There are two types of Trust as we know them in South Africa, namely, Inter Vivos Trusts and Testamentary Trusts (Will Trusts).
An INTER VIVOS TRUST is often referred to as a Family Trust, and is an entity which is formed during the life of a person.
Typically, a Settlor or Donor will enter into a contract with Trustees, the terms of which will be contained in a Deed of Trust, in terms of which the Settlor will donate to or settle upon the Trust, a sum of money in order to establish the Trust, and appoint Trustees to administer the Trust fund, for the benefit of beneficiaries which will be described in the Trust Deed.
The objects of the Trust are usually to provide an income for the beneficiaries, to provide funds for the housing, care, maintenance, education, general welfare, recuperation, health, entertainment or pleasure or advancement of life of the interests of any beneficiary, and to transfer the assets to the capital beneficiaries upon termination of the Trust.
Trusts can be created giving Vested or Discretionary rightsto the beneficiaries stipulated or described in the Trust Deed, whereby the assets vest in the named beneficiaries, but the assets and benefits flowing from them, are required to be administered by the Trustees until the happening of a certain event.
More common forms of Trusts are Discretionary Trusts in which the Trustees are authorised to use their discretion in determining how the benefits flowing from the Trust are to be distributed amongst beneficiaries. In these types of Trusts, the vesting of benefits or assets in beneficiaries is delayed until the exercise of such discretion by the Trustees. The discussion below will refer to Discretionary Trusts, unless otherwise indicated.
The beneficiaries are usually defined as income beneficiaries and capital beneficiaries.
Income beneficiaries are usually those persons who may from time to time (or at times stipulated in the Trust Deed) be selected by the Trustees in the discretion of the Trustees, from the list of beneficiaries described in the Trust Deed. These distributions are usually in the form of income from the Trust assets or the use of Trust assets. It is usual for the class of beneficiaries in Discretionary Trusts to be widely defined to enable the Trustees to exercise their discretion as to the distribution of the income benefits from the Trust as widely as possible.
Capital beneficiaries are usually persons who, from time to time (or at times stipulated in the Trust Deed), are selected from the Trustees in the discretion of the Trustes, to benefit from the distribution of portion or the whole of the capital assets of the Trust. This class of beneficiaries is often described very widely as well, in discretionary Trusts.
Contingent beneficiaries are sometimes identified in the Trust Deed to ensure that the Trust does not fail should none of the stipulated income or capital beneficiaries be able to ascertained.
The Trust will terminate upon the happening of an event as stipulated in the Trust Deed. Typically, Trustees are given discretionary powers to extend the date of termination of the Trust, or to terminate the Trust prior to the happening of that event or the attainment of that date.
Provisions pertaining to the distribution of income are usually very widely framed to enable the Trustees to award income benefits to the income beneficiaries as widely as possible.
Provisions pertaining to the award of capital amongst the capital beneficiaries are also provided for in the Trust Deed.
TESTAMENTARY TRUSTS are commonly known as a Will Trust. These types of Trust are created in terms of the Will of a deceased person. Will Trusts cannot be registered with the Master of the High Court during the lifetime of the Testator (the person making the will), as they do not come into existence until the death of the Testator.
Set up and administration charges pertaining to the Will Trust are therefore postponed until the death of the Testator, which is when the Will Trust actually comes into existence.
Will Trusts are usually incorporated in Estate Planning where a Testator wishes to protect certain assets in his or her Estate for the benefit of certain beneficiaries, or to limit beneficiaries’ personal administration and management of certain assets, or as a protection against the beneficiaries themselves.
Trusts are registered through the office of the Masters of the High Court in the various provincial jurisdictions in South Africa. There is no central registering authority for Trusts at this stage, although there is some talk that a central registry for Trusts is being planned in South Africa.
The formalities to register a Trust are contained in the Trust Property Control Act 57 of 1958 in terms of which the original Trust Deed, original Letters of Acceptance of Trust as Trustees by the Trustees to be appointed, a letter from an accounting officer agreeing to take appointment as accounting officer of the trust, and other supporting documents are required to be submitted to the Master of the High Court.
Any change in the Trustees during the existence of the Trust need to be processed in a similar manner by the issue of new Letters of Authority by the Master of the High Court. If a Trustee dies or resigns, the Trust Deed usually makes provision for the assumption of a substitute Trustee to be appointed in the same manner. Most Trust Deeds make provision for a certain minimum number of Trustees to be appointed from time to time and this must be considered before deciding whether to appoint an additional Trustee. The effective date of the resignation of a Trustee is currently regarded as the date on which a written notice of resignation as Trustee is lodged with the Master of the High Court in the jurisdiction in which the Trust is registered, although there has been recent case law dealing with this issue.
A person of sound mind and who is a major, can potentially be appointed as a Trustee of a Trust. It is usual for the Trust Deed to set out instances in which a Trustee may not be appointed as a Trustee, or in which a Trustee is obliged to resign, for example, if a Trustee becomes insolvent or dies.
In terms of the Trust Property Control Act, there is no prescribed minimum number of Trustees, and the number of Trustees required is usually dealt with in the Trust Deed or the Will creating the Trust.
In Inter Vivos Trusts, it is very ucommon for a husband and wife to be appointed as Trustees in such a Trust. Since the landmark case of Land and Agricultural Bank of South Africa vs. Parker and others, 2005 (2) SA77(SCA) it is now advisable for an Independent Outsider/Professional Trustee to be appointed, together with the spouses as Trustees.
A practical number of Trustees is three to five. I higher number of Trustees can often lead to administrative difficultie spertaining inter alia to the signature of documents and the attending to the various duties of Trusteeship. Three or five Trustees also ensures that there is also uneven number of Trustees so that a majority decision can be achieved in a voting situation.
TRUST ADMINISTRATION FORMALITIES
The Trust Deed will stipulate in great detail how the Trust is to be administered and what formalities must be followed.
These formalities will include issues such as:
CONTRACTS WITH TRUSTS
People are often nervous about entering into contracts with Trusts, such as the purchasing of property from a Trust or the sale of property to a Trust. Their caution is well deserved!
It is possible for a Trust to purchase property prior to its registration, but very strict formalities need to be complied with in this instance and is not encouraged. Usually, a person representing the Trust to be registered, will sign such a contract in his or her capacity as a representative for a nominee. Careful attention will be needed to taken pertaining to the terms of the nominee appointment, as the sale agreement will usually include clauses pertaining to how and when the person needs to nominate the nominee.
A deed of sale entered into by one Trustee purporting to act on behalf of other Trustees where that Trustee is not authorised to do so by his or her co-Trustees, may be void ab initio as it will not comply with Section 2 of the Alienation of Land Act, and cannot be ratified thereafter (C Thorpe NO v Trittenwein (2006) SCA 30).
It is therefore important, when contracting with a Trustees of a Trust, to request sight of a copy of the Trust Deed (as well as any Deed of Ammenment or Variation of the Trust Deed, if one has been lodged at the Master's Offic), a certified copy the Letters of Authority issued by the Master of the High Court, a suitable Resolution pertaining to the transaction, and copies of the Identity Documents of the Trustees, ..
WHAT ARE THE BENEFITS OF SETTING UP A TRUST?
The most common reasons for the setting up of a Trust are as follows:
WHAT ARE THE DRAWBACKS TO CREATING A TRUST?
The most common drawbacks are as follows:
SHOULD IMMOVABLE PROPERTY BE REGISTERED IN THE NAME OF A TRUST?
There are certain disadvantages to immovable property being registered acquired in the name of a Trust:
There can be significant benefits of transferring immovable property into a Trust where the immovable property is not a primary residence. The Trust is a useful vehicle in which to house investment properties. The reason for this is that the growth in the value of the properties can be contained in the Trust and not in the planner’s personal Estate for Estate Duty purposes.
CAN A TRUST OWN SHARES IN A COMPANY OR MEMBERS INTEREST IN A CLOSE CORPORATION?
This is possible, and can often be an advantage as the tax rate and the inclusion rate for capital gains tax purposes which applies to companies and close corporations is lower than that applicable to Trusts.
It has only been possible since 2005 for an Inter Vivos Trust to own Members Interest in a Close Corporation, although it has been possible for Will Trusts to own Members Interest in Close Corporations prior to this. Please note that, since the implimentation of the new Companies Act, no new Close Corporations are able to be registered.
The concept of Trusts goes back to the days of the Crusades, and English Law has accordingly incorporated provisions pertaining to Trusts for many years. The concept of utilising Trusts in offshore jurisdictions, where there are tax exempt or restricted tax benefits, has been a very popular method of estate and business planning over the years.
The use of Trusts has considerable advantages with regard to the pegging of one’s Estate.
A typical example would be whereby a planner wishes to invest a certain sum of money, say R1 million, and intends for the investment to be of fairly aggressive nature, anticipating substantial growth over a period of time. If such investments were placed in the planner’s own name, the planner’s Estate would be enhanced by the growth of the investment over time.
It is accordingly common for persons embarking upon the purchase of shares in a private company, investment property or other investments to structure the acquisition or investment through Trusts.
ARE THE KNIVES OUT FOR TRUSTS?
Ant does not believe that the knives are out for Trusts as such, but substantial emphasis is being placed on the correct administration of Trusts these days, which is coming under very much closer scrutiny than in the past. The authorities are far more vigilant these days about correct administration of Trusts, particularly for tax purposes, andheI encourages all my clients to ensure that the correct administration procedures are adopted in the administration of Trusts.
Ant insists that every decision made in Trusts in which he is a Trustee being reduced to writing in the form of the Trust minute or resolution of the Trustees. He ensures that copies of all documents are kept on file in the main Trust administration file, which is accessible to the co-Trustees, and in certain instances the beneficiaries, and is capable of scrutiny by the Master of the High Court or the South African Revenue Services.
IS IT NECESSARY FOR FINANCIAL STATEMENTS TO BE PREPARED FOR TRUSTS?
One needs to have reference to the Terms and Conditions of the Trust as contained in the Trust Deed or Will to ascertain whether there is an obligation to provide Annual Financial Statements for a Trust. Ant insists that, in every Trust in which he is a professional Trustee:
Many Trustees have failed to ensure that Annual Financial Statements or at least a simple balance sheet and income and expenditure statement are prepared, and experience has shown that this has created substantial difficulty many years down the line, particularly when taxes need to be assessed and where Trusts need to be terminated and the assets distributed to beneficiaries.
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