A trust is a three-party fiduciary relationship in which the first party, the trustor or settlor, transfers a property upon the second party for the benefit of the third party, the beneficiary.
A testamentary trust is created by a will and arises after the death of the settlor.
Setting up a family trust
A well-planned trust can protect your assets and preserve your wealth – we investigate the steps behind setting up and managing a family trust. A family trust is a living trust (also called an inter vivos trust) that involves three parties – the founder, the trustees and the founder’s beneficiaries. In short, a trust comes into being when an agreement is reached between the founder and the trustees. The founder’s assets are sold to the trust and a loan account (debt) is created. Assets can also be donated to the family trust, but this has donations tax implications. Throughout its existence, the trust can accumulate other assets through purchases or an inheritance.
Managing a trust
The administration of a trust is a complex business – trustees are responsible for controlling trust assets and protecting them through making investments in accordance with the trust deed and the needs of the beneficiaries, explains Zainap Behardien, Manager of Testamentary and Inter Vivos Trusts at Sanlam. Trustees also handle all transactions, including making regular 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 (SARS)
- The Master of the High Court (if requested)
“Trustees are also required to give advice to their fellow trustees and the trust’s beneficiaries,” says Behardien. Although trustees may administer a trust themselves, they sometimes outsource some tasks to agents who handle matters on their behalf. The buck, however, stops with all the trustees as far as end decisions and liabilities are concerned.
Benefits of family trusts
- A trust is ideal for estate “pegging” or the freezing of asset values, and people often establish a living trust for estate planning purposes. “This means that once the asset is moved into the trust, either through a loan account or a donation, any future growth of the asset will take place in the trust, so the value of the donor’s estate at his death is significantly less than if the growth had taken place in his estate. This means his estate duty liability will be less,” says Behardien.
- A trust also protects the interests of the surviving spouse and minor children who may have limited skills in financial matters, which means they won’t run the risk of being exploited by unscrupulous investors.
- A trust can continue for future generations, as assets can’t be frozen once the founder of the trust dies – the trust simply continues to function as before.
- The assets in a trust are protected from creditors, as long as the founder was solvent at the time of placing the assets into the trust.
You must decide on the following before you can have a trust deed drafted by a professional trust practitioner:
The name of the trust
It is preferable not to use your name and/or surname, because this will make it easy for your creditors or Sars to track your trust.
Trusts are registered at the Master of the High Court. You do not have to reserve a name, as you do when registering a company. For example, you can have more than one trust with the same name. A trust is given a registration number when it is registered. It operates on a similar basis as a motor vehicle, which has an individual registration number.
Although you can change the name of your trust – if the trust deed allows this – the trust number will remain the same and will be the identifier of your trust.
The registration number of an inter-vivos trust starts with the letters IT, followed by a number issued by the Master of the High Court’s office, followed by the year in which the trust was registered. For example, registration number IT 3293/18 indicates this was the 3 293rd trust registered at the Master of the High Court’s office where the trust was registered in 2018.
A trust is registered with reference to the Master of the High Court’s office where it was registered. Each Master’s office has its own sequence of numbers for every year.
The type of trust
Decide whether you want a discretionary or a vested trust. In a discretionary trust, the trustees have the right to decide how much income (or capital) to award each beneficiary. In a vested trust, the income and capital gains vest in the beneficiaries. Take note that complications can arise in vested trusts if a beneficiary is declared insolvent, or when the beneficiary dies.
The purpose or object of the trust
It is important to define the purpose and object of the trust clearly in the trust deed, without which the trust may not legally exist.
The name of the founder
The founder is the person (although there can be more than one) who sets up the trust. This must be the person who intended setting up the trust and who transfers at least the initial donation to the trust.
The founder may not be the lawyer who sets up the trust, or his or her secretary.
The founder cannot reserve any sole rights in the trust deed, because this may have negative tax and other consequences.
The names of the proposed trustees
Great care should be taken here. It highly recommended that the trustees have experience in running a trust and knowledge of accounting, because this will minimise the risk of the Master of the High Court requiring the trustees to put up security for the discharge of their duties.
As a general rule, your children or grandchildren should not be trustees while you and/or your spouse are still alive. Children often have different goals and motives from their parents. They may decide to out-vote their parents, which can lead to a great deal of stress, particularly when the parents rely on the trust as their sole source of income. Allow your children to take over the management of the trust only once you and your spouse are dead.
It is recommended that you add a clause to your will appointing your children as follow-up trustees. This will ensure continuity.
Appointing too many trustees can make decision-making difficult or even impossible. Choose a minimum of two trustees, so that the decision-making is not left in the hands of only one person. Nominate a maximum of four or five trustees, depending on your circumstances.
Is it necessary to appoint an independent trustee?
It has become a requirement to appoint an independent trustee for a family trust.
Nomination of beneficiaries
Decide whom you want to nominate as beneficiaries, and whether they are to be income or capital beneficiaries (or both). This gives you the flexibility to treat each type of beneficiary differently.
Remember that as soon as a beneficiary receives any distributions from the trust (or accepts his or her benefits in writing to the trustees), it is not a simple process to remove him or her as a beneficiary without his or her consent.
The addition or substitution of beneficiaries (in a discretionary trust) at a later date may trigger transfer duty if the trust holds residential property.
It is important to ensure that the description of the beneficiaries in the trust deed identifies them (by name) or makes them identifiable (such as your descendants).
It is not permitted to have a provision in the trust deed whereby trustees can nominate their own beneficiaries – this will render the trust null and void.
It is important to remember that a trust does not come into existence without a clearly defined object. In a family trust, the object is the beneficiaries for whose benefit the trust was created.
The trustees’ powers, competencies and obligations, including a clear description of the trustees’ discretionary powers and duties, and their remuneration, must be stipulated in the trust deed, because the powers given to the trustees in the deed are their only powers.
Administrative procedures, such as the calling of trustees’ meetings, how trustees’ meetings must be conducted, voting rights, decision-making and dispute-resolution procedures, and veto rights should be clearly provided for in the trust instrument.
It is equally important to ensure that the trustees can and will follow the “rules” set out in the trust instrument. Failure to achieve this may be indicative of an alter ego trust.
Ensure that the provisions you insert into the trust instrument are practical, giving you the protection you require without being excessively onerous.
Consider the implications of a majority-decision requirement. Requiring a unanimous decision could leave your trust in stalemate if certain trustees become obstructive.
Giving excessive powers to a specific trustee could result in that trustee taking control of the trust, which will have tax consequences.
Use a professional
Use a professional who specialises in trusts to draft your trust deed and ensure the trust deed is drafted according to your individual circumstances.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa and the founder of Trusteeze, which specialises in trust administration. She is the author of Demystifying Trusts in South Africa (Createspace).