The description of beneficiaries in the trust deed should be complementary to the objective of the trust. This decision should fit into your estate plan and your family’s circumstances. It is important to understand that you can only benefit from a trust if you are a beneficiary and no one else. However, be mindful of nominating beneficiaries ‘willy nilly’ in the trust instrument, as this may give them rights, regardless of whether it is a discretionary trust or not.
Clearly defining beneficiaries
In terms of the object of a trust, it is important to remember that without a clearly defined object, a trust does not come into existence. In a family trust, the object is the beneficiaries for whose benefit the trust was created.
When you decide who should benefit from the trust, you should clearly define the beneficiaries. It is important to ensure that the description of the beneficiaries in the trust instrument identifies them (by name) or makes them identifiable (a clearly defined class of beneficiaries, such as your descendants) (Estate Richards v Nichol case of 1999).
Anticipate the possibility of future changes of beneficiaries
Remember that as soon as a beneficiary receives any distributions from the trust (or accepts their benefits in writing to the trustees), removing them as a beneficiary of the trust is not a simple process. You will need their consent to do that.
The addition or substitution of beneficiaries (in a discretionary trust) at a later date may also trigger Transfer Duty if the trust holds residential property (Section 1 of the Transfer Duty Act). As there is no definition of “residential property trust”, the provisions would apply to a trust owning residential property whatever the proportion such property is of the full value of the assets held by the trust. The Transfer Duty, in this instance, is based on the full market value of the residential property, regardless of the interest the person acquires in the trust. It is, therefore, important to carefully consider and include the relevant beneficiaries from the outset.
In addition to the above consequences, be mindful of chopping and changing beneficiaries as it may change the objective of the trust and thereby create a new trust with adverse tax consequences.
Be mindful of what beneficiaries can do with their rights
It is important to remember that a beneficiary can renounce their rights and can cede both a vested and discretionary right to another person or entity. One should be mindful of the consequences and may want to expressly prohibit such a cession in terms of the trust instrument.
Practical considerations for decision-making powers in the trust instrument
It is important to ensure that the meaning of the term “beneficiaries” corresponds with its intended meaning in clauses dealing with, for example, the appointment of trustees or the amendment of the trust instrument. If, for example, the definition of “beneficiary” in the trust instrument includes “all those persons related by blood or affinity to the founder” and, if the agreement of all beneficiaries is required for the appointment of a trustee or to make a change to the trust instrument, it may become a tedious task to trace and involve all said persons in such an appointment or change. The founder should, therefore, exercise practicality when considering such clauses in the trust instrument.
Often people do not pay sufficient attention to the important and significant beneficiary clause in the trust deed and accept a vanilla, off-the-shelf trust deed that does not specifically provide for and reflect the family’s circumstances. That can cost them dearly. The estate planner may wish to review an existing trust deed set up by them, to ensure that it reflects their wishes. It may be (and should possibly be) amended, subject to the terms of the trust deed, and the above considerations. Find the help of a professional who specialises in trust services.
Phia van der Spuy is a Chartered Accountant with a Masters degree in tax and a registered Fiduciary Practitioner of South Africa, a Chartered Tax Adviser, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze, the provider of a digital trust solution.