Why are so many trusts in trouble? When people are advised to structure their assets in a trust, they are often not informed about the uniqueness of a trust as an estate-planning vehicle. This ignorance may result in trusts being exposed at some stage, such as when they are attacked by creditors – including the South African Revenue Service (Sars) – when married couples divorce, when an estate is wound up and when beneficiaries are dissatisfied.
As many court cases have proved, the fact that you have set up a trust does not mean that the assets you transferred into it are protected. It is important to actively administer a trust, knowing exactly how legislation affects trusts, because administration that does not meet the requirements may cause your trust to be disregarded if someone attacks it.
The courts acknowledged for the first time in Braun v Blann & Botha (1984) that a trust is “unique”. It is therefore critical to understand the nature of a trust, to ensure that the benefits unique to a trust are not lost.
Transfer of assets
The key element of a trust arrangement is the transfer of ownership and control of the trust’s assets from the founder to one or more trustees, who hold the trust’s assets for the benefit of the trust’s beneficiaries, not in their personal capacities.
A trust, generally speaking, is therefore an arrangement that allows someone to hold assets (without owning them) for the benefit of the trust’s beneficiaries. This requires a clear separation between the control and the enjoyment of the assets held in trust.
In the context of estate planning, a trust can be described as a legal relationship that has been created by a person (known as the founder, donor or settlor) through placing assets under the control of another person (known as the trustee) during the founder’s lifetime (an inter-vivos trust) or on the founder’s death (will trust, testamentary trust or trust mortis causa) for the benefit of third persons (the beneficiaries). The selection and involvement of these parties should be carefully considered when you set up a trust, to avoid serious repercussions down the line, in terms of taxation and exposing assets to unintended parties.
The Trust Property Control Act contains a cumbersome definition of a trust, but the short version is that a trust is a structure into which property is transferred, which is administered by trustees on behalf of one or more beneficiaries in accordance with the trust instrument, which could be a trust deed or a will.
The Act defines a trust as “an arrangement through which the ownership in property of one person is, by virtue of a trust instrument, made over or bequeathed”. The Trust Property Control Act does not, however, define what is meant by “arrangement”. A general definition of “arrange” is to plan for how something will happen.
The Income Tax Act defines a trust as “any trust fund consisting of cash or other assets which are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person”. Here, the concept of a trust is defined in relation to the trustees (taking care of someone else’s money or assets in a suitable way) and the trust’s assets.
The Income Tax Act also sees a trust as a “person” for tax purposes and must therefore be registered with Sars.
The Deeds Registry Act, Transfer Duty Act, Value Added Tax Act and the Insolvency Act afford a trust legal personality, similar to a company or close corporation.
More than a contract
The courts, on the other hand, hold that a trust is in essence a contract. The fact that a trust is considered a contract enables the amendment thereof by the parties to the trust, similar to any other contract.
However, it is clear that a trust is much more than a contract. A trust, through its trustees, may enter into a contract, whereas a contract cannot enter into a contract with others. A trust acts through its trustees, while contracts are merely enforced and adhered to by parties thereto and do not have the capacity to act themselves. Trusts may, through its trustees, enter into litigation, while contracts will, at most, provide the basis for litigation. The fact that trusts are afforded juristic personality by certain legislation, as explained above, certainly set them apart from ordinary contracts, as we know them.
All roleplayers in a trust should understand how trusts are viewed in South Africa in terms of legislation and the courts. A lack of knowledge and understanding may compromise the effective execution of the founder’s objective, as set out in the trust deed, the constitution document of the trust. This may, in turn, cost the founder dearly.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa and the founder of Trusteeze, which specialises in trust administration.