The importance of a properly drafted Trust Deed
Over many years the South African Revenue Service (SARS) started to shift its focus to the tax position of trusts. The goal is to amend rules and regulations to prevent the population from avoiding tax by using trusts. A number of measures have been introduced over the years, resulting in the income of trusts currently being taxed at 45% and capital gains being taxed at 36%. A trust also cannot claim the same rebates that can be claimed by natural persons from a tax perspective.
With this knowledge, it is arguable that trusts have, to an extent, lost their magic as far as tax benefits are concerned. This does not, however, mean that trusts are no longer beneficial. On the contrary, trusts are a useful succession planning tool that can protect beneficiaries, even against themselves if necessary. They allow the founder of the trust to establish a plan for the future of his/her assets for the benefit and protection of the beneficiaries by drafting core principles into the trust documents. The trustees of the trust must always consider and adhere to the stipulations of the trust deed when administering and distributing the assets to beneficiaries. The values and principles instilled in the trust deed by the founder will therefore continue to live on, even when the founder is no longer here.
Further to the above trusts allow for assets to be split for the benefit of multiple family members and are an efficient way to house complex assets and protect assets from creditors. Assets that belong to a trust are also not subject to executors’ fees, which can amount to up to 3.5% plus VAT on the gross value of an estate. In addition, they will not be subject to estate duty of 20% (25% on estates above R30 000 000.00), after the exclusion of the first R3 500 000.00, which applies to estates.
There is, therefore, a massive benefit to housing growth assets in a trust when you consider the savings on executor fees and estate duty implications. Other benefits include:
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Continuity – growth in a trust asset takes place within the confines of the trust which allows for the continuous growth of assets after death which creates a legacy and protects assets from creditors.
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Provides protection of assets for beneficiaries who are not able to manage their financial affairs.
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Facilitation of the continued maintenance of children during divorce.
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Avoidance of delays for the beneficiaries of a deceased estate.
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Benefit special interests such as charities
Some of the main practical issues in failure to establish a trust properly include:
Registration of an alter ego trust:
This can be explained through the application of the substance over form principle. What this principle entails is that effect is not given to the form of an agreement if it does not reflect the true intention of the parties involved. In other words, if the form in which the parties express their intention is disingenuous and a mere pretence, effect will not be given to the agreement.
Therefore, where a trust is established but it is evident that the parties never intended to give effect to the trust as a result of their management of the trust, a court of law would not uphold its existence. This could, for example, occur where a founder transfers his or her residential home to a trust and appoints him/herself and his/her spouse as trustees and beneficiaries.
In principle this is possible, but for a valid trust to exist the donor/founder must give up control of the trust property. If they do not, trust property can be held to form part of the donor’s/founder’s estate and creditors can potentially attach the property in claims against the donor’s estate.
The best way to prevent this issue is to appoint an independent trustee. A corporate trustee is generally the best option when appointing an independent trustee as a corporate trustee has the correct degree of independence from the trust while being equipped with the skills and expertise to assist in effective trust management.
Mismanagement/loss of management of the trust:
A trust deed must be drafted in such a way to ensure continuity of the trust post-death or resignation of the trustees. A well-devised succession plan for follow-up trustees should be implemented by the Trust Deed. If this is not done or is not done properly, this could result in the trust itself being wound up or terminated with a donor or beneficiary estate. The result of which could be additional estate duty and other fees.
Failure to appoint appropriate trustees could lead to mismanagement of the estate in circumstances where the appointed trustees do not have the best interests of the trust at heart and do not understand the consequences of their fiduciary responsibility as trustees.
Failure to establish authority for a trustee to bind the trust:
Even if a trustee has been properly appointed in terms of the trust deed or by the court in terms of general trust law, he or she may not act on behalf of the trust until authorised to do so by the Master.
Any such act performed by a trustee prior to receiving Letters of Authority from the Master will be null and void and incapable of ratification. Such authorisation by the Master must be clearly distinguished from an authority granted to an individual trustee by the board of trustees to perform some act on its behalf.
The trust will be bound, despite the trustee’s lack of authority if:
- The board of trustees subsequently ratifies the actions taken on its behalf; or
- If the trustee had “ostensible authority” to bind the trust; that is, if the board of trustees created the impression that the trustee had the necessary authority to represent them, and the other party reasonably relied on that representation.
In such circumstances, the board would be precluded (i.e. “estopped”) from denying the existence of the authority.
The above provides a practical explanation of a few of the issues that can arise if proper advice is not obtained for the drafting and registration of a trust deed from the outset. The consequences can be catastrophic where management of the trust is completely lost, especially in cases where the trust has specifically been established to cater for the needs of beneficiaries who are unable to manage their own affairs.
It can also result in an unfortunate loss of assets that were intended to be maintained over generations as part of an estate planning mechanism, not to mention the additional fees (which could escalate without receipt of the proper advice when planning the structure within the trust).
Furthermore, it is vital to appoint an independent trustee to ensure the trust is properly formed. As mentioned, a corporate trustee is well equipped to deal with this issue and to provide ongoing support and assistance within the trust. This is vital to avoid mismanagement of a trust and prevent any complications within a trust at a later stage. This also assists in providing for continuity of a trust.
These issues can be avoided if proper advice of an expert is obtained when parties decide to establish a trust for estate or business management purposes. Should you seek any assistance in setting up a trust, investigating whether a trust is the correct vehicle for your needs, or would like some guidance on current structures you have in place, please make contact with one of our professionals.
ABOUT THE AUTHOR:
Savannah Solomons
Savannah Solomons is an LLB Graduate of the North West University (NWU). She practices in the commercial field and has experience in transactional work such as mergers, acquisitions, joint ventures, due diligence, compliance investigations and reports. She has worked for large corporates as well as multinational companies.
