A trust is an agreement between an owner of assets and trustees. In terms of this agreement, the trustees undertake that they will administer the trust’s assets with the necessary care to the benefit of the beneficiaries. It is an efficient and flexible way to ensure that assets are looked after. It also ensures that assets are objectively managed and controlled by appointed trustees in the best interests of the beneficiaries.
The concept of a trust originates from the middle ages and even have roots as far back as biblical times. The landlord would leave his assets and servants to a trusted person for as long as he was away hunting at war. The trusted person (or trustee) had full control over the assets until the landlord’s return. This system still applies, in principle, to this day.
The protection of your loved ones’ financial interests is extremely important in the planning of your estate. You want to be sure that your family, and especially minors, will be looked after, and that your estate and income tax obligations are kept as low as possible, so that your heirs can enjoy the full benefit of your estate.
It is paramount to appoint the right trustees. You have to trust that the trustees will always act in the best interests of the beneficiaries and that the trust will be managed in accordance with legislation and stipulations of a trust act.
A trust’s administration must be transparent to ensure proper governance, asset protection and the satisfaction of all concerned.
Who needs trusts?
If a minor is an heir to an estate where there is no will, or if there is a will but no trust clause, the inheritance must be paid into the Guardians’ Fund of the Master of the High Court. The same happens in the event of a minor being the beneficiary to the death benefits of a policy.
- Persons that cannot take care of their own affairs:
If persons are not able to take care of their own affairs due to physical or mental conditions, their assets must be placed under the protection of a curator. The Master of the High Court will give permission for all expenses as well as the types of investments made.
Other instances where a trust can be used to good effect:
- In case of indivisible assets:
Certain assets may, owing to their nature or because of circumstances, not be transferred to more than one person. For example: the Sub-division of Agricultural Land Act, Act 70/1970, currently stipulates that agricultural land may not be sub-divided without the authorisation of the Minister of Agriculture.
- To effect tax savings in the case of:
- Estate duty: Assets transferred to a trust no longer form part of your own estate. This effectively means that all the growth in the assets occur in the trust, and not in your own estate, which effects a tax saving.
- Capital gains tax: Although capital gains tax is higher in a trust, a trust remains an excellent estate planning instrument. There are ways of deferring the capital gains tax on a trust asset to the trust beneficiaries, with the result that capital gains tax can then be levied at an individual rate. In addition the death of the trust planner (donor or founder) will not trigger CGT in the trust if the asset is not disposed of.
- Income tax: If non-allocated income may be capitalised in a trust, the trust will pay income tax at the present rate of 45%. All income paid out to income beneficiaries via the conduit principle will be taxable in their hands at their personal income tax rate. This provides the financial planner with excellent opportunities to really benefit clients who are already over taxed in South Africa.
Note: If tax savings is the only objective of the trust planner / donor / founder, great care should be taken by the financial planner for that trust runs a serious risk of long term failure.
- If your assets grow faster than inflation:
Certain investments, such as shares, unit trusts and market-related policies and investment assets, have the potential to grow faster than inflation. If the assets are retained in your own hands, it could result in increased estate duty and CGT. Such assets should preferably be held in a trust in order to keep the growth out of your own estate.
- If your family composition is complex:
If you are divorced, or if you want to keep certain assets in your family, it could complicate inheritances and make your will very complex. This could result in unnecessary delays in settling your estate. Trust structures can be very useful in these scenarios.
- To protect assets:
A trust could be structured in such a way that it does not vest in your hands and will therefore not form part of your estate. In the event of your insolvency, creditors will not be able to lay claim to these assets.
Types of trusts:
To ascertain what type of trust will suit your needs, a detailed consultation process with a trust or fiduciary law specialist will indicate the precise need and appropriate form of trust. This can be one or more of the following:
- Testamentary Trust
- Discretionary (family or inter vivos) trust
- vested trust (bewind trust)
- Charitable trust
- Umbrella trust
- Guardians trust
- Special trust (in compliance with section 1 of the Income Tax Act)
Testamentary trust (mortis causa)
Testamentary trusts are the most common trusts in use. They are especially suited to the protection of interest of minors and other dependents who are not able to look after their own affairs. These types of trusts come into being only after the death of the testator.
The trust is administered by trustees appointed in terms of the will, and is usually ended after a predetermined period or at a determined event like a minor turning 21 or the death of an income beneficiary.
Assets that form part of an estate may be moved to this trust, with or without limited rights such as usufruct. A testator appoints the trustees in a will.
The trust is formed by placing a trust clause in a will, which serves the same purpose as a trust deed. During the estate settlement period of the deceased estate, the appointed trustees apply for a letter of authorisation at the same office of the Master of the High Court as where the estate is registered.
Planners are however cautioned to have testamentary trusts (and in fact wills in general) drafted by a qualified practitioner. In the reported case of C Raubenheimer vs G Raubenheimer and others (560/2011)  ZASCA 97 the learned judge (JA Leach) introduces the judgement in the Supreme Court of Appeal as follows:
“It is a never-ending source of amazement that so many people rely on
untrained advisors when preparing their wills, one of the most important documents
they are ever likely to sign.”
A testamentary trust may further be both a discretionary or vested trust.
- Discretionary trust:
Payment of income and/or capital is subject to the discretion of the trustees and all non-allocated income is taxable in the hands of the trust. This type of trust may thus be utilised to save on income tax by splitting incomes. Capital beneficiaries may only be determined at a later stage.
- Vested trust:
The income and capital beneficiaries are already determined and described. The income is taxable in the hands of the income beneficiary, which could also be the capital beneficiary. The capital beneficiary thus gets immediate property rights, subject to the terms of the will or trust act.
Living trust (inter vivos)
Living trusts are ideal for keeping growth assets out of your estate and are thus a superb medium to limit estate duty and to protect assets from generation to generation. A living or inter vivos trust comes into being during the lifetime of the settlor or founder with the signing and registration of a trust.
A living trust is formed as an arrangement between the founder/settlor and the trustees. The founder/settlor is the person that takes the initiative to create a trust.
The interested parties in a living trust are the founder/settlor, the trustees, the persons or company appointed to take control over the assets and take responsibility for the administration and management thereof; and the beneficiaries or person who, in terms of the trust act, are entitled to the income and/or capital of the trust.
After signature of the trust deed, the trust is registered with the Master of the Supreme Court in whose jurisdiction most of the assets are situated or where the administration is to take place.
A living trust can take several forms:
- Family trust;
A trust that comes into being through an agreement between the founder and the trustees. Assets are sold to the trust and a loan account (debt) is created, or assets can be donated, but with donation tax implications.
- Charitable trust;
A charitable trust is a particular kind of trust that may be classified as non-taxable in terms of the Income Tax Act. Capital loans are made to a trust. The trust is so structured that it pays no income tax. The trustees then make donations to charities, schools, churches, etc. on your behalf and according to your wishes. Because there is no income tax applicable, you may make large donations.
- Umbrella trust;
This is a trust linked to a pension, provident, retirement annuity or preservation fund as well as group schemes. The trustees of the fund/scheme obtain an additional option to, in specific cases, transfer the death benefits to the trust for management to the benefit of the beneficiaries.
- Guardian’s trust;
These trusts are created as an alternative for monies due to minors that must, under certain circumstances, be paid into the Guardians’ Fund of the Master of the Supreme Court. Examples of such monies are yields from policies and cash inheritances for which no provision had been made with trusts. This trust is authorised to receive, and to manage to their advantage, any benefits accruing to minors from the Guardian’s Fund – from death claims to life and endowment policies. It is a safe alternative for the Guardian’s Fund to pay benefits into the trust rather than to the remaining guardian, who will not necessarily act in the best interest of the child.
- Special trusts;
These types of trusts, which are taxed at the same rate as a natural person, may only be created to benefit a person suffering from serious mental illness as described in the Mental Illness Act, Nr 18 of 1973, or that suffers from serious physical deformity. Testamentary trusts benefiting any living family member, of whom the youngest turns 21 in a tax year, may in certain cases also be classified as a special trust and as a result receive beneficial tax treatment by SARS.
Role and appointment of trustees:
The Control of Trust Assets Act contains certain provisions to which all trustees must comply. Non-compliance to these provisions may lead to criminal prosecution.
Although it is generally accepted that there will be at least three trustees, two are perfectly sufficient. A trust company may well act as the only trustee.
Because the management of a trust is a big responsibility, it is important that the right persons/institutions act as trustees. Expertise and experience are of the utmost importance since the management of a trust usually spans many years.
Duties and responsibilities:
The law places a responsibility on trustees to always act objectively and in the interest of beneficiaries. The law dictates the following regulations, which trustees must heed:
- Secret profits – trustees may under no circumstances make secret profits or speculate with trust assets.
- Negligence – trustees must ensure that they have the necessary expertise and show due care when dealing with the trust assets.
- Good faith – the trustees must always act in good faith.
- Compliance with the trust deed – trustees are legally bound and obligated to execute the stipulations of the trust deed or the will (in which the aims as well as the powers and responsibilities of the trustees are explained).
Administration of a trust
The administration of a trust entails receiving and controlling trust assets, and the protection thereof – which requires that investments are made according to the stipulations of the trust deed, the needs of the beneficiaries and investment principles.
The administration also entails that trustees handle all transactions and requires of them the investment of assets without speculating, and to make regular maintenance payments to beneficiaries.
In terms of the law, trustees are expected to report to:
- Fellow trustees, beneficiaries and guardians of minor children
- The South African Revenue Service
- The Master of the High Court (if so requested)
Lastly, the administration of a trust entails that trustees must provide advice to fellow trustees and beneficiaries. Trustees administer a trust themselves. If they cannot or will not do so, they may contract agents to take care of the administration on their behalf.