More than 150 beneficiaries receive houses and title deeds in Cape Town. Photo: Henk Kruger/African News Agency (ANA)

JOHANNESBURG – Families set up trusts to achieve the benefits of asset protection and estate duty. 

Asset protection trusts include a large spectrum of legal structures that are set up to mitigate the effects of divorce, attacks from creditors, and bankruptcy on the part of the beneficiary. 

Their main objective is the protection and maintenance of trust property for the benefit of the family members of the founder, often in perpetuity. 

While the main consideration for setting up a trust should not be to save on estate duty, if a trust is set up before wealth is created, and assets are then acquired, such as shareholding at an early stage of a new business is acquired at nominal value, estate duty benefits can still be achieved. 

The South African Revenue Service has implemented a measure (Section 7C of the Income Tax Act) to tax interest-free/low interest loans to trusts (or companies held by trusts), in the event an estate planner moves his/her assets, historically acquired by him/her, to a trust (or company held by a trust), which may undo any potential estate duty benefits that trusts historically enjoyed. 

While a trust offers asset protection against creditors, it is important to note that as long as there are loans or claims against the trust by any person (for example the seller), the trust could be exposed to the creditors of that person. It is, therefore, important to reduce the value of the loan account to zero as soon as is practically possible.

An unintended consequence is sometimes achieved when the estate planner is allowed to dictate in the trust deed how his/her assets should be treated, such as a percentage allocation to each beneficiary. 

Typically, the beneficiaries have a personal right to claim their portion of the trust benefits from the trustees at the time of a certain event specified in the trust deed. 

This is often done to allow the estate planner to control assets in the trust during the life of the trust, as well as upon the happening of an event, such as the death of the estate planner, or the termination of the trust. 

In many instances the accountant or lawyer drafting the trust deed adds these clauses, without the estate planner even realising the consequences. This is typical of the older trust deeds. 

Any clause in a trust deed affecting the absolute discretion of trustees to deal with trust assets may render the trust a vested trust, with dire consequences.

Sars defines a vested trust as a trust where the founder transfers ownership of the assets to the beneficiaries of the trust, but administration and control of the assets is given to the trustees. In terms of this type of trust, the beneficiaries are the owners of the trust assets. 

The trustees are not given discretion to deal with trust assets, and the beneficiaries and their benefits are fixed and predetermined. Any income and capital gains earned by the trust vest in the beneficiaries. 

The unintended consequences are that the benefits of asset protection are lost and that the income and capital gains should be taxed in the hands of the vested income and capital beneficiaries during the life of the trust. 

In the event of the death of the beneficiary prior to payment, the deceased beneficiary's interests, ie his/her personal rights, are transmissible to his/her heirs, and these interests must be included in his/her estate for estate duty purposes.

Read through the trust deed, or get the help of a professional to read through the trust deed and remove any clauses with any such unintended consequences. 

Phia van der Spuy is a registered Fiduciary Practitioner of South Africa®, a Master Tax Practitioner (SA)™, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze®, a professional trust practitioner.

BUSINESS REPORT