The government is working on improving the regulation of trusts. The law of trusts is not contained in any single set of legislation. Trusts in South Africa are, in fact, largely unregulated, which frequently leads to their abuse.
The main statute that governs South African trust law is the Trust Property Control Act of 1988, which regulates certain administrative aspects relating to trusts. South African trusts are also governed by the Income Tax Act, Estate Duty Act and common law.
Trusts can also be governed by a particular statute. For example, the Companies Act envisages a trust to hold shares that have been issued but not fully paid for, and the Financial Institutions (Protection of Funds) Act provides for the safe custody and administration of trust property by financial institutions.
A trust is not an independent entity or juristic person that can be owned, sold, or transferred as would be the case with a company or a close corporation.
A trust does not have a legal personality, because it is simply an accumulation of assets. Because of this, a trust cannot own property. Any property held in trust is held by the trustees in their capacity as trustees.
A trust cannot be sued, because it is not recognised as a legal person in South Africa, unless a statute defines it as such. The Deeds Registry Act, Transfer Duty Act, Value Added Tax Act and the Insolvency Act afford a trust legal personality. The trustees, in their official capacity, can be sued, however.
Despite its lack of legal personality, a trust has legal capacity, and the trustees may perform juristic acts, provided the trust instrument allows this.
The following legislation is important for trusts:
Trust Property Control Act
The purpose of the act (according to its preamble) is to regulate the control of trust property, and to provide for matters relating to it. Much of the act is aimed at establishing firmer control over trustees and their administration of the trust.
Although the text of the act is not divided into chapters, the following aspects are covered:
- Definition clause;
- Documents deemed to be trust instruments;
- The role of the High Court in respect of trusts and trustees;
- The role of the Master of the High Court in respect of trusts and trustees;
- The duties of trustees; and
- The powers of beneficiaries or interested parties.
Income Tax Act
Before 1998, trusts were not defined as taxpayers under the Income Tax Act, unlike individuals and companies. This gave rise to a considerable amount of abuse of trusts for tax-saving purposes. The government has since made various amendments to this act to combat these practices.
The Income Tax Act sees a trust as a “person” for tax purposes. All trusts must be registered with the South African Revenue Service (Sars), as a result of this definition.
Various taxation sections and anti-avoidance measures have been introduced relating to trusts. Sars is reviewing trusts, and estate planners should stay abreast of any changes that may affect them.
Estate Duty Act
Section 3(3)(d) of the Estate Duty Act is relevant where the trust instrument contains a provision that empowers the deceased, immediately before his or her death, to:
* Appropriate or dispose of property.
* Or revoke or vary the provisions of any donation, settlement, trust, or other disposition made by him or her for his or her own, or his or her estate’s benefit.
A trust deed may typically contain clauses that attempt to protect the estate planner, such as the inclusion of a casting vote, a testamentary reservation, etc.
Instead of providing the necessary protection for the estate planner, it will rather compromise him or her. In such a case, the trust property will be included in the estate of the deceased as deemed property and attract estate duty; so it is important to be mindful of inserting problematic provisions when you draft your trust deed.
It is not even a requirement that the estate planner in fact benefited from such favourable provisions; the mere fact that such a person had the ability to deal with the assets in the way envisaged in the act, the day before he or she dies, will result in the assets being included in the estate of such a person upon death.
If you have registered a trust, review and amend your trust deed and remove any provisions which may impact your estate negatively, especially if you have not made provision for additional estate duty and capital gains tax payable on your death, as a result.
There are better ways to structure a trust deed to provide the estate planner with some level of influence without falling foul of this onerous provision of the Estate Duty Act.
Common law is the body of law developed by judges and courts. The defining characteristic of common law is that it arises as legal precedent that can be applied to similar situations.
Today, one-third of the world’s population live in common law jurisdictions, or in systems mixed with civil law. Owing to the limited legislation relating to trusts in South Africa, huge reliance is placed on legal precedent relating to the treatment of trusts.
Phia van der Spuy is a registered fiduciary practitioner of South Africa, a master tax practitioner (SA) and the founder of Trusteeze, which specialises in trust administration.