Be careful what beneficiaries can do with their rights

A trust is either set up during the live of a person (inter vivos trust) or upon the death of such person in terms of his/her will (testamentary trust). Beneficiaries are those persons who are initially named by the founder in the trust instrument and are subsequently selected by the trustees from time to time in terms of the trust instrument stipulations, set by the founder. Beneficiaries are the only persons who can benefit from a trust. Beneficiaries are usually defined as income and/or capital beneficiaries. This means that the founder can distinguish between who may benefit from the assets and income of the trust. Beneficiaries are also either defined as vested or discretionary beneficiaries. 

Vested rights are acquired by beneficiaries in a vested trust/bewind trust, where the assets vest in the beneficiaries; in other words, the beneficiaries are the rightful owners of the assets and therefore have a right to it, but the administration is taken care of by trustees, until for example, when a child turns twenty five. The beneficiary cannot dispose of the assets until he/she takes over the control over the asset. The beneficiaries have vested rights to the income and/or assets of the trust. The beneficiaries will be liable for all taxes resulting from the assets. Upon the death of the beneficiary, these assets will be included in his/her estate. 

Beneficiaries in a discretionary trust have no right to income/capital until the trustees have exercised their discretion. All they have is a hope to receive something from the trust and will only be entitled to any asset/income once distributed by the trustee to such beneficiaries, having a vested right. If the trustees vest income or capital gains in a beneficiary, such beneficiary will be liable for tax on such distribution, in stead of the trust. Upon the death of the beneficiary, only these vested rights will be included in the estate.

Although the founder of the trust may carefully plan who could benefit from the trust (and who not) as described above, one needs to be mindful of what beneficiaries can do with their respective rights. It clearly depends on the type of trust, the classification of beneficiaries, the rights afforded to beneficiaries (or actions are not prohibited) in the trust instrument and whether income or capital gains were vested in beneficiaries.

Can a beneficiary renounce his/her benefits?

A beneficiary of a discretionary inter vivos trust, such as a family trust, does not have a right to receive any benefits from the trust, but just a hope. This means that such a beneficiary may never receive anything from the trust. Due to the fact that an inter vivos trust is regarded as a contract between two parties (the founder/s and the trustee/s), for the benefit of another (the beneficiary/ies), such a beneficiary have to accept his/her benefits from the trust, by either accepting a distribution from the trust, or by writing to the trustees to accept the benefits. Such a beneficiary can repudiate (reject) his/her benefits. Such benefits will then be dealt with in terms of the trust deed, and if no alternative manner of dealing with the assets is stipulated in the trust deed, the assets could revert to the founder. This may be useful in the event of a divorce where only one of the parties remain a beneficiary of the trust.

The vesting rights in terms of a will occur by operation of law in terms of the law of succession. The rights of a beneficiary under a testamentary trust therefore vest upon the death of the testator. In terms of the law, a beneficiary of a testamentary trust can repudiate his/her trust benefit. Such repudiation will be retroactive from the moment of the vesting, as if the person was never entitled to any benefit. The benefits will then be dealt with in terms of the will, and if no alternative was catered for in the will, the benefits will be dealt with in terms of the law of intestate succession.

Can a beneficiary cede/sell his/her rights? 

Even though a vested right is very different from a discretionary right, a beneficiary of a trust can cede (transfer) both a vested and a discretionary right to someone else, if the trust deed allows it, or does not prohibit it. In the instance of a discretionary trust, any benefits flowing from the cession can only be enforceable by the cessionary (the person who the benefits were cede to) if and when the trustees exercise their discretion in favour of the cedent (beneficiary), due to the fact that such a beneficiary has no right, but only a hope to receive any benefits from the trust. In the instance of a vested trust, the beneficiary can cede such vested right, which the cessionary can claim from the trustees. The protection that the founder sought by creating a trust may be lost if a beneficiary was allowed to cede an interest or a right to someone else. This should be prohibited in the trust deed.

People have historically “sold” their trusts in an attempt to save Transfer Duty. They merely replaced the trustees and beneficiaries to reflect the new “ownership”. The South African Revenue Service introduced an anti-avoidance provision on 2002 to stop these practices and such transactions/arrangements now attract Transfer Duty. It is arguable whether a beneficiary can sell his/her interest in a discretionary trust, which is merely a contingent right, or hope in accordance with the judgment in the cir v Sive’s Estate case of 1955. A discretionary beneficiary's contingent right has no value, as any benefit allocated to him/her is left to the discretion of trustees, and is therefore not measurable. One needs to be mindful of the fact that changes to beneficiaries of a discretionary trust, such as a family trust, may create a new trust altogether, as such a trust’s objective is to benefit the named beneficiaries and a change of beneficiaries changes the objective, and creates a new trust.

Estate planners need to be mindful of what beneficiaries might do and may want to prohibit the cession/sale of beneficiaries’ rights, but may want to allow the repudiation of benefits, in trust deeds.