WHAT IS A TRUST?
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.
The terms of a Will Trust are typically not contained in such detail as they are in an Inter Vivos Trust (where the Trust Deed may run into 25 pages or more). A practice is sometimes adopted to attach a full Trust Deed to a Will, rather than to incorporate the usually shorter provisions pertaining to Will Trusts in the body of the Will, particularly if the estate is of high value or is very complicated.
In the past, terms and conditions pertaining to Will Trusts, were often very poorly described in Wills, and it is now practise to include wide terms, conditions, and powers of Trustees in Will Trusts, which makes them more effective and practical.
REGISTRATION OF TRUSTS
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.
Once the Master of the High Court is satisfied that the documents are in order, he will issue Letters of Authority appointing the Trustees named in the Trust Deed. It is important to note that until the Letters of Authority have been issued by the Master of the High Court, the aspirant Trustees do not have the capacity to act as Trustees.
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.
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:
- The possibility of higher Capital Gains Tax being payable on the disposal of the immovable property due to the loss of the primary residence exclusion for capital gains purposes, if the property is to be one’s primary residence;
- Income tax on income retained in a Trust is payable at the rate of a flat 40%. If, however, distributions are made to beneficiaries and income is not retained in the Trust, there can be an attribution of the income tax to the beneficiaries at such beneficiaries’ tax rate;
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.
It is often very useful for a South African resident to have an Offshore Trust in which offshore assets are held, but the biggest drawback in this regard, is the substantial cost involved in the registration and administration of Offshore Trusts. Generally, administration costs pertaining to Offshore Trusts are substantially higher than those of local Trusts and this has often been an impediment to utilising Offshore Trusts in Estate planning and investment structures relating to offshore assets.
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.
If, however, the planner were to loan the proceeds to be invested, i.e. R1 million, to a Trust and the investments were placed in the Trust’s name, the growth on such investments would happen in the hands of the Trust and the amount owing back to the planner, which would be an asset in his Estate, would merely be the inception amount of the loan, particularly if the loan was not interest bearing.
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.
As the law currently stands, it is possible for no-interest or low-interest loans to be made to Trusts by South African residents, but such no-interest or low-interest loans cannot be made to an offshore Trust without the Section 31 of the Income Tax Act transfer pricing provisions being invoked, whereby the Commissioner of taxes may deem an interest rate to be applicable to such loans.
Estate Planning is extremely important for all South Africans of reasonable wealth. Estate planning, however, should not be viewed as an event, but rather as a process. The process needs to be reviewed on a regular basis, and clients are always encouraged to remind themselves to review their Estate plans on their birthday each year.
Estate Planning is an holistic process. It should involve the Estate Planning expert, the client’s Accountant, the client’s Financial Planner, and preferably, both spouses. It is unwise to embark upon an Estate Planning exercise without involving all these players, as it is imperative to ensure that all such advisors are familiar with, and contribute in their own particular way to, the Estate Planning process.
It is an interesting fact that many South Africans of reasonable wealth still do not have a Will.
One of the most important reasons to have a current Will is to ensure that an Executor is appointed to your Estate, that Guardians nominated for minor children, and to ensure that one’s Estate devolves upon those persons who are intended to benefit from the Estate. A full presentation on the benefits and formalities pertaining to Wills, and Estate Planning, is available on request in PowerPoint format.
A “Brochure Will” can be completed on this website by any person requiring a simple Will. Submission of the completed application form will enable a simple Will to be prepared for such person which will be emailed to such person for signature. There is no charge for the preparation of a “Brochure Will”.
Traditionally, it was not usual for attorneys to charge fees for drawing Wills, but these days, it is more common than not for attorneys to charge for this important service. Prior to an amendment to the Attorney’s Act some time ago, only Attorneys were allowed to charge for the drawing up of a Will. Financial Institutions, Accountants and other professionals regularly drafted Wills, but did not charge for them as they were not entitled to do so, in terms of the Attorneys Act.
Since this amendment to the Act, however, it has become usual for Financial Institutions and other professionals to charge for the drawing up of a Will – and Attorneys have consequently adopted a practise of charging for Wills as well. The charge for a Simple Will is generally very low, but, in more structered Estate Planning Wills, a substantial amount of time is often taken in obtaining the necessary information to enable the plan to be compiled, and these Wills are then generally charged on a time and attendance basis.
In taking instructions to draw Wills, Ant likes to compile a brief summary of a person’s assets and liabilities, in order to ascertain the nature and extent thereof – and only thereafter, to apply the intentions of the person to the devolution of his or her Estate.
Ant believes that it is not prudent merely to take instructions from a client to draw a Will in accordance with the client’s wishes, without first analysing the extent and nature of the Estate assets and liabilities, particularly with a view to establishing the liquidity of the client’s Estate, in the event of the client’s death. Liquidity is an important issue, both from an Estate Duty point of view, and as far as the cost of Administration of the Estate is involved. Even where no Estate Duty is payable, there is usually a considerable amount of liquidity required to cover the Administration costs of the Deceased Estate.
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:
How many Trustees need to agree to certain issues or decisions, how many Trustees will comprise a quorum, how meetings of Trustees are to be carried out, whether there is a casting vote, and whether there is a reservation of power in favour of one of the Trustees.
It is imperative that all decisions of the Trustees are minuted or recorded in Minutes or Resolutions. Traditionally, this aspect has often been overlooked in the administration of Trusts. With the modern administration of Trusts, substantial focus is placed on the trail of documentation evidencing decisions made or action taken by the Trustees from time to time.
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!
When dealing with a contract involving a Trust, it is advisable to ensure that the contracting party has had sight of a minute or resolution of the Trustees of the Trust authorising the Trustees to act or sign. This is particularly so in the case of the purchase or sale of immovable property. In terms of the Alienation of Land Act, 1981, any deed of sale of immovable property has to be in writing and the parties thereto or their agents have to be legally authorised to act at the time of signing the contract.
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.
The nominee will usually be the Trust which is about to be registered. People often feel that they are unable to purchase immovable property on behalf of a “Trust to be formed”, due to the danger of double taxation for transfer duty purposes, if such a person purchases the property and then transfers it on to a Trust. The nominee provision described above generally have, in certain circumstances in the past, ensured that a double transfer duty situation is avoided, but this proceedureis not advisable.
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:
- To protect and administer assets which are earmarked for minors or other beneficiaries on death;
- To utilise structured planning to reduce the amount of Estate Duty that will be payable on death;
- To protect assets from creditors or the effects of insolvency;
- To utilise the services of a board of Trustees and their combined knowledge and abilities to administer Trust assets;
- To obtain certain tax benefits that are available in certain instances.
WHAT ARE THE DRAWBACKS TO CREATING A TRUST?
The most common drawbacks are as follows:
- The costs of setting up and administering the Trust;
- The loss of control over ownership and the administration of the assets within the Trust;
- The higher rate of income and capital gains taxes on distributions, if retained in the Trust;
- The possibility of legislative amendments in the future which may adversely affect the benefit of the Trust.
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.
The Minister of Finance in his Budget Speech in February 2013 announced that his Department would be looking at the possibility of introducing reforms to the manner in which Trusts and Trust Beneficiaries are treated for Tax puerposes. He indicated that the traditional “conduit principle” adopted in Trusts, where Income and Capital Gains can be distributed down to beneficiaires and taxed in their hands at their rates in certain circumstances, is one area that his Department intends focussing on, amongst others.
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:
- Annual Financial Statements are prepared on a formal basis;
- An Annual General Meeting of Trustees be held to peruse and approve the financial statements;
- A reputable accounting officer or accountant be appointed to prepare compile Financial Statements for the Trust;
- The Trust to be registered for income tax purposes, and VAT in certain circumstances.
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.