1. What is a trust?
At Leeuwner Maritz our expert legal team can assist you will the setting up of trusts that are clear, elegant and unambiguous.
A trust is created by an individual, known as the Donor / Founder. It is an agreement / contract between an owner of assets (the donor) and trustees for the benefit of a third party.
It is a legal structure to which property (real, tangible or intangible) is transferred by the donor and then held and administered by a trustee as its nominal owner for the benefit of beneficiaries in accordance with and for the purpose and objectives as contained in the donor’s trust deed or will.
2. The legal consequence of a trust:
- The donor intents and actually divests himself / herself of legal ownership of the trust assets.
- There is a separation of legal ownership and administrative control from beneficial ownership.
- Can be either a person or a legal entity;
- Can be one or more;
- May not act as such without the written authority of the Master;
- May also be a beneficiary and the founder of a trust may also be a trustee and beneficiary; and
- Owes the utmost good faith towards all beneficiaries and must always act with great care, diligence and skill.
4. Beneficiaries can include:
- Any person (unborn or alive);
- Another duly registered trust;
- Juristic persons;
- The state or any organ of the state.
A trust may have any number of beneficiaries.
5. Inter Vivos (“between the living”) Trusts:
An inter vivos trust is formed during the donor’s lifetime upon the execution of a trust deed. Same can be a vested trust or a discretionary trust.
The trust deed sets out:
- Details of the trustees as well as their powers and duties. Such powers are strictly interpreted;
- The purpose and objectives of the trust; and
- Details of the beneficiaries.
5.1 Vested Trusts / Bewind Trusts (has few advantages as per point 8 hereof):
The beneficiaries have vested rights as stipulated in the trust deed. The assets and / or benefits vest in the beneficiaries, but are administered by the trustees.
The beneficiaries are only entitled to receive a benefit once the trustees have decided to benefit them. The trustees have full discretion to determine benefits of beneficiaries.
Same is a discretionary trust and a form of business vehicle which can inter alia own land, property, shares in a company and members interest in a close corporation.
6. Testamentary Trusts (“Will Trusts”):
This type of trust is created by a specific stipulation in the will of the testator and is created upon his / her death during the winding up of the deceased estate. It is prudent to draft the trust deed separately and to incorporate same by reference into the will.
Normally a testator wishes to protect certain assets in his / her for the benefit of certain beneficiaries (vulnerable spouse / minor children / incapacitated dependants / spendthrift children) and to limit such beneficiaries’ administration and management of assets.
If you have a large Estate or minor children (under 18) you might want to create a testamentary trust which will take ownership and protect the minors’ inheritance, while they receive an income so that they can properly cared for, alternatively such inheritance will be converted to cash and paid to the Guardians Fund.
• Guardians Fund – Same falls under the administration of the Master of the High Court to hold and administer funds paid on behalf of minors. Money is invested with the Public Investment Commission and interest is calculated monthly at a rate per annum determined by the Minister of Finance. In the ordinary course a minor can claim the invested money as well as the accrued interest on reaching the age of majority.
7. Advantages of a Trust:
- Assets can be transferred to your nominated beneficiaries in the way you want;
- a trust survives the life of an individual (donor / trustee / beneficiary) and can span multiple generations;
- exclusion of estate duty, executor’s fees, transfer fees and capital gains tax upon death of the donor;
- A trust can protect an individual’s assets from creditors and / or matrimonial and relationship disputes;
- subject to certain exceptions, assets are held by the trust and are not owned by the trustees or beneficiaries. Creditors of the trustees or beneficiaries have no claim against the trust;
- only the portion of the trust assets that vests in that beneficiary upon date of death would form part of the beneficiary’s estate for estate duty purposes;
- a beneficiary cannot sell a right in a trust
- Estate duty can be minimised or pegged
- assets are held by the trust and the growth (capital gains) of same occurs in the trust, resulting in a lower net value of the donor’s / testator’s estate and thus excluding estate duty payable on such growth;
- Tax benefits can be created by the correct distribution of income and capital gains. The trust’s income can be taxed in the hands of either the trust or can be divided among beneficiaries who pay tax in their personal capacities at their individual tax rates;
- Allows for multi-ownership of assets;
- a business;
- a farm – there are legal restrictions on subdivision of certain agricultural land.
8. Disadvantages of a Trust:
- The relinquishment of control over ownership and the administration of the assets within the Trust. Assets belong to the trust and are administered by the trustees in terms of the trust deed;
- Costs incidental to administering the trust e.g. services of professionals, annual financial statements / income tax returns, safekeeping of all records from inception to five years after deregistration;
- The higher rate of:
- Income tax – payable at a flat rate of 40% (individuals pay according to income scales), (the tax burden, however, can be divided among beneficiaries who pay tax in their personal capacities, resulting in the trust not to pay any tax.)
- Capital gains tax (CGT) payable at a rate of 26-6% (individuals pay 13-3%).
- (Generally these are insignificant in relation to the potential of estate duty saving.)
With our legal team’s advice your trust deed will not read as follows:
“The wether decided that he’ll whether the weather whatever the weather, whether he likes it or not. The farmer looked out the window and wondered whether the wether would weather the weather or whether the weather would kill the wether.”