JOHANNESBURG - Many people have set up trusts as part of their estate plans to either protect their assets during their lifetimes, or to ensure continued use of the assets on their death. 

This is especially true for properties the estate owner wants to retain in the family for future generations. In many instances, the estate owner and his family live in such a property, which has been transferred into the trust.

As a starting point, it is important to acknowledge that the estate owner who transferred the property into the trust no longer controls such property. He or she either donated or sold it to the trust, and the board of trustees must manage all the trust’s assets for the benefit of the beneficiaries.

Although such person may retain some level of influence, through being a trustee of the trust, he or she will have to consider all beneficiaries’ needs in making trust decisions. If such person persists in dealing with the trust property as if he or she still owns it, the trust will be at risk of being labelled an “alter ego” trust. This means that the courts or the South African Revenue Service (Sars) may disregard the trust and include the value of the assets in the estate of such a person.

Furthermore, it is important to ensure the trust deed is drafted correctly, so that the trustees have the authority to purchase property in the name of the trust or borrow money for the purpose of buying property, or the ability to receive the property as donation, and the authority to deal with the trust assets as intended by the founder, including specific allowance to permit the free use of trust property by the beneficiaries.

This means that, even if the founder intended to sell the property to the trust, but live on the property with his or her family, the trustees will only be able to deal with the trust assets as specifically prescribed in the trust deed. If the trustees are not empowered in the trust deed to, for example, allow beneficiaries to live in the trust-owned house free of charge, they will have no power to allow this.

It is therefore important to read the trust deed to ensure the trustees have the powers to execute the wishes of the founder.

Test case

A case, from which valuable lessons can be learnt, is the FNB v Brits case of 2011. In this case, the husband and wife structured their affairs in three trusts, with the main objective being to protect themselves from creditors. Unfortunately, they did not diligently execute the trust deeds, and administered the trust assets on an ongoing basis as assets held separately from their personal estates.

A property held in one trust was used as their residence, at no cost, and with no rental agreement. The other trust held the household content, for which there also was no sale or rental agreement.

Their clear lack of administration and control of trust assets caused the trusts to be “pierced” by the court. The principle of piercing a corporate veil is a well-established principle for companies, as established in the Airport Cold Storage (Pty) Ltd v Ibrahim case of 2008. This principle holds the directors to be the owners of the property actually owned by the company, or for the directors to be personally liable for the company’s debts and other liabilities. There must at least be some misuse or abuse of the distinction between the corporate entity and those who control it, which results in an unfair advantage being afforded to the ones controlling it. The company merely serves as a façade, concealing the true situation.

In the FNB v Britz case, the following issues relating to the household content were highlighted:

* The said trust did not pay all the monies for the acquisition of the household content from the Britz family.

* The trust did not take physical delivery of the household content. It remained in physical possession of the Britz family.

* The Britz family transferred their ownership of the household content to the trust over a period of four years.

* The trustees’ loans in lieu of the value of the household content they transferred to the trust were unsecured, did not bear any interest and no specific terms of repayment had been arranged (a very common arrangement).

The following issues were highlighted relating to the residence:

* Through the provisions of the trust deed relating to the appointment of trustees, Mr and Mrs Britz controlled, or had power to control, the affairs of the trusts.

* There was no lease agreement between Mr and Mrs Britz and the trust, in terms of which they would justify the alleged tenancy by them of the house supposedly owned by the trust.

* The trust did not have a bank account into which any rent could have been paid.

* There was no evidence that Mr and Mrs Britz (as trustees of the trusts) had convened and held any trustees’ meetings.

It is clear from this case that if a trust arrangement is not used for proper commercial or estate planning purposes, a court will not hesitate to declare that the assets do not belong to the trust, but to the individual who used the trust as a façade. Use the points above to test your own trust’s compliance. Also be mindful that Sars is also putting a magnifying glass on the treatment of trust assets.

Trustees have to indicate on the trust tax return whether anybody enjoyed the right of use of assets retained in the trust, as well as details of expenses incurred by the trust in respect of the use of trust assets.

Phia van der Spuy is a registered Fiduciary Practitioner of South Africa and the founder of Trusteeze, which specialises in trust administration. She is the author of Demystifying Trusts in South Africa (Createspace).

- PERSONAL FINANCE