Considerations when defining trust beneficiaries
February 14th, 2021 10:52
Beneficiaries are those persons who are initially defined 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. The Trust Property Control Act does not define a beneficiary and is relatively silent as far as matters regarding the beneficiaries of a trust are concerned. The nature, number and rights of beneficiaries are accordingly determined by reference to the trust instrument and common law. If there is any conflict, the common law will prevail. An example is the Potgieter v Potgieter case of 2012 where despite the fact that the trust deed only required the consent of the trustees to amend the trust deed, the Court also required the consent of the beneficiaries who have received benefits from the trust.
The following are useful pointers when an estate planner sets up a trust:
· Without a clearly defined object, a trust does not come into existence. In a family trust, the object is the beneficiaries for whose benefit the trust was created. Ensure trust beneficiaries are either identified (such as name and identity number) or identifiable (a clearly defined class of beneficiaries) (Estate Richards v Nichol case of 1999).
· Beneficiaries are usually defined as income and/or capital beneficiaries. This gives you the flexibility to treat each type of beneficiary differently. Income should be clearly distinguished from capital in the trust instrument, especially if different people are income and capital beneficiaries. Capital beneficiaries can benefit from the distribution of an actual trust asset or from a gain made on the disposal of trust assets. The treatment of unallocated income should also be defined to reflect the founder’s intention – whether it will form part of trust capital at the end of a financial year, if unallocated, or whether it will keep its nature as income. If the trust instrument is silent, it may be assumed that income and capital will always retain its nature. In the event that income and capital beneficiaries are different, it is good practice to provide in the trust instrument that in the event that income is insufficient for the maintenance of an income beneficiary, that capital can be used to make good any such shortfall. This will assist the trustees to optimise the trust’s investment returns, whilst taking into account the needs of all beneficiaries to prevent unintended hardship. Focusing at all cost on the short-term income production in a trust may have a detrimental effect on the long-term position and value of the trust’s assets, which in the long run may negatively impact both of the income and capital beneficiaries.
· If you want a specific beneficiary to be favoured over others in a discretionary trust, say so in the trust instrument, otherwise beneficiaries may put pressure on trustees to treat them equally. The trust instrument in the instance of a discretionary trust should also clearly state that beneficiaries need not be treated equally, if that is what the estate planner wishes for.
· It is acceptable for a trust instrument to provide that a beneficiary shall not receive a benefit until the happening of some event, such as reaching a certain age (Estate Dempers v SIR case of 1977).
· A trust instrument can also provide that a beneficiary will only receive a benefit from a trust for a limited period. The beneficiary may then have an unconditional vested right for that limited period only, and such right will during that time form part of his/her insolvent estate or his/her assets during a divorce.
· You cannot vest income and/or capital in a beneficiary, but cease the vested right in the event of the insolvency or divorce of that beneficiary. Once it is vested, it belongs to that beneficiary.
· A trust instrument cannot restrict a beneficiary, for example, by prohibiting a beneficiary from marrying.
· Provisions of our Constitution may affect the content of a trust instrument. If any provision, including the appointment of beneficiaries in a trust instrument, offends our Constitution, then it will be declared invalid. This seems to be going against the principle of freedom of testation or contractual freedom, but the law has never tolerated acts that are against good morals, and something that offends the provisions of our Constitution goes against good morals. So be mindful when you create a trust, especially a charitable or educational trust, that the terms you stipulate in the trust instrument not be contrary to public policy, as grounded in our Constitution. It cannot, for example, exclude recipients of trust benefits on the grounds of race, gender or religion. If such terms are illegal, immoral or contrary to public policy a court can strike out the offending clause/s in terms of the common law (Minister of Education v Syfrets Trust Ltd case of 2006).
· It is important to remember that a beneficiary can cede both a vested and discretionary right to another person or entity. One may very well want to prohibit such a cession expressly in terms of the trust instrument, if that is not in line with the wishes of the estate planner.
· As soon as a beneficiary receives any distributions from the trust (or accepts his/her benefits in writing to the trustees), removing him/her as a beneficiary of the trust without his/her consent is not a simple process. Be mindful that you will need his/her consent to do that.
· Be mindful that the addition or substitution of beneficiaries (in a discretionary trust) at a later date may trigger Transfer Duty if the trust holds residential property (Section 1 of the Transfer Duty Act).
· It is important to ensure that the meaning of the term “beneficiaries” corresponds with its intended meaning in clauses dealing with, for example, the appointment of trustees or the amendment of the deed. If, for example, the term “beneficiary” is used to include “all those persons related by blood or affinity to the founder” and, if the agreement of all beneficiaries is required for the appointment of a trustee or to make a change to the trust deed, it may become difficult to trace and involve said persons in such an appointment or change.
The estate planner should ensure that the definition of trust beneficiaries in the trust instrument meets his/her objectives for setting up a trust, which will not create unintended consequences later on.
~ Written by Phia van der Spuy ~