Time to protect assets best you can?

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The world has become a challenging place. It has become difficult to make ends meet for many people in South Africa. Living costs have gone up post Covid and especially business owners have been impacted and may even be at risk to loose everything. Pierre-Olivier Gourinchas from the International Monetary Fund (IMF) reckons “the worst is yet to come and, for many people, 2023 will feel like a recession.” It is expected that a third of the global economy will shrink in the next year. Now, more than ever, is it important for estate planners to protect what they have gathered over many years. The times where people treated their estate plans and the execution thereof (including trust structures) ‘slap dash’ are over and even SARS is having a closer look at trusts – refer to their media release on 28 September 2022 with the title “SARS sharpens its focus on Trusts”.

Do not assume your accountant is taking care of the trust’s administration

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Often there is a misconception that financial statements confirm the compliance of a trust. Most of the times the accountant only provides accounting and taxation services to trusts, but does not provide compliance and administration services. There is a material difference between trust administration and accounting for trusts. Although financial information is required to report to trust stakeholders and submit tax returns, a trust that lacks administration and compliance is exposed to risk of attack. SARS and any personal creditors, including a soon-to-be-ex-spouse, can rely on a combination of factors (lack of resolutions, minutes, or a bank account) to request that a court declares the trust the ‘alter ego’ (an extension of oneself) of the founder or controlling trustee, resulting in the disregard of the trust to penetrate the trust. This ‘cost’ may be significantly higher than the effort or the cost required to properly administer a trust in terms of our law. It is important to demonstrate that a trust is managed as a separate entity to the founder, the trustees and its beneficiaries and that trust assets are held and dealt with separately from anyone else.

The trust as a taxpayer

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Some estate planners and trustees are not aware that a trust is regarded as a separate taxpayer, who has to register as such, and who has to submit relevant tax returns.

Is your adviser not taking your trust seriously?

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To my horror I was part of a discussion where a colleague in the fiduciary industry who works at a prominent wealth manager spoke to me about their clients and their service offering. When I asked who takes care of their clients’ trust needs, the reply was: “We have cracked the code, as long as you have the client’s balance sheet, that is where you make money. We realised trust services do not make us money, so we stay clear from that as it is just too risky”. I was horrified and replied: “So are you telling me you do not care about your clients’ needs? Who then takes care of that, as you know as well as I do, clients, especially now, need help and they may rely on you as their primary financial relationship? Do you not even refer them to a reputable trust service provider? The person was speechless.” I then realised the false sense of security that a number of clients experience with their financial service providers – such as their financial advisors, accountants, attorneys and banks - as this seems to be a general issue. SARS and the Master are introducing all sorts of changes. I believe it is the ethical duty and responsibility of professionals to assist their clients, whether they provide trust services themselves or whether they form part of a network of professionals to take care of their clients’ financial needs. It should not only be about their profits. Or they should tell their clients that.

‘Real-time’ reporting to SARS on trusts? Yes, maybe

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Trusts are still largely unregulated, which frequently leads to their abuse. The Courts and SARS are, however, becoming impatient with trustees and trust service providers.

The wife as a trustee of the family trust

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In South Africa, family members are typically acting as trustees of their family trusts, often without them knowing what they are signing up for. Trustees are the guardians of the trust assets and have a duty to manage these assets in the best interests of the beneficiaries, as outlined in the trust deed. The Trust Property Control Act is quite specific as to what is expected of trustees, and clearly stipulates the duties of trustees. Under Section 9(1) of the Trust Property Control Act, trustees must “act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another.” If you do not, you may find yourself in trouble.

The first trustee meeting

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People often agree to serve as trustees on a trust, without understanding the purpose of the trust and the objectives of the founder. They underestimate the importance of communication and record keeping. It should all start with the first trustee meeting. If these discussions did not take place between trustees (and the founder) yet, it is never too late to have them, especially when the founder is still alive. That may save a lot of heartache, especially for later generations.

Can one distinguish between beneficiaries in a trust deed?

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Only beneficiaries can benefit from a trust. Few people are aware that the founder can decide who is to benefit from the trust and to what extent. Limitations and milestones can also be built into the trust deed to ensure the desired beneficiaries benefit from the trust at a point in time.