Types of trusts
- Family trust
- Investment trust
- BEE employee share trust
- Special and charitable trusts
- Trust amendment
- Dissolving of a trust
Information about trusts in general
WHAT IS A TRUST?
A trust is the arrangement through which control and ownership in property is by virtue of a trust instrument made over or bequeathed to another person or persons (the trustees) for the benefit of beneficiaries. There must be separation between control and enjoyment of the trust property.
WHAT IS A TRUST INSTRUMENT?
The existence of a trust is found in a written document in terms of which the initial trust property is identified and transferred to trustees. This can be amended if needed at a later stage, by following the correct proses.
WHO ARE THE PARTIES TO A TRUST?
The trust has 3 main parties, namely the settlor, trustees, and beneficiaries.
The trust is formed by a person (known as the settlor) making over, by way of donation, a nominal sum of money to trustees. This act of making over assets to trustees, combined with the trustee’s acceptance of such assets, forms the trust.
A trustee is the person who has bare ownership of the trust assets and who administers the assets on behalf of the beneficiaries. A trust must have at least one trustee. The property to be held in trust must be made over to the trustees who hold this property for the benefit of the beneficiaries.
Trustees will have ownership of all trust property, but will not personally benefit or enjoy the trust property. (However the trust property will not form part of the personal estate of the trustee in his or her capacity as such). A trustee must act in all trust matters with the utmost good faith observe all duties imposed in terms of the law and trust deed. A trustee must actively participate in the affairs of the trust. The trustee can only act as trustee if authorized in writing by the master.
In performing the duties and exercising the powers of trustee, a trustee must act with the care, diligence and skill that can be reasonably be expected of a person who manage the affairs of another.
A trustee must deposit all money that is received in a separate trust account. (The trust account can be opened once the trustees receive their letter of authority from the master). The trustees must keep the financial records in order. A trustee can resign by following the necessary steps.
The beneficiary is the person who has certain rights in terms of trust property, the person who receives the enjoyment of the trust property. A trust must have at least one beneficiary. The trustee and the beneficiary cannot be the same person. Exactly what rights the beneficiary has must be ascertained from the trust deed. There can be distinguished between income beneficiaries and capital beneficiaries. Until the trustees have exercised their discretion, a discretionary beneficiary only has a hope that some benefit will be received by such beneficiary in the future. The beneficiaries of the trust must be ascertained, defined or ascertainable, or the impersonal object of the trust must be clearly defined.
THE MASTER OF THE HIGH COURT
All trusts should be submitted at the Master of the High Court. The Master in whose jurisdiction the trust property shall be kept shall have jurisdiction.
TRUST AND AUDITS
There is no statutory obligation to appoint an auditor, but the master often insists on the appointment. It can still be stated in the trust deed that it is not required to be annually audited.
Trust property is defined as movable of immovable property. It must be clearly indicated in the financial records what property is held by trustees. Trust property is used to determine which Master’s office has jurisdiction over the trust and where same should be submitted. It should be noted that the trustees do not beneficially own trust property and thus the trust property will not form part of the personal estate of a trustees in his capacity as trustee.
TRUST RECORDS AND DOCUMENTS
All trust documents should be kept for 5years after the termination of the trust.
Trust documents include:
- Ownership of the trust property
- Investment of trust property
- Shares held in companies
- Location of trust property
- Acquisition and disposal of trust property
- Distribution of trust property
- Administration of trust property
A family trust is a trust that is designed to secure the interests and protect the property of a group of family members. It must be properly controlled and administered by independent trustees.
The High Court of South Africa has recently handed down judgment in terms of which the Master of the High Court was instructed not to issue Letters of Authority in the instance of family trusts, save where at least one independent trustee is to be appointed, in conjunction with the other trustees, as the Court requires a clear separation between ownership and enjoyment of trust assets.
ESTABLISHMENT OF THE TRUST
The making over of an asset to the trustees forms or establishes the trust. The trust is arguably not formed until the asset is actually received by the trustees. It is therefore extremely important for the trust bank account and the trust records to indicate that the monies have been paid to, and received by the trustees.
ADVANTAGES OF A TRUST
A discretionary trust is extremely flexible, and can be administered to take into account changes over time in family, financial and legislative circumstances.
This means the trustees can manage the trust’s assets in the best interest of the beneficiaries at any particular time by taking into account all relevant factors. This flexibility caters for such uncertainties as divorce, insolvency, increase in family size or fortunes, and of course annual changes to tax legislation.
- Tax planning:
If created and operated with care and with appropriate advice from tax experts, a trust can be administered so as to mitigate taxes such as estate duty, income tax, capital gains tax, donations tax and transfer duty (depending on the relationship between the settlor – the person who establishes a trust and transfers assets into it – and the beneficiaries) for both the settlor and the beneficiaries.
The assets owned by the trust will not be subject to estate duty, capital gains and executor’s fees on the death of the settlor.
- Estate and succession planning:
Trusts provide for the creation of flexible succession arrangements.
Also, the assets owned by the trust will not be subject to cumbersome and often lengthy legal procedures after your death, as is the case with the administration of assets in your personal estate. Trust assets are accessible at all times, while assets in your personal estate are frozen during the estate administration process.
- Family asset management:
A trust can provide a centralised asset management structure and controlled distributions for beneficiaries who are not in a position to manage assets themselves. This may be due to minority, disability or prodigality. A trust can provide for joint ownership of indivisible assets like holiday homes and farms.
Should the estate owner subsequently be mentally incapacitated through sickness or injury, a trust prevents the need for the appointment of a curator bonis (a person appointed by a court to manage finances) to take care of the founder’s affairs.
- Asset protection:
A properly set up and administered trust can help a family to protect assets from potential creditors, although care must be taken to ensure that transfers of property are not made in such a way as to prejudice creditors.
The manner in which assets are transferred is also important and relevant to the extent of the protection. For example, if you transfer an asset on a loan account, the amount of the loan account will remain an asset in your estate until the trust repays you. That means that the amount of the loan account will not be protected from creditors, only the increase in the value of the asset during the period of the trust’s ownership of the asset.
However, over a period of time, as the value of the trust’s assets goes up and the value of your loan account goes down, so will the benefit of asset protection be established. Remember also that the ownership of the asset by the trust also means that it will not fall into your beneficiaries’ personal estates on your death, is the asset will be protected from creditors of your beneficiaries.
- Choosing the right trustees:
By choosing your trustees wisely, you can ensure professional asset and investment management and that your assets are taken care of when you are not around or able to look after them yourself.
POTENTIAL DISADVANTAGES INCLUDE THE FOLLOWING:
- The settlor will lose control of the underlying assets. To set up a valid trust, a settlor must intend to and actually transfer legal (although not beneficial) ownership of the trust assets to the trustees.
This means that the trustees then must administer and control the trust assets.
- The security the settlor then has regarding the management of the assets is that the trustees are legally bound to comply with the terms of the trust deed and with their fiduciary duties.
This means that the trustees may only distribute assets to the beneficiaries as defined in the trust deed, and in the manner it prescribes. They are also obliged at all times to act in the best interests of the beneficiaries.
- Higher tax rates apply to income and gains retained by the trust. Capital gains tax is payable in the trust at an effective rate of 20%, and there are no abatements. Income retained in a trust is taxed at 40%. However, accurate application of the anti-avoidance provisions and income splitting can facilitate overall tax savings rather than additional tax.
- Taxes and costs incurred in setting up the trust and transferring the assets to it. You need to assess whether these costs are outweighed by the long-term benefits.
- Establishing a trust generates additional administrative costs and complexity in your affairs. It can be difficult to find dedicated and knowledgeable independent trustees. And if not set up and administered properly, you run the risk of the trust being regarded as a sham (or as not having been established in the first place), in which case the benefits of asset protection may be lost.
In summary, trusts are not appropriate for everyone. However, if set up and administered properly, they still provide real and substantial advantages which could benefit you and your family.