Let a trust protect you during your life when you need it most

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Lately a number of people who created trusts in the past are questioning their rationales for creating trusts, especially given new taxes implemented to discourage estate owners to structure their affairs using trusts. When transferring assets into a trust, it is not only about considering the tax savings or the additional taxes payable on such assets. 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.

Can trusts provide interest free loans to others?

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During the last couple of years there was a great focus on loans made by a connected person to a trust, or a company held by a trust, since the South African Revenue Service (SARS) introduced the punitive tax measures (Section 7C of the Income Tax Act) on such interest-free or soft loans (where interest is charged at a rate below the official interest rate, currently 7.75%), in an attempt to combat estate duty/donations tax leakage on assets moved into trusts, or companies held by trusts.

Can you change the name of a trust?

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A trust is recognised by its unique registration number, and not by its name. One is not required to reserve the name of a trust before it is registered. For companies one has to reserve its name before it is registered. There may therefore be multiple trusts in South Africa with the same name. It is wise not to make the name of the trust too recognisable, such as your surname, so that creditors cannot trace the trust too easily.

When and how can trustees make distributions to beneficiaries?

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No beneficiary has a right to any distribution in a discretionary trust. An individual may be defined as a beneficiary, but he/she is not entitled to any distribution until such time as the trustees have approved such a distribution.

Important principles to consider for making trust distributions

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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 deed 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.

Important aspects to remember should a trust acquire properties

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In view of the fact that trustees cannot enter into agreements until they have been issued with Letters of Authority by the Master of the High Court, it should be noted that no person may enter into an agreement "on behalf of a trust to be formed". This is only possible in the case of companies and close corporations. With regards to a trust, the trust must already be in existence at the time the agreement is entered into.

Be careful when you define beneficiaries in the trust deed

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The Trust Property Control Act does not specify the requirements or procedures required for the formation of a valid trust. The Master of the High Court may have issued Letters of Authority, and may have assigned a registration number to the trust, but this does not make the trust valid. It is not the Master of the High Court’s duty to test and investigate the validity of a trust. The validity of a trust is usually only challenged by creditors, SARS, a soon-to-be-ex-spouse, and so forth, at a time when it may seem beneficial to such persons or creditors to disregard the trust.

Time to revisit a trust as part of your estate plan?

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Proper estate planning is widely defined as the arrangement, securement, management and disposition of your estate so that you, your family and other beneficiaries may enjoy, and continue to enjoy, the maximum benefits from your estate and your assets during your lifetime and after your death, no matter when death may occur. This is therefore a great deal more than just the retirement planning performed by most financial advisors.