Things to consider when you sell your assets to a trust

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When assets are sold to the trust, the trust does not usually pay for the assets due to a lack of liquidity in the trust; instead, the trust creates a loan account and owes the seller the money. Many people are of the view that by selling an asset to a trust, they remove it from their personal estates, but they forget that this loan account will be seen as an asset in the transferor’s personal estate in the event of an insolvency and for Estate Duty purposes. In the event of an insolvency, all the assets held in trust may be subject to the claims of the estate planner’s creditors, if the loan account is called up and the trust is unable to repay the loan amount (Magnum Financial Holdings (Pty) Ltd (in liquidation) v Summerly case of 1984).

Trustees of a trust have a fiduciary duty

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The duties of trustees arise through the provisions of the Trust Property Control Act, the common law and the trust deed. All trustees—whether independent or not—are charged with the responsibility of ensuring that the trust functions properly to the greatest benefit of the beneficiaries. These responsibilities include, but are not limited to:
• Ensuring compliance with the provisions of the trust instrument
• Ensuring compliance with all statutory requirements
• Conducting of proper trustee meetings
• Recording of proper minutes of all meetings and decisions by the trustees. The focus should not be on the keeping of minutes, but on the decisions reached. A trust operates on the resolutions of its trustees and it is important that these should be recorded.
• Proper maintenance and safekeeping of minute books

Beneficiaries can’t hire and fire trustees as they please

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Most family trusts are created with good intentions and whilst the family lives in harmony. Very seldom the creator or founder of the trust considers and anticipates the possibility that two or more of the family members may have disagreements, which may even result in major hostility. One potential aggravating factor is when there is a divorce in the family, when relationships break down. Emotions run high and family members side with one another. Then questions get asked – Why am I not a trustee? Why am I not a beneficiary? How can I remove a trustee? How can I remove a beneficiary? Can I sue a trustee? When these questions get asked, it is often too late to rectify any ‘flaws’ in the manner the trust has been set up, and to add and remove trustees and beneficiaries.

Are your and your family’s wealth protected in a trust?

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A real life example illustrates the risk of being compromised as a beneficiary of a trust. A businessman was asked by his friend to sign as surety for his debt as a developer. The businessman was happy to do that, as all his assets were transferred to a trust, which protected the assets from any creditors. Unfortunately the friend experienced financial difficulty and the bank approached the businessman who signed surety for his friend’s debt to recover its loan. When the businessman informed the bank that he did not hold any material assets in his personal name, the bank decided to sequestrate the businessman. The effect of this was catastrophic – this action caused the businessman to be removed as trustee and beneficiary of the trust. How could that happen?

The framework within which trustees have to act

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A trust instrument should clearly set out the purpose of the trust and trustees’ powers should be stipulated in the trust instrument to support and achieve such purpose. Trustees should continuously be guided by the purpose of the trust in exercising their duties. Trustees are required to exercise their powers independently and objectively.
Trustees hold a fiduciary position and therefore must always exercise their powers to the advantage of the beneficiaries, and act within these powers.

Funders of trust structures be ware of the looming tax changes

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It is well known that trusts and estates have been under the magnifying glass of the South African Revenue Service (SARS) for a while now. This led to the introduction of an anti-avoidance measure (Section 7C of the Income Tax Act) effective from 1 March 2017, whereby SARS accesses growth in a trust. SARS wanted a way to access growth in assets, which people historically deliberately moved into a trust and thereby “froze” the value of the estate for estate duty purposes. As an example, a farmer transferred his farm into a trust many years ago at a value of R1m and created an interest-free loan for that amount to the trust. Therefore, upon his death, thirty years later, the farm in the trust may be worth R50m, but the loan of only R1m is reflected in his estate. SARS could therefore not access the growth in the farm upon his death, as the trust is a separate entity.

Time to review your trust deed?

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The beginning of a year is a good time to review a trust deed to ensure that it is still relevant and to understand how changes in circumstances can impact a trust arrangement.

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.