What to watch out for before you contract with a trust

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People are often nervous about entering into contracts with a trust due to the unique nature of trusts. Often a contracting party requests a resolution whereby the trustees authorise the trust to enter into a particular transaction. This is particularly true in the case of the purchase or sale of immovable property. In terms of the Land Alienation Act, any deed of sale of immovable property has to be in writing and the parties thereto or their agents have to be legally authorised to act at the time of signing of the contract.

Fair remuneration as trustee?

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A trustee must act in good faith, and at all times avoid conflict of interest between personal interests and official and fiduciary duties to the trust and to the beneficiaries. A trustee may not gain personally from the trust fund (other than reasonable remuneration), in his/her capacity as trustee. However, trustees may be rewarded for the execution of their official duties.

The use of Special Trusts

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The South African Revenue Service (Sars) recognise the use of trusts for purposes other than wealth transfer, and specifically for persons with disabilities and minor children who are not able to produce enough income to take care of themselves and who also cannot take care of themselves. Sars introduced the concept of a Special Trust to bring about more favourable tax treatment for such trusts.

Which powers to give to trustees in the trust deed

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A trust’s constitutional document is a trust deed. This is a contract that sets out the framework within which the trustees must operate, including their powers and limitations. The trustees’ powers, competencies and obligations, including a clear description of the trustees’ discretionary powers and duties, as well as their remuneration, must be clearly stipulated in the trust deed. The estate planner must ensure that the powers provided to trustees in the trust deed are in line with his/her intention for setting up the trust.

Tax consequences of using trust owned assets

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Historically, estate planners were advised to move all paid up personal assets into their family trusts. With the punitive measures of the South African Revenue Service (Sars) to attack estate freezing, through the taxation of interest-free or low-interest loans to trusts, introduced in March 2017 (Section 7C of the Income Tax Act), estate planners will have to be careful about which assets they want to protect in a trust and, apart from the sentimental assets, rather focus on moving high growth assets into a trust.

Should you place your primary residence in a trust?

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The decision to move your primary residence into a trust depends on your individual circumstances. The general rule of thumb is to only consider moving any property into a trust if you plan to hold it for a long time, unless you want to protect it from your creditors.

Be mindful if you use trust-owned assets

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Many people have set up trusts as part of their estate plans to either protect their assets during their lifetimes, or to ensure continued use of the assets upon their death. This is especially true for properties the estate owner desires to retain in the family for generations. In many instances, the estate owner and his family live in such properties transferred into the trust.

Does a trust eliminate estate duty?

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Although death and taxes are certain, people are always looking for ways to minimise taxes upon death. In certain instances, people are not even aware of the tax consequences upon death. They may have to pay in excess of 30% in costs and taxes – capital gains tax, estate duty and executors fees. If no provision was made for these costs and taxes, the executor may have to liquidate assets needed by the remaining family, to make these payments from the estate.