Trusts are typically classified in terms of the following:
The method of formation (inter-vivos trusts and testamentary trusts), the rights conferred on beneficiaries (discretionary trusts and vested trusts) or the purpose of the trust (special trust, charitable trust, employee trust, etc).
These descriptions are not mutually exclusive. For example, a trust could be founded during a person’s lifetime (inter-vivos) for the purpose of holding and administering a rental property portfolio on behalf of beneficiaries (ownership/trading trust), where the trustees are to exercise their discretion in distributing income or capital (discretionary trust).
A combination of both vested and discretionary rights is possible within both a vested and a discretionary trust.
An inter-vivos trust is established during a person’s lifetime in order to manage certain assets or investments, and support beneficiaries such as family members.
These trusts can be structured as either vested or discretionary inter-vivos trusts. Discretionary trusts are the more common forms of inter-vivos trusts. In these types of trusts, the vesting of benefits or assets in beneficiaries is done at the discretion of the trustees.
SA Revenue Service (Sars) describes discretionary trusts as trusts where the trustees decide whether to, and how much of the income, assets or net trust capital of the trust is to be distributed to the beneficiaries.
The beneficiaries only have contingent rights (a right that depends on a future event or the performance of an action by the trustees such as a decision to make a distribution) to the income, assets or net trust capital of the trust.
In terms of a vested trust, the beneficiaries are the owners of the trust assets. The trustees only have administrative control over the trust assets, which they manage solely for the benefit of the beneficiaries.
The trustees are not given any discretion in terms of the trust instrument, and the beneficiaries and their benefits are fixed and predetermined.
Inter-vivos trusts are ideal for keeping growth assets (shares, properties and alternative investments) out of your estate and are superb mediums to protect assets from generation to generation.
Testamentary/mortis causa trust
Testamentary trusts come into existence after the death of the founder. They are commonly known as will trusts and, as such, are created in terms of the will of a deceased person.
Testamentary trusts are especially suited to the protection of the interests of minors and other dependants who are unable to take care of their own affairs, in the event that there is no inter-vivos trust set up.
Testamentary trusts are usually created to hold assets on behalf of minor children, since minor children cannot, in terms of South African law, inherit. In the absence of a trust, assets from the deceased estate left to minor children are sold, and the money is paid to them when they reach adulthood. Testamentary trusts are created at the winding up of a deceased estate, following a specific stipulation in a person’s will that a trust must be set up.
Such a stipulation in the will serves the same purpose as a trust deed. The terms of a testamentary trust are typically not as detailed as with an inter-vivos trust.
Sometimes a full trust deed is attached to a will, instead of incorporating the usually shorter provisions of a testamentary trust in the body of the will. This serves to provide additional comfort and assurance that the testator’s wishes will be honoured.
A testator appoints the trustees in his/her will. Their roles as trustees usually end after a predetermined period, or at a determined date, such as a minor turning 18, or upon the death of an income beneficiary.
The child’s guardian does not necessarily have to be a trustee; in fact, it is often a good check and balance to have a separate, independent person, who is financially astute, as a trustee. If for any reason the will is invalid, the trust will not come into effect.
The Master of the High Court has the power to declare this type of trust invalid, unlike an inter-vivos trust, where the Master of the High Court has no such power.
During the settlement period of the deceased estate, the appointed trustees apply for a letter of authorisation at the office of the Master of the High Court where the estate is registered.
Generally, the terms of a will trust cannot be amended, but the Trust Property Control Act does give the court certain powers to amend this type of trust instrument.
Sars introduced the concept of a special trust to bring about more favourable tax treatment for certain trusts. Unlike conventional trusts, which are taxed at a flat rate, a special trust is taxed on the same sliding scale applicable to a natural person.
Phia van der Spuy is the founder of Trusteeze®.
The views expressed here are not necessarily those of Independent Media.
– BUSINESS REPORT