WHAT IS A TRUST

A Trust is a contract between two or more persons, which contains a stipulation for the benefit of a third. This contract is called a TRUST DEED. A TRUST DEED contains inter alia, the terms upon which a number of Trustees are appointed to receive, hold, administer and distribute certain Trust property for the benefit of defined Beneficiaries. An inter vivos Trust is a Trust which is established by the Founder during his lifetime.

HOW DO YOU FORM A TRUST

The person intending to establish a Trust is called the Founder of the TRUST.

A TRUST comes into existence when the Founder:

  • makes over ownership in all or some of his property (movable, immovable or a contingent interest in property);
  • to another person (the Trustee);
  • to be administered and distributed for the benefit of a third person (the Beneficiary).

From a practical point of view the following must take place:

The Founder and the Trustees must enter into a written contract (TRUST DEED) recording, inter alia:

  • the intention to establish a valid and binding TRUST;
  • the purposes for which the TRUST is being formed;
  • the identity of the Trust property being made over by the Founder to the Trustees;
  • the identity of the Trustees;
  • the identity of the Beneficiaries;
  • the power of Trustees. A Trustee will only have those powers which are specifically provided for in the TRUST DEED.

There must be a handing over of Trust property by the Founder to the Trustees. This normally takes the form of a gift of Trust property (say R100,00) by the Founder to the Trustees.

The TRUST DEED together with a R100,00 revenue stamp must be sent to and lodged with the Master of the High Court.

The Master of the High Court must:

  • Allocate a registration number to the TRUST DEED;
  • Furnish the Trustee with the Master's written authority to act as a Trustee.

It is only after all of the above has taken place that a valid and binding TRUST will come into existence.

THE PURPOSE OF A TRUST

A TRUST can serve a variety of purposes namely:

  • To protect or preserve a Trust Fund for the benefit of one or more Beneficiaries over a period of time.

An example of such a TRUST is one formed by the Founder for the purpose of preserving a farming property on which farming operations are being conducted in whole or in part for a succession of Beneficiaries, i.e. from generation to generation, allowing, say, the income of the TRUST to go to the surviving spouse and the capital to the children on the surviving spouse's death. It would even be possible to preserve the capital for descendants further down the line, the intermediate descendants to benefit from the income. This form of TRUST gained some popularity amongst the farming community where the intention is for ownership in a farming property to pass from generation to generation as long as the law allows.

Other examples of such a TRUST is one formed for the purpose of purchasing a holiday home for use by a succession of Beneficiaries, or holding certain investments such as share portfolios for the benefit of one or more Beneficiaries over a period of time.

  • To protect family assets from the business risks of the Founder.

The Founder of a TRUST may wish to protect himself as well as his family from the financial risks that could arise from his economic or business activities. If the Founder is engaged in an enterprise which could result in a reduction of the estate he possesses or even put him into bankruptcy, he can protect his existing assets (such as his family home) from the grasp of his creditors by transferring them to a TRUST, provided that this does not result at the time in his liabilities exceeding his assets.

The Founder would have the choice to either donate his assets to the TRUST which would involve a donations tax, alternatively, he could sell his assets to the TRUST in which event the advantage will be that the growth in the value of the assets would take place within the TRUST and will not form part of the Founder's estate.

  • To save on Estate Duty.

If a property is sold to a TRUST, the purchase price owing to the seller can become a loan account in the books of the TRUST. On the seller's death, it is only the loan claim against the TRUST which will form part of the deceased sellers' estate. The growth in the value of the asset that will take place within the TRUST, does not form part of the sellers' estate and will therefore not attract Estate Duty. The placing of the asset in a TRUST freezes the value of the sellers' estate.

To avoid the TRUST having to repay the amount due to the seller, the seller will often bequeath his loan claim against the TRUST to the TRUST.

  • To provide for the maintenance of a spouse and children in consequence of a Divorce Order.

The benefit of this type of TRUST is that the setting aside of assets in TRUST for this purpose is not only protective of the interests of the spouse and children but also assists in the administration of the estate of the Founder should he die before the obligation to maintain has fallen away.

Where the estate of the deceased is directly burdened with the maintenance of a divorced spouse or children, the estate cannot be wound up or assets distributed to the heirs until the provision has been made to meet the claim for maintenance.

  • To carry on a business.

A TRUST can have as its main purpose the facilitation of some business objective or trading activity. This is an effective alternative to the use of a company as it avoids the restrictions and costs of an audit etc. required by the Companies Act. It is also an alternative to the use of a partnership as it avoids the demise that follows on the dissolution of a partnership by death or resignation of a partner as the retiring partner in a business Trust can simply cede his beneficial interest in the TRUST to a third person, usually with the consent of all of the Trustees.

A business Trust is often used for the purpose of acquiring residential property, and more often, commercial or industrial property. The reason for this is that a TRUST DEED can confer upon its Beneficiaries the right to cede or assign their beneficial interest in the TRUST to a third person for whatever consideration may be applicable at the time, in whole or in part.

This right can be a valuable one in respect of a beneficial interest in immovable property registered in the name of the TRUST as this right will enable the Beneficiary to cede his beneficial interest in the property to another without incurring liability for transfer duty. The reason for this is that there is no acquisition of property involved in such a transaction as the ownership in the property remains vested in the Trustees prior to and after the cession.

  • To create and preserve a Trust fund for some charitable purpose.

A Founder may wish to establish a charitable TRUST in terms of which certain capital contributed by the Founder to the TRUST is retained for a period of time or in perpetuity and the income distributed to charitable bodies or for charitable purposes.

The receipts and accruals of a charitable TRUST can be exempt from income tax in certain circumstances. The Estate Duty Act also provides for a deduction in determining the dutiable amount of a deceased estate in respect of which estate duty is payable, of an amount bequeathed to a charitable TRUST which is exempt from paying income tax under the relevant provisions of the Income Tax Act.

WHY SHOULD YOU KNOW ABOUT TRUSTS

TRUSTS can play an essential role in Estate and Tax Planning.

The flexibility in the administration and allocation of the assets of an estate is a primary factor to be considered in the course of Estate Planning.

The provisions contained in a Will regarding the inheritance of immovable property are often flexible. An example of such a provision is a fideicommissum which ties down the fiduciary. Although owner of the property, the fiduciary cannot dispose of it for the benefit of either himself or his successors without the consent of all the fideicommissaries, some of whom may be unborn.

Another such provision is a usufruct which ties down both the usufructuary and the bare dominium holder. The usufructuary cannot dispose of the property over which he enjoys his usufruct, nor can the bare dominium holder dispose of the property free of the usufruct. Both must consent to this, but the ability to consent may be lacking because of unborn heirs.

By placing immovable property in TRUST and giving the Trustees the power to dispose of the immovable property with the consent of all or certain of the ascertained Beneficiaries in the TRUST, a flexibility which the simpler form of bequest cannot give, is created. This also allows the Trustees to exercise an impartial discretion as to whether or not the immovable property concerned should be retained or sold and the proceeds re-invested.

This is good planning to the extent that it enables the investment of the Estate to be determined according to changes in circumstances which the Founder of the TRUST or the Testator would not always be able to foresee.

The MECHANISM of the TRUST can also bring about substantial savings in Estate Duty. As mentioned previously, if a property is sold to a TRUST, the growth in the value of the asset that will take place after the sale, will take place within the TRUST and will not form party of the seller's estate. The placing of the asset in a TRUST accordingly freezes the value of the seller's estate.

This flexibility can also be extended to the distribution of income and capital. Where the Trustees are granted the discretion to distribute the income and capital of the TRUST amongst the Beneficiaries as they may determine from time to time, a variety of circumstances can be catered for. This discretion becomes more important the longer the TRUST is to endure.

In addition to the above, a TRUST can provide significant savings in Income Tax. The flexibility which a TRUST can provide in the distribution of income and capital is complemented by the tax savings which result therefrom.

A TRUST is deemed to be a person for income tax purposes. A TRUST is taxed at the rate applicable to unmarried persons. A TRUST does not, however, qualify for tax rebates which are available to natural persons.

It is possible to split the taxable income of a TRUST by vesting it in a number of Beneficiaries. It follows, therefore, that the greater the number of Beneficiaries in whom TRUST income can vest, the greater the spread of income. As a result of rebates granted to natural persons under the Income Tax Act, persons are not liable for tax if the taxable income earned by a particular person is equal to or less than the rebate to which they are entitled under the Income Tax Act. The possibility of spreading the income of the TRUST creates room for reducing tax payable by both the TRUST and/or the Beneficiary depending of course upon the amount of taxable income received by a Beneficiary from the TRUST and any other sources.

The TRUST mechanism also facilitates "donations" to Beneficiaries which would otherwise be subject to donations tax.

In summary therefore, the creation of a TRUST can serve not only to peg the value of an estate for Estate Duty purposes, but can also provide large Income Tax advantages and play an important role in proper estate and financial planning for individuals.

The subject of TRUST is a complicated one and requires a thorough knowledge of the law pertaining to TRUSTS, THE Income Tax Act insofar as it pertains to TRUSTS, the Administration of Estates Act and the Estate Duty Act.

It is recommended that should you require any information or advice in respect of TRUSTS, that you consult a lawyer. It is important to make certain that your lawyer is experienced in the field of TRUSTS to ensure that your assets are adequately protected and that your estate and financial planning needs are properly catered for.