentary trust is set up in terms of the will of a person and comes into effect after their death.

A Trust whether Intervivos or Testamentary may be either vesting or discretionary.

• Vesting trust – the income or assets of the trust are vested in the beneficiaries. The beneficiaries have the vested rights to the income or assets of the trust.
• Discretionary trust – the trustees usually have the discretion whether to and how much of the income, assets or net trust capital of the trust to distribute to the beneficiaries

When drafting the Deed of Trust, the following issues need to be considered:-

1. The desired name of the trust.
2. The purpose or object of the trust.
3. The name of the donor.
4. The name of the proposed trustees. It is advisable to appoint at least one independent trustee. Previous experience in administering a trust is recommended.

 

5. The names of the beneficiaries and whether they are to be income or capital beneficiaries (or both).
6. Whether the trust is a discretionary or a vesting trust.
7. The rights and obligations of the trustees, including their powers, remuneration and meetings.
8. Rules and restrictions regarding the distribution of income and capital.
9. The duration and procedure on termination of the trust.
10. The procedure to be followed if the trust needs to be amended.
11. The name of the person who will do the trust’s books (preferably an accountant) and whether the books of the trust need to be audited.

Once the above is decided, the Trust Deed is drafted and signed by the donor and the trustees. The Trust Deed is then sent to the Master of the High Court for registration. The Master will issue a letter of authority to the trustees, when all the requirements for registering a trust are satisfied.  No trustee may act on the trust’s behalf prior to the issuing of the letter of authority. The trustees need to be very clear on their duties in respect of a trust. This responsibility is not to be taken lightly. The trustees need to ensure that they play an active and effective role in the administration of the trust. The penalties can be severe for absentee or “puppet” trustees.

 

The advantages to placing assets in a trust for estate planning purposes include:

• There will be continuity as a Trust can span multiple generations. When any trustee dies, the trust and any assets owned by it, remain unaffected. Upon the death of a beneficiary, only the portion of the trust assets that vests in that beneficiary upon date of death, would form part of the beneficiary’s estate for estate duty purposes.

 

• The trust is not liable for estate duty, executor’s fees or other taxes which come into play on the death of a human being who owns property. Trusts can continue to pay benefits to dependants (beneficiaries) after you die. This can be useful if you have dependants as money in your personal estate may not be available to your dependants until your estate has been wound up.

 

• Benefits not yet awarded to beneficiaries cannot be attached if a beneficiary becomes insolvent or is sued by creditors. This benefit is applicable more to discretionary trusts.

 

• Tax-efficient income splitting. This is known as the “conduit principle” – dividends which ordinarily would be subject to a high rate of taxation can be split between beneficiaries who are on a lower marginal rate of taxation.

 

 

 

The disadvantages of placing assets in a trust for estate planning purposes include:

 

• The loss of legal control of assets. Your assets are transferred to the trust and are managed by the trustees for the benefit of the beneficiaries. You no longer own the assets, but you can exercise some control over them by being a trustee.
• One needs to realise that there are costs for establishing and maintaining a trust but one needs to compare this to tax savings and the protection that it affords. The purpose of setting up the trust may be the determining factor. The costs of setting up and running a trust will include legal fees for drawing the trust deed and registering the trust, trustees’ fees for administering the trust, and audit fees, if the Master of the High Court insists that an auditor be appointed.
• There are administrative requirements. You need to keep all records from inception of the trust to at least 5 years after the trust has been deregistered. Trustees minutes and resolutions about all transactions have to be retained. A separate bank account for the trust needs to maintained.

 

In conclusion, various types of trusts exist, and these types or categories often overlap. It is important to fully consult with an attorney before creating any type of trust. Do not hesitate to contact us for all your trust needs.

 

BY: FATIMA SALAJEE