WHAT IS A TRUST?

A TRUST is a contract between two or more persons in terms of which a number of TRUSTEES are appointed to receive, hold, administer and distribute certain TRUST ASSETS (such as money, share portfolios, immovable property etc.) for the benefit of a number of BENEFICIARIES, i.e. it is a type of contract for the benefit of third parties. This contract is called a TRUST DEED.

WHO ARE THE PARTIES TO A TRUST DEED


THE FOUNDER

Any person with contractual capacity or capable of making a Will and who intends to dispose of his property in a specific manner within the framework of trusts may create a TRUST. This person is called the FOUNDER of the TRUST.

The FOUNDER will normally decide to establish a TRUST for a number or reasons which could include any of the following, namely:

  1. To create and preserve a TRUST FUND to be utilised for the maintenance, education, advancement in life and general well-being of one or more BENEFICIARIES;
  2. To preserve a family asset or family business for the benefit of one or more BENEFICIARIES over a period of time;
  3. To protect family assets from the business risks of the FOUNDER;
  4. To save on Estate Duty;
  5. To provide for the maintenance of a spouse and children in consequence of a Divorce Order;
  6. To carry on a business or a trade;
  7. To create and preserve a TRUST FUND for some charitable purpose.

The FOUNDER must hand over control of the TRUST ASSETS or must be legally obliged to hand over control of the TRUST ASSETS to the TRUSTEES in order for a valid TRUST to come into existence.

THE TRUSTEES

The TRUSTEES are the persons to whom the TRUST ASSETS are entrusted. They are appointed by the FOUNDER and are responsible to ensure that the TRUST ASSETS are utilised in accordance with the FOUNDER's intention and to the best advantage of the BENEFICIARIES of the TRUST.

Any person, natural or juristic, may be appointed as a TRUSTEE. A BENEFICIARY may be appointed as TRUSTEE and, if there is no conflict of interest, the FOUNDER may also be so appointed.

The TRUSTEES have no personal rights to or interest in the TRUST ASSETS but simply hold, administer and manage the TRUST ASSETS for the benefit of the BENEFICIARIES.

The TRUSTEES can only do that which the FOUNDER empowers and directs them to do and their rights and powers to act on behalf of the TRUST will accordingly be set out in the TRUST DEED.

The TRUSTEES will usually be given the discretion to award income and/or assets of the TRUST to certain BENEFICIARIES as and when they consider it prudent to do so, subject to any specific directions of the FOUNDER as contained in the TRUST DEED.

A TRUSTEE has an obligation to the BENEFICIARIES of the TRUST to, in the performance of his duty and the exercise of his powers, act with the care, diligence and skill, which can reasonably be expected of a person who manages the affairs of another. A TRUSTEE can be held accountable should he fail to exercise the necessary care, diligence and skill.

THE BENEFICIARIES

The BENEFICIARIES are the persons appointed by the FOUNDER to be the recipients of either the assets and/or the income of the TRUST. The BENEFICIARIES are the persons on whose behalf the TRUST ASSETS are given to the TRUSTEES.

The BENEFICIARIES can be specific and can have a vested interest in the TRUST, alternatively, the FOUNDER may nominate a certain class of persons to be BENEFICIARIES of the TRUST. In the latter case, the TRUSTEES will normally be given the discretion to decide who will from time to time benefit from the TRUST taking all circumstances as well as the directions of the FOUNDER into consideration.

In these cases, the BENEFICIARIES have no vested rights to claim any benefit from the TRUST but merely a hope or spes of receiving assets and/or income from the TRUST. The distribution of a benefit to a BENEFICIARY will in such cases be in the sole discretion of the TRUSTEES.

THE ESSENTIAL FEATURES OF A TRUST

In order for a valid TRUST to come into existence, it is necessary that:

  1. Certain identifiable assets be set aside for the purposes of the TRUST i.e. the assets which will be placed in the TRUST must be clearly identified;
  2. There be a nomination and acceptance of nomination of certain persons to the office of TRUSTEE thereby placing an obligation upon such TRUSTEE to administer the assets of the TRUST for the benefit of the BENEFICIARIES;
  3. A TRUSTEE administer the assets other than for himself;
  4. The BENEFICIARIES be clearly identified;
  5. The assets which have been set aside for the TRUST be placed under the control of the TRUSTEES;
  6. There be directions to the TRUSTEES for the administration of the TRUST ASSETS indicating clearly the wishes of the FOUNDER in relation to the assets, the income and the BENEFICIARIES of the TRUST.

WHY REGISTER A TRUST?

In addition to the reasons advanced for registering a TRUST, TRUSTS can play an essential role in Estate and Tax Planning.

From and Estate Planning point of view a TRUST has the following advantages:

  1. It enables the FOUNDER to divest himself of his assets;
  2. The BENEFICIARIES of a TRUST do not normally have a vested right to the assets and the assets will accordingly not form part of their respective estates;
  3. A TRUST is not a living person and can, therefore, not have an estate for Estate Duty purposes. The consequence of this is that the assets of the TRUST are accordingly not taxable under the Estate Duty Act.
  4. A TRUST can also lead to substantial savings on Estate Duty. For example, 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 seller's estate. The growth in the value of the asset that will take place within the TRUST does not form part of the seller's estate and will therefore not attract Estate Duty. The placing of the asset in a TRUST therefore freezes the value of the seller's estate.

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 and the mechanism of the TRUST can provide this flexibility as opposed to the provisions of a Will which are often inflexible.

From an Income Tax point of view, a TRUST can provide significant savings in Income Tax by virtue of the flexibility, which a TRUST can provide in the distribution of its income and assets.

One of the advantages of a TRUST is that it is possible to split the taxable income of a TRUST by vesting it in a number of BENEFICIARIES. The greater the number of BENEFICIARIES in whom trust income can vest, the greater the spread of income on which income tax will be paid.

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 during a tax year 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 an/or the BENEFICIARY depending upon the amount of taxable income received by a BENEFICIARY from the TRUST and/or any other sources.

Therefore, assuming that the income received by a BENEFICIARY from a TRUST is the only source of such BENEFICIARY's income, then in the case of an unmarried BENEFICIARY under the age of 63 (SIXTY THREE) the TRUST can pay taxable income in the sum of R10 714,00 to such BENEFICIARY without either the TRUST or the BENEFICIARY incurring any tax liability in respect thereof.

Another advantage of the TRUST is that the income of the TRUST retains its identity as it flows through the TRUST to the BENEFICIARY. This is known as the "Conduit Principal". Thus, if a TRUST receives dividend income and distributes it to a BENEFICIARY, it retains its nature as a dividend and is accordingly exempt from tax in the hands of the BENEFICIARY.

The Conduit Principal will only apply if the income received by the TRUST is distributed to the BENEFICIARIES during the same year of accrual. Where income is not distributed during the year in which it accrued to the TRUST it may lose its identity and, if distributed in a subsequent year, may no longer have the characteristic of the original income.

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

ADVANTAGES AND DISADVANTAGES OF REGISTERING A TRUST

The advantages of registering a TRUST are:

  1. A TRUST can be registered within 5 days as opposed to the amount of time that it takes to register a Company or a Close Corporation;
  2. A TRUST offers flexibility in that it is easy to cede the beneficial interest of a BENEFICIARY who holds a vested interest in a TRUST to a third party;
  3. Transfer duty advantages in those instances where the BENEFICIARIES are natural persons resulting in a reduced transfer duty liability as opposed to an increased transfer liability in the case of Companies and Close Corporations;
  4. Estate Duty advantages;
  5. Taxation advantages;
  6. The costs of registering a TRUST as opposed to the costs of registering a Company or a Close Corporation.

The disadvantages of registering a TRUST are:

  1. A TRUST cannot own a member's interest in a Close Corporation (it can however hold shares in a (Pty) Ltd;
  2. A TRUST is slow to make decisions as all the TRUSTEES normally have to be involved in the decision making process;
  3. Legislation could in the future limit the benefit which TRUSTS currently enjoy;
  4. The costs of administering a TRUST;
  5. The loss of control by the FOUNDER of the TRUST ASSETS sold or donated to the TRUST as the control thereof vests in the TRUSTEES.

SUMMARY

In summary therefore, a TRUST can serve a variety of purposes and can play an important role in proper Business, Estate and/or Financial Planning for individuals, who wish to make use of the Estate Duty and Income Tax advantages as well as all of the other benefits that the mechanism of TRUSTS offer.

The subject of TRUSTS is a complicated one and requires a thorough knowledge of the law pertaining to TRUSTS, contracts, estate planning, the Transfer Duty Act, the Income Tax Act as well as the Estate Duty Act.

Should you require any information or advice in respect of TRUSTS we recommend that you consult with your attorney. The subject of TRUSTS is highly specialised and it is important to make certain that your attorney is experienced in the field of TRUSTS so as to ensure that your assets are adequately protected and that your Business, Estate and Financial Planning needs are properly catered for.

For more information, please feel free to contact our offices on =27 41 3969200