Be careful of your automatic removal as trustee

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Often estate planners sign trust deeds without reading it first. This creates a huge risk, as many trust deeds are ‘copied and pasted’ and do not reflect the wishes and personal circumstances of estate planners and their families. One particular aspect the estate planner has to pay attention to is the appointment and removal of trustees in terms of the trust deed. Unintended consequences may arise if the trust deed automatically removes a trustee on the happening of an event specified in the trust deed. This may have dire consequences, as the estate planner, who may have been appointed as a trustee, may be automatically removed and then loose the ability to participate in trust decisions.

Is there such a thing as a dormant trust?

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Often people refer to their trusts as ‘dormant’ trusts that do not need any work and that they do not want to pay a lot of money for to administer. Is there such a thing as a dormant trust? I do not think so – a trust is either alive or it is dead. The word ‘dormant’ is used to describe something that is temporarily inactive or when its normal physical functions are suspended or slowed down for a period of time, or it is even in a deep sleep. Another definition refers to something that is dormant as not being active, growing, or being used at the present time, but which is capable of becoming active later.

The role of the founder of a trust

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A trust can be described as a legal relationship which 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). Therefore a trust is either a contract (Crookes v Watson case of 1956) that is brought about by a person (the founder) when he/she is alive or it is a testamentary disposition that is brought about on the death of a person. A trust can also be created in terms of a court order (court order trust), such as a divorce order.

Trustee, be mindful of your mental capacity

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When transferring assets to a trust, tax savings is not the only consideration. It is also about a strategy to protect your assets, to create continuity and liquidity upon your death, as well as other considerations—such as a contingency plan should you develop a mental illness such as Alzheimer’s Disease or senile dementia. Registering a trust, in which you build wealth, acts as “insurance” should something go wrong with your mental health. If you have created a trust during your lifetime and become afflicted by one of these dreadful conditions, your financial affairs would continue as before, with persons that you entrusted as trustees of the trust. Therefore the appointment of trustees should be carefully considered in anticipation of these circumstances.

The trust as taxpayer

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A trust is different to a company or a close corporation in that it is the trail of each transaction with the trust that will determine whether it is the trust that is liable for the payment of any tax on income or capital gains earned within the trust, or a person connected to the trust, such as a funder, donor, or beneficiary.

Because the South African Revenue Service (Sars) has begun to view trusts as a means of structured tax avoidance, a number of measures have been introduced over the years resulting in the income of trusts being taxed at 45% - the highest rate applicable to individuals - and capital gains being taxed at 36% - the highest effective rate applicable to any taxpayer (although the effective tax rate for a capital gain distributed to a shareholder in a company is now at a higher rate of 37.92% after the increase of the dividend tax rate in February 2017).

Trustees can manipulate a trust

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Trustees are the guardians of a trust’s assets. They are also the decision makers of a trust. The founder should ensure that the trust deed, the constitutive charter of the trust, deals in sufficient detail with the appointment and removal of trustees. If it does not, trustees may manipulate the trust and may cause the objective of the trust not to be met. Many court cases deal with the abuse by trustees of trust assets and the appointment and removal of trustees to influence voting.

When to act and when not to act as a trustee

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The trustees are the custodians of the assets in a trust. The trustees act of behalf of the trust and, in their capacity as trustees, can bring and defend actions concerning the trust. That is why it is so important to understand when someone can act, and be held liable, as a trustee and when someone can no longer act, and be held liable, as trustee. Misconceptions regarding when one can and should act as trustee may result in invalidating trust actions and may even lead to abuse by dishonest trustees.

Does a trust's books have to be audited?

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It is not a legal requirement that a trust’s books are audited, and it may add an unnecessary cost in the administration of a trust. However, a trust deed may specifically require the books of a trust to be audited. A number of the older trust deeds stipulate that the trusts’ books have to be audited. If the trustees do not meet this requirement, they will be in breach of their obligations as set out in the trust deed. It is therefore important to understand the requirements of the trust deed.

When it comes to the administration of a trust, the onus is on the trustees to clearly identify and record trust property (in terms of Section 11 of the Trust Property Control Act (“the Act”)) and to deliver to the Master of the High Court any trust documents and records when requested to do so (in terms of Section 16 of the Act).