Even though trusts are great vehicles to use in estate planning, they have disadvantages. Some of these can be managed, and others need to be accepted. Either way, trusts are certainly not for everybody.
The loss of legal control over assets
Your assets are transferred to the trust and are managed by the trustees for the benefit of the beneficiaries. The use of these assets is determined by the trust deed.
You no longer own the assets, but you can exercise some influence over them by being a trustee. You do not have the power to veto decisions, unless if specifically provided for in the trust deed (more on this below).
Remember that, for a trust to be valid, it should be the founder’s intention to have a trust in place, and the founder should transfer legal (although not beneficial) ownership of the trust assets to the trustees.
Any indication that the founder retains control over the assets may result in the trust being labelled an “alter ego” trust, and dire estate duty consequences may result.
At least one trustee should be independent. This will demonstrate to the SA Revenue Service (Sars) and creditors that the founder has properly divested of his or her assets. Although the trust’s assets are managed by the trustees on behalf of the beneficiaries, the comfort that the founder has regarding the management of the assets is that the trustees are legally bound to comply with the terms of the trust deed, and with their fiduciary duties.
The trustees may only distribute assets to the beneficiaries as defined in the trust deed, and in the manner prescribed by it. They are also obliged, at all times, to act in the best interests of the beneficiaries, which may include the founder.
Estate planners can manage this disadvantage in the following ways:
* Each individual’s circumstances and wishes are different. It is therefore important that you tailor your trust deed to your specific requirements. Do not accept a stock standard template that many so-called professionals make use of.
* It is permitted that you can be the founder, a trustee and a beneficiary (Goodricke and Son (Pty) Ltd v Registrar of Deeds, 1974), but you are not permitted to be the only trustee and only beneficiary.
* If you are the founder of your family trust, do not let anyone convince you that you cannot also be a trustee (who influences decisions) and a beneficiary (who receives benefits from the trust).
* The first trustees should be carefully selected by the founder - for example, a spouse could one day become an ex-spouse. The provision for follow-up trustees should also be well thought through by the founder and captured in the trust deed.
* The founder is entitled to include a provision in the trust deed that enables him or her to appoint replacement trustees. This will in itself not cause a problem for estate duty purposes.
* The founder should ensure that the decision-making provisions in the trust deed are adequately considered. The founder should be able to influence, but not control decisions made by the trustees. The founder is permitted to veto trust decisions. However, be mindful that all distributed trust income will be taxed in the hands of the donor or funder if he or she can veto distributions. A similar provision applies to capital gains distributed to beneficiaries.
* It is acceptable to insert a clause in the trust deed that requires the founder to be present at a meeting in order to constitute a quorum and to be part of a decision.
This will not be problematic for estate duty purposes, unless the founder reserves a casting vote for him- or herself, which will enable the founder, shortly before his or her death, to dispose of the trust assets for his or her benefit, or for the benefit of the founder’s estate. This will trigger the provisions of section 3(3)(d) of the Estate Duty Act.
In summary, provided the founder is not seen to control the trust assets, either through his or her behaviour or through empowering provisions in the trust deed, he or she may retain some influence over the trust assets, and not lose complete control over them.
Establishing a trust generates additional administration costs and complexity in one’s affairs. It is important to demonstrate the active management of the trust as a separate entity from oneself.
The costs of setting up a trust will include legal fees for drawing the trust deed and registering the trust. Ongoing costs will include the costs to maintain a separate bank account for all the trust’s affairs. Annual financial statements must be prepared.
A trust does not require an audit, unless the Master of the High Court requests it, or should the trust deed stipulate that it must be audited.
Sars views a trust as a separate legal entity for which income tax returns must be submitted.
It is now a requirement of the Master to appoint an independent trustee for every new family business trust. Independent trustees usually charge a monthly fee for this service.
It is important that one weighs up whether the costs of establishing and managing a trust exceed any savings in terms of estate duty.
However, tax savings should not be the main motivation for setting up a trust in the first place.
If a trust is set up to protect your assets, the benefits of the trust may far outweigh the costs of setting up and maintaining it.
For example, setting up and maintaining a trust may be a small price to pay when compared with losing all your assets in the event of your sequestration.
In part two of this article, to be published next week, I will discuss the administrative burdens of a trust, taxation, and the responsibilities that go with being a trustee.
Van der Spuy is a registered Fiduciary Practitioner of South Africa, a Master Tax Practitioner (SA), a Trust and Estate Practitioner, and the founder of Trusteeze, a professional trust practice.