Do you want to bequeath your assets to an existing trust upon your death?
January 7th, 2022 08:46
In many instances, it may make sense to utilise existing trust(s) as part of your legacy plan. Your assets can be bequeathed to an existing trust – if the trust instrument allows for it. If this is the case, the trustees of that trust have to be specifically empowered in terms of the trust instrument to accept such a bequest. Review the trustee power clause to ensure that the trustees can, in fact, accept further donations or bequests.
An obvious asset to bequeath to a trust is a loan owed by the trust to the testator or testatrix. Such loans typically originate from the sale of assets to a trust. The testator or testatrix can also bequeath other assets to one or more existing trusts.
While it appears that one can bequeath assets to both vesting and discretionary trusts (both ownership trusts, where the assets are held by the trustees for the benefit of beneficiaries), it is important to be mindful of certain principles.
Powers afforded to trustees
South African trust law distinguishes between a general and specific power of appointment afforded to a trustee. The Braun v Blann & Botha case of 1984 established the principle that only a specific power of appointment of trustees is accepted or permitted. If the trustees are granted powers that are too broad in terms of the trust instrument – such as the power to create further trusts as they wish or to include new beneficiaries (such as those not envisaged by the testator or testatrix when they drafted their will) – it may well be that the granting of such broad powers to trustees may pose a risk of attack on such trust by SARS, creditors and disgruntled beneficiaries. Some even argue that a power to completely exclude a beneficiary from benefitting (as is the case with most discretionary trusts as it is the only way for it to qualify as a discretionary trust) from the trust may open a bequest to such trust to a risk of attack. It is important to note that despite the fact that a bequest to a discretionary inter vivos trust (with broad trustee powers) may be open to attack, any attempt to empower trustees with an impermissible general power of appointment (unlimited discretionary powers) would, in any event, lead to the trust being declared invalid.
Bequest to existing vesting trust
A bequest to a vesting inter vivos trust was tested in the Kohlberg v Burnett case of 1986. The testator bequeathed the residue of his estate to two trusts that he created about a year before his death. It was claimed that the trust instrument did not form part of his will, that the bequest was a bequest to the beneficiaries under the trusts, that the identity of the beneficiaries could only be identified from the trust instrument, and that one cannot incorporate the terms of a document into one’s will by merely referring to it. It was argued that the will failed to identify the beneficiaries of the bequest and that the assets would, therefore, devolve intestate. The Court did not agree with this argument. It confirmed that a bequest to an inter vivos trust is valid without the terms of the trust being incorporated into the will, as required in terms of a testamentary trust. It held that a trust is not a legal persona, but that trustees are entitled to act and hold property on behalf of a trust, that the beneficiaries of the bequests were the trusts which are clearly identifiable from the will, and that individuals who benefit in terms of the trust instrument are not beneficiaries in terms of the will, but rather in terms of the (existing) trust instrument.
It is important to note that the two existing trusts, in this case, vested certain rights in the beneficiaries. The trust instruments gave clear instructions in terms of how the trustees were to deal with the income and capital of the trusts. In terms of the trust instruments, they had no discretion to deal with the income and capital of the trusts – it was therefore vesting trusts and not discretionary trusts.
In this case, there was no question of a delegation of testamentary powers – a principle that is not allowed in South African law. Only a testator or testatrix can instruct how their assets should be dealt with post-death and no one else. The law does not allow a testator or testatrix to delegate their testamentary powers beyond certain limited exceptions – including through a trust structure.
What about existing discretionary trusts?
This case did not deal with discretionary trusts, where trustees have full discretion to deal with trust assets, which, in certain instances, may be equated to a delegation of testamentary powers. It appears that it is the level of discretion afforded to the trustees in the trust instrument that is the determining factor in terms of whether a person can bequeath their assets to a discretionary inter vivos trust. One would, therefore, need to study the terms of the trust instrument before bequeathing one’s assets to a discretionary trust and effect amendments if necessary. For example, it is suggested that the beneficiaries (or even the trust instrument, which may affect the rights of beneficiaries or obligations of trustees) should not be allowed to be amended post the testator’s or testatrix’s death. The trustees must be mindful and exercise extra care when dealing with assets bequeathed to a discretionary trust.
In summary, ensure the trust instrument allows for the receipt of bequests and that the trustees are not afforded too wide powers in the trust instrument, especially a right to amend beneficiaries or their rights.
~ Written by Phia van der Spuy ~