Many people are wary of trusts because they worry that they will lose control over their assets. This fear is often exacerbated by professionals who advise that clients should not be seen to be involved in the administration of their trusts. Some professionals even advise their clients that they cannot be the founders, trustees and/or beneficiaries of their trusts. This is clearly absurd. Why would anyone, particularly while they are alive, “give away” the assets they have worked hard for?
If this is something that concerns you, there are ways of structuring your trust(s) so that you will not feel you are relinquishing full control over your assets.
There are ways of structuring your trust(s) where you can be the founder, trustee and beneficiary of the trust, while satisfying the South African Revenue Service and the Master of the High Court of the legitimacy and lawfulness of your trust’s structure.
The key element of the 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 assets, not in their personal capacities, but for the benefit of the trust’s beneficiaries.
Your assets are transferred to the trust and are managed by the trustees for the benefit of the beneficiaries. The trust deed determines the use of these assets. You no longer own the assets, but you can exercise some influence over them by being a trustee.
Trustees control the affairs of the trust, which means that you have to pay careful attention when you select trustees, taking various scenarios into account.
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’s 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. In this case, there may be dire estate duty consequences.
Although the trustees manage the trust’s assets on behalf of the beneficiaries, the founder has the comfort of knowing that the trustees are legally bound to comply with the terms of the trust deed and with their fiduciary duties.
The trustees may distribute assets to the beneficiaries only as defined in the trust deed and in the manner prescribed by the trust deed. They are also obliged, at all times, to act in the best interests of the beneficiaries, which may include the founder.
This is what you can do to alleviate your fears of losing control over your assets:
• 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 use. It is critical that you engage the services of an experienced professional, because the incorrect drafting of your trust deed may spell disaster.
• It is permitted that the same person is the founder, a trustee and a beneficiary, but this person is not permitted to be the only trustee and beneficiary. If you are the founder of your trust, do not allow anyone to 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, or your children could outvote you. 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. If you insist on including a provision in the trust deed that permits you to veto trust decisions, keep in mind that all distributed trust income and capital gains resulting from a soft loan or assets donated to the trust by you will be taxed in your hands.
• 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 himself or herself that will enable the founder to dispose of the trust assets for his or her benefit, or for the benefit of his or her estate, shortly before his or her death. This will trigger estate duty on the trust’s assets on your death.
In summary, provided the founder is not seen to control the trust’s 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.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa and the founder of Trusteeze, which specialises in trust administration.