In today’s day and age, many people make use of trusts, the underlying idea of which is essentially the collection of assets and liabilities, vesting in administrators called trustees, to be managed by them, in terms of a contract called a trust deed, for the benefit of the beneficiaries, who normally are the heirs.
Although many people make use of trusts, I would not be too surprised if most of them would have needed to read the above paragraph twice… Since I had to think twice as to how to define a trust, it is probably all right if you had to read it twice…
I recently received a letter on the topic of estate planning from Standard Bank which caused me to also read the September edition of “Leadership”. I thought that it was a very accurate article and I thought that I should share some of this information with AÏDA’s family and friends.
Trusts can perform a crucial role in protecting assets and are frequently recommended by estate planners, but we know enough about these special purpose “entities”?
Trusts must be carefully established correctly and it must be managed very carefully. In a recent divorce case that was argued before the Supreme Court of Appeal in Badenhorst v Badenhorst 2006(2) SA 255(SCA), the Court decided that, under the prevailing circumstances, the assets were in fact under the control of Mr. Badenhorst, who was one of the trustees.
In essence, the Court found that this particular trust was essentially a sham. This had serious consequences for Mr. Badenhorst, as all the assets were deemed to be owned by him personally, and had to be equitably shared with Mrs. Badenhorst in their divorce proceedings.
If you have a trust, this court decision could have serious consequences for you. You can be sure that the South African Revenue Services has taken note of the arguments put forward by Badenhorst's lawyers, and it is probably only a matter of time before a case comes before court with SARS seeking an order that estate duty be paid on assets which were held in trust, under the de facto control of the deceased.
When one takes interest in a trust, you firstly need to understand what governs the trust’s state of affairs. The trust deed is a legal contract between the founder of the trust and trustees which sets out how the trust is constituted and how it is to be administered. It expressly sets out that all transferred assets become trust assets under the sole control of the trustees.
The Trust Property Control Act, 57 of 1988 regulates trusts and requires that all trust deeds are registered with the Master of the High Court. No person may act as a trustee until they have been issued with letters of authority to do so by the Master.
The cost of owning assets in trust has become more expensive in terms of capital gains taxes, income taxes and there are fewer income tax avoidance opportunities. Add to this the risk of being declared a sham trust in Court, and think twice.
The primary purpose of a trust should be to put assets under the control of others who can act in your place for the beneficiaries. This allows continuity in the event of death, absence and incapacity, separating the enjoyment of capital and income and the management of it.
Such continuity is particularly important in the case of minors, or major beneficiaries who are not good with finances or who do not have the capacity to conduct their own financial affairs.
Protection from creditors is a real advantage, and as things stand now, there will be no estate duty or capital gains tax payable on the trust assets on the death of the founder. However, where the founder, trustee and beneficiary are the same, extra care should be taken to ensure your trust is not set aside.
Before you establish your own trust, please pay attention to the following:
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