TRUSTS

TRUSTS:

A LEGACY OR A LIABILITY AND WHAT

ABOUT THE ADMINISTRATION?

BENEFITS OF A TRUST• Ensures the smooth handover of assets from

one generation to the next.• Cares for assets for those who are unable to

look after the assets themselves i.e. minors and elderly battling with dementia. Alternative to the Guardians Fund.

• Donations tax. If a natural person makes a donation greater than

R100k then donations tax at 20%. A distribution from a trust attracts no donations tax.

BENEFITS OF A TRUST• Reduction of death duties which are made

up of :-– Deemed Capital Gains Tax – max 13.3%.– Executor fees – max 3.99%.– Estate duty tax – 20% .

• Ability to split income and capital gains to multiple beneficiaries to reduce income tax.

• Possible protection of assets from creditors.

ESTATE GROWTH vs. DEATH DUTIES

DISADVANTAGES OF A TRUST

• In order for a valid trust to come into existence the donor must hand over ownership and control to the trustees.

• The trustees become owners of the asset.• Decision making is now made in terms of the deed

and not by 1 trustee i.e. the original donor.• Costs: Banks normally charge between 1 – 2% of

capital to act as trustees plus 6% on income collected.

TRUST DEED AND ADMINISTRATION

TRUST DEED1. The Deed of Trust is the trustees’ constitution and if

a responsibility, duty or power is not expressly stated then it cannot be implied by the trustees. The trustees have no authority to ‘assume’ that they may carry out a particular duty or power and if they do so then they are acting ultra vires.

2. It is a dynamic document that must be reviewed regularly. Tax and trust laws change!

3. Experience has shown that at least 9 out of 10 trusts either have wrong clauses or are missing clauses.

SUMMARY OF PROBLEM CLAUSES

1. Key terms used throughout the trust deed are not adequately defined or are incorrectly worded.

2. Incorrect Beneficiaries. 3. Mistakes dealing with the power and authority of

trustees.4. Insufficient clarity when dealing with administrative

matters.5. Manner in which income and capital are allocated.6. Termination date of trust. Pre-emptorary clauses.7. Control clauses granted to one trustee.

IMPROPER MANAGEMENT OF TRUST

1. Requirements as laid down in the Trust Deed are not complied with by the Trustees.

2. All the Trustees are not fulfilling their fiduciary responsibilities.1. Ensuring property is adequately insured.2. Determining the correct risk profile.3. Determining the asset allocation to match the income

requirements of the Beneficiaries.

3. Trust income is paid directly to a Trustee / Beneficiary and not into the Trust bank account.

IMPROPER MANAGEMENT OF TRUST

4. Trustee meetings are not held.5. Trustee /s never attend meetings.6. Trust transactions are not recorded through

minutes or resolutions.7. Annual Financial Statements are not prepared.8. Trust income / capital gains are not treated in the

most efficient manner.9. Testator / testatrix Wills are not synchronized

with the trust.

MYTHS & LEGENDS #1

SARS will use section 3(3)(d) to deem assets to form part of your estate!

MYTHS & LEGENDS #1

By Default this section can only be applied on death as it forms part of the Estate Duty Act and not the Income Tax Act! SARS cannot use it during your lifetime.

MYTHS & LEGENDS #1

Section 3(3)(d) states:Property which is deemed to be property of the deceased includes —

property (being property not otherwise chargeable under this Act or the full value of which is not otherwise required to be taken into account in the determination of the dutiable amount of the estate) of which the deceased was immediately prior to his death competent to dispose for his own benefit or for the benefit of his estate.

MYTHS & LEGENDS #1For purposes of paragraph (d) of subsection (3)—

(a) the term “property” shall be deemed to include the profits of any property;

(b) a person shall be deemed to have been competent to dispose of any property—

(i) if he had such power as would have enabled him, if he were sui juris, to appropriate or dispose of such property as he saw fit

whether exercisable by will, power of appointment or in any other manner;

(ii) if under any deed of donation, settlement, trust or other disposition made by him he retained the power to revoke or vary the provisions thereof relating to such property;

MYTHS & LEGENDS #1“Alter ego” = Control

• 2 Test for control:

1. Control is given to a specific person in the trust deed. Stipulations in the deed can establish de jure control.

2. Check the facts whether, irrespective of the stipulations of the trust deed, a trustee has exercised / abused his / her powers on his / her own and ignored the rest of the trustees and the trust deed. These surrounding facts will determine de facto control. (This is the most common)

MYTHS & LEGENDS #1First stage of test for control:1. First check the powers to control in the trust deed

e.g.:• Sole trusteeships,• Veto rights especially positive veto rights,• Sole right to appoint and dismiss co-trustees,• Sole right to amend trust deed i.e.

“testamentary reservation”.

MYTHS & LEGENDS #1• These reserved powers, on their own, may not be

conclusive to establish control on the part of an individual. Simply because the trust deed contains certain powers to control being bestowed on one person is not indicative of whether those powers have indeed been used or abused.

• There can even be no stipulation in the deed reserving control power in the hands of one person but the conduct of one individual may reveal an abuse of power and control.For this abuse of power the person’s conduct has to be checked in the 2nd tier of the test (i.e. for de facto control).

MYTHS & LEGENDS #12. The second stage of the test is the important de facto

control check for a party’s conduct during the existence of the trust. A trustee may actually abuse his position as a trustee even in a trust deed which, on its face value, may appear to be “clean” of any specific powers of control granted/reserved for one person.

MYTHS & LEGENDS #1In Badenhorst v Badenhorst 2006 2 SA 255 (SCA) (Delivered on 29/11/05) Combrinck AJA held the following on the two tier test for control:

“That control would have to be de facto and not necessarily de jure, and to determine whether a party had such control it was necessary to first have a regard to the terms of the trust deed and to consider how the affairs of the trust were conducted during the marriage”.

MYTHS & LEGENDS #2

Trusts ALWAYS pay Income Tax at 40% and Capital Gains Tax at 26.6%!

MYTHS & LEGENDS #2• Section 25B & paragraph 80(2);

• Income / capital gains are distributed to the beneficiaries and are taxed in their hands at their tax rates. Income and capital gains retain their identity. Trust is ignored for tax.

• Opportunities through distribution i.e. university fees for children and school fees for grandchildren.

MYTHS & LEGENDS #2• Section 7(8) & paragraph 70;

• Attribution of income and capital gains to the Lendor. Income and capital gains retain their identity.

• To the extent that the trust has benefitted from the interest-free loan the income and/or capital gains is deemed to belong to the Lendor.

• Income and / or capital gains is taxed at natural persons rates with no impact on loan account.

• Attribution MUST be applied! Not an option.

MYTHS & LEGENDS #3

Loan must attract interest!

MYTHS & LEGENDS #3Decision of Commissioner, South African Revenue Services v Brummeria Renaissance (Pty) Ltd and Others 2007 (6) SA 601 (SCA)• Only if there is a quid pro quo relationship between the lender and the borrower.•Reason is the right to retain and use loan capital on an interest-free basis constitutes a right which has an ascertainable money value which accrues to the borrower.

MYTHS & LEGENDS #4

Independent trustee must be a professional!

MYTHS & LEGENDS #4Post the decision in the Land and Agricultural Bank of South Africa v Parker 2005 2 SA 77 (SCA) the Master has to insist on the appointment of an ‘independent trustee’ in situations where all the beneficiaries are related and some or all of them are also the only trustees. This independent outsider can be a person related to the other trustees, provided that such person is not a beneficiary to the trust. In terms of Cameron’s judgement in the above mentioned case the independent outsider;

MYTHS & LEGENDS #4“does not have to be a professional person, such as an attorney or accountant, but someone who with proper realisation of the responsibilities of trusteeship accepts office in order to ensure that the trust functions properly, that the provisions of the trust deed are observed, and that the conduct of the trustees who lack a sufficiently independent interest in the observance of substantive and procedural requirements arising from the trust deed can be scrutinised and checked”.

ROLE OF INDEPENDENT TRUSTEE

• As mentioned it is now required after decision of Land & Agricultural Bank v Parker.

• Shouldn’t just appear in name.

• Must be party to all decisions and should attend all trustee meetings.

• His/her conduct could show if the trust is a bona fide trust or a sham.

TRUSTS AND YOUR WILL• Don’t take it for granted that you can

automatically bequeath assets to your IV trust. If the definition of beneficiaries are too wide the bequest could fail Braun v Blann & Botha.

• Nominating a replacement trustee.• Great opportunity to transfer fixed property as

there are no transfer duties.• Section 9(4) of the transfer duty act.

Inter Vivos TrustsConclusion– Ensure that one of the trustees is independent.– Ensure that your trust deed is “compliant” with

current legislation and case law.– Ensure that all the statutory requirements are

complied with i.e. trustee meetings, minutes of all decisions etc.

– Ensure your will “compliments” your trust.– Remember, both are dynamic documents and

should be reviewed on a regular basis!

QUESTIONS?