What is a trust?

A trust is a legal entity that manages assets, such as property or investments, on behalf of its beneficiaries.

Trusts can be used for estate planning but are also useful if you want someone who is unable to manage assets, such as minors, the elderly or disabled people, to benefit from them. Trustees manage the trust and have a fiduciary duty to ensure that the beneficiaries are taken care of.

Trusts are regulated by the Trust Property Control Act 57 of 1988. The act was amended in 2022 (effective 1 April 2023) requiring more stringent record keeping and reporting to combat money laundering. 

Two main types of trusts

The act defines two main types of trusts:

• Inter vivos trust (living trust)
  An inter vivos trust is established during the founder’s lifetime. The founder transfers assets into the trust and appoints trustees to administer it. Any growth in the assets occurs within the trust, lowering the taxable value of the founder’s estate to the benefit of the heirs when the founder passes away.
  
  These trusts can be either discretionary, where the trustees decide on the distribution of income or assets, or vesting, where the distribution of income or assets is predetermined.
  
  
  
• Testamentary trusts
  Testamentary trusts are established in terms of a will and are often created to provide for minor children.
  
  

Specific application trusts

Other types of trusts serve a specific purpose:

• Charitable trusts

Charitable trusts benefit the public, such as those that serve in healthcare or education. If they are registered as a public benefit organisation (PBO) with the SARS Tax Exemption Unit they may also be exempt from income tax and capital gains tax under Section 10(1) of the Income Tax Act. Donations to these trusts may be exempt from donations tax.

• Business or trading trusts

These trusts create a legal structure in which the assets in a business are managed by trustees and not an individual. There are tax and estate duty implications.

• Special trusts

Special trusts are created for individuals with a disability, or who are minors related to the founder and enjoy certain tax concessions.

Three role players in a trust

• The founder

The founder creates the trust and transfers assets into it. Once the trust is established, the founder relinquishes control unless they are appointed as a trustee.

• The trustees
  

  The founder selects trustees who, after they have obtained their authority from the Master of the High Court, manage the trust.
  
  
  
• The beneficiaries
  The beneficiaries receive income, capital or other benefits from the trust.
  
  

The trust deed

This is a legal document that describes the trust’s parties, purpose, duration and how the assets should be managed. Without a trust deed, the trust can’t exist.

In the case of the testamentary trust, the will that establishes the trust is the trust deed.

The trust deed specifies the number of trustees and decisions cannot be taken without the required number of trustees.

This document is submitted to the Master of the High Court in order to establish the trust and once it is established and a trust bank account has been set up, assets can be transferred to it (taking care not to trigger donations tax) and the trustees can start managing the trust.

The trust deed should align with the requirements for recording and disclosing beneficial ownership of the trust and reporting by accountable institutions such as banks and attorneys required to comply with anti-money laundering laws.

A South African resident trust cannot hold offshore assets but can apply for South African Reserve Bank approval to make distributions to an offshore trust.

Decision-making within a trust

The assets are owned by the trust and the trustees are responsible for making investment decisions, distributing income to the beneficiaries and ensuring that the trust complies with tax and other legislation. Trustees also have duties to maintain trust records and the register of beneficial owners.

The trustees must follow the trust deed rules and have a fiduciary duty to act in the best interest of the trust beneficiaries.

If the trustees neglect their duties and the trust suffers losses, the trustees may be held personally liable, either individually or as a group. They may be required to cover legal costs and to make up for the trust beneficiaries’ losses. They may also be dismissed as a trustee by the Master of the High Court.

Requirements for trusteeship

Trustees must be 18 years or older and should have some understanding of their legal duties and responsibilities.

For an inter vivos trust, the founder may serve as a trustee, but at least one other independent trustee is required to ensure impartiality. If the founder is the only trustee or is de facto controlling the trust, the validity of the trust may be challenged in court and the South African Revenue Service may consider the assets to be the founder’s own assets and disregard the trust structure.

A trust beneficiary may also serve as a trustee, but an unrelated third party, such as an accountant or professional trustee, must also be appointed.

You may not be a trustee if you’re:

An unrehabilitated insolvent

Of unsound mind

Disqualified in terms of the Companies Act 71 of 2008

Can a trust be modified?

A trust deed can be changed in numerous ways. If the founder is still alive, the trust deed can be amended and signed by the trustees, the founder and the trust beneficiaries.

If the founder dies and the trust deed has a clause allowing for its amendment, the trustees need to follow this clause to alter the trust deed. If there is no amendment clause, the trustees must apply to the High Court to amend the trust deed. Beneficiaries are allowed to comment on the proposed amendments and make counter-proposals before the court decides the outcome.

A trust is not permanent

A trust can terminate for several reasons:

• The trust deed stipulates an end date.
  
  
• The trust’s purposes have been fulfilled.
  
  
• Beneficiaries have died or renounced their rights to the trust.
  
  
• The trust assets are destroyed, and there is no hope of recouping them.
  
  
• A High Court order terminates a trust if its provisions violate public policy or are not in the beneficiaries’ best interest.

Terminating a trust is a complex legal process that entails deregistering the trust with both the Master of the High Court and SARS.

Trusts are costly

The costs of establishing and managing a trust vary according to the type of trust and its complexity. A testamentary trust is often less expensive, as the will serves as the trust deed.

Trustee fees range typically from around 0,5 percent to 2 percent of the trust’s value. Reporting requirements to the Master of the High Court must be met which typically means professional fees such as accounting or auditing fees also need to be paid. In addition, trusts must submit tax returns and pay tax annually typically at a higher rate than those that apply to individuals.

THE PROS AND CONS OF A TRUST
Privacy, as the details of a trust are never made public	Loss of control and decision-making power over the assets
It can reduce estate duty	It can be expensive to establish and manage
Assets are managed responsibly	It needs to be tailored to suit your specific needs
Assets are protected from creditors	Tax rates may be higher than for individuals
Succession is uninterrupted - the trust will continue even if one of the beneficiaries passes away	Increased compliance burdens resulting from the 2023 anti-money laundering amendments to the Trust Property Control act
Source: www.smartaboutmoney.co.za

Trusts are complex structures, so you should seek professional advice to find the right solution for you and the best way to transfer assets into the trust.

This article was written by Sylvia Walker and reviewed by Layla Patel, an attorney at SD Law.