Why should trust beneficiaries (and trustees) have valid wills?

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It is estimated that the average person spends 76 800 hours on building their estate, yet very few people spend any time ensuring that their estates are not diluted by more than 30% upon death through death taxes.

The Court in the Raubenheimer v Raubenheimer case of 2012 concluded that estate planning, wills, succession, and the administration of deceased estates are inevitably linked to the proper drafting of a will, and the following was said:
“It is a never-ending source of amazement that so many people rely on untrained advisors when preparing their wills, one of the most important documents they are ever likely to sign. This is by no means a recent phenomenon".

Is the trust at risk if the founder did not make the initial donation?

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The trust assets defined in the trust instrument should be physically transferred by the founder to the trustees. The founder has to relinquish control over those assets. The trust should be structured in such a way as to ensure there is a clear separation between control and ownership and enjoyment of trust assets. If that is not achieved, the trust may be at risk of attack.

How is a trust defined in our legislation?

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Trusts became part of South African law after the British occupied the Cape in 1806. In South Africa, a trust is not a special type of legal device because our legal system is based on Roman-Dutch law, which does not recognise the concept of a trust. South African trust law as we know it today was developed incrementally as a combination of English law, Roman-Dutch law (also known as South African common law) and South African rules, through the mechanism of contract.

Can trustees delegate their authority?

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It often happens that trustees do not actively participate in trust matters on an on-going basis – such as when soon-to-be-ex spouses do not want to face one another in trustee meetings, or when people are simply relying on an (invalid) clause in a trust instrument to abdicate their responsibility as trustee. This article takes a closer look at what our law allows.

Has time run out for trustees to hide from Sars?

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The South African Revenue Service (SARS) presented a webinar on 29 July 2021 called Trust and Tax obligations, wherein they made it clear that there is a great focus on trust tax compliance. With approximately only 11% of trusts being tax compliant in South Africa, SARS will have a field day with the implementation of their nine strategic objectives, leaving trusts at great risk due to non-compliance. This may in turn lead to trustees being held personally liable by beneficiaries for not fulfilling their fiduciary obligations. Section 1 of 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.” This definition was inserted following the decision in CIR v Friedman case of 1993, in which it was held that under common law a trust is not a “person”. A fiduciary duty is an onerous, legal obligation (a duty of loyalty and care), of a person managing property or money belonging to another person, to act in the best interests of such a person. The following strategic objectives were discussed, which trustees should take to heart and get their affairs in order (as a matter of urgency) to avoid surprise attacks from SARS, which may costs trusts – and potentially trustees – dearly, financially.

Have a handle on the trust bank account and trustee signatories

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People are often of the view that trusts do not require their own bank accounts. Trustees (and even service providers) will use any excuse to justify why separate trust bank accounts are not maintained – from being convenient to saving costs to the trust being ‘dormant’, to name but a few. Little do they realise that it is in fact, a legal requirement for each trust to have a separate bank account. The main rationale for this is to prevent any mingling of trust funds with non-trust funds, which may place the trust at financial risk.

Trustees can’t escape their fiduciary obligations

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“There is no magic in the term ‘fiduciary duty’”. This is what the judge said in the Phillips v Fieldstone Africa (Pty) Ltd case of 2004. In carrying out their duties, trustees fulfil a fiduciary position. A fiduciary duty is an onerous, legal obligation of a person managing property or money belonging to another person to act in the best interests of such a person. A fiduciary relationship arises from the nature of the actual relationship undertaken.

Making distributions to trust beneficiaries to save tax at all costs

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A trust can hold and distribute trust funds at any time, but this must be done in accordance with both the terms of the trust instrument and the purpose for which the trust was created. This may involve distributing the income of the trust among family members in a tax-effective way over many years, or providing capital from the trust at a time when it will most benefit the beneficiaries in the future, for example when purchasing a home. In practice, often trustees disregard the purpose for which the trust was set up, as reflected in its objective in the trust instrument, and blindly allocate all income and capital gains to beneficiaries (without making any payment to them) in an attempt to avoid or save tax. Little do they realise that they are slowly undoing the purpose of the trust. The tax tail should never wag the estate plan dog.