These are the considerations when defining trust beneficiaries
The Trust Property Control Act does not define a beneficiary and is relatively silent as far as matters regarding the beneficiaries of a trust are concerned. The nature, number and rights of beneficiaries are accordingly determined by reference to the trust instrument and common law. If there is any conflict, common law will prevail. An example is the Potgieter vs Potgieter case of 2012 where, despite the fact that the trust deed required only the consent of the trustees to amend the trust deed, the court also required the consent of the beneficiaries who had received benefits from the trust.
The following are useful pointers when an estate planner sets up a trust:
* Without a clearly defined object, a trust does not come into existence. In a family trust, the object is the beneficiaries for whose benefit the trust was created. Ensure trust beneficiaries are either identified (such as name and identity number) or identifiable (a clearly defined class of beneficiaries).
* Beneficiaries are usually defined as income and/or capital beneficiaries. This gives you the flexibility to treat each type of beneficiary differently. Income should be clearly distinguished from capital in the trust instrument, particularly if there are both income and capital beneficiaries.
Capital beneficiaries can benefit from the distribution of a trust asset or from a gain made on the disposal of trust assets. The treatment of unallocated income should also be defined to reflect the founder’s intention - whether it forms part of trust capital at the end of a financial year, if unallocated, or whether it keeps its nature as income.
If the trust instrument is silent, it may be assumed that income and capital will always retain their nature. In the event that income and capital beneficiaries are different, it is good practice to provide in the trust instrument that, in the event that income is insufficient for the maintenance of an income beneficiary, capital can be used to make good any such shortfall.
This will assist the trustees to optimise the trust’s investment returns, while taking into account the needs of all beneficiaries to prevent unintended hardship. Focusing on short-term income production in a trust may have a detrimental effect on the long-term position and value of the trust’s assets, which, in the long run, may negatively impact both the income and the capital beneficiaries.
* If you want a specific beneficiary to be favoured over others in a discretionary trust, say so in the trust instrument, otherwise beneficiaries may put pressure on trustees to treat them equally. The trust instrument in the instance of a discretionary trust should also clearly state that beneficiaries need not be treated equally, if that is what the estate planner wishes.
* It is acceptable for a trust instrument to provide that a beneficiary shall not receive a benefit until the happening of some event, such as reaching a certain age.
* A trust instrument can also provide that a beneficiary receives a benefit for a limited period only. The beneficiary may then have an unconditional vested right for that limited period only, and such a right will, during that time, form part of his or her insolvent estate or his or her assets during a divorce.
* You cannot vest a right to income or capital in a beneficiary but end that right in the event of the beneficiary’s insolvency or divorce. Once it is vested, it belongs to that beneficiary.
* A trust instrument cannot restrict a beneficiary by, for example, prohibiting a beneficiary from marrying.
* Provisions of the Constitution may affect the content of a trust instrument. If any provision in a trust instrument, including the appointment of beneficiaries, offends our Constitution, it will be declared invalid. This seems to go against the principle of freedom of testation or contractual freedom, but the law has never tolerated acts that are against good morals, and something that offends our Constitution goes against good morals. Be mindful when you create a trust, particularly a charitable or educational trust, that the terms you stipulate not be contrary to public policy, as grounded in our Constitution. It cannot, for example, exclude recipients of benefits on the grounds of race, gender or religion.
* A beneficiary can cede either a vested or a discretionary right to another person or entity. You may prohibit such a cession expressly in terms of the trust instrument, if that is not in line with your wishes.
* As soon as beneficiaries receive any distributions from the trust (or accept their benefits in writing to the trustees), removing them as beneficiaries is not a simple process. You will need their consent.
* Be mindful that the addition or substitution of beneficiaries (in a discretionary trust) at a later date may trigger transfer duty if the trust holds residential property.
* The meaning of the term “beneficiary” must correspond with its intended meaning in clauses dealing with, for example, the appointment of trustees or the amendment of the deed. If, for example, the term “beneficiary” is used to include “all those persons related by blood or affinity to the founder” and, if the agreement of all beneficiaries is required for the appointment of a trustee or to make a change to the trust deed, it may become difficult to trace and involve said persons in such an appointment or change.
The estate planner should ensure that the definition of beneficiaries in the trust instrument meets his or her objectives for setting up a trust, and will not create unintended consequences later on.
Phia 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 trust practitioner.