Is the trust still serving a purpose? - 17 August 2023

For some time, but especially after the recent introduction of tighter measures on South African trusts (similar to measures already introduced in many other countries), estate planners and trustees are (and should be) evaluating whether ‘their’ trusts still serve a purpose. It is a well-known fact that many trusts registered in South Africa were never activated as originally envisaged. Given the fact that many trustees face a penalty of up to R 10 million and/or five years imprisonment, it may be a good time to review the trust. Many trustees have gotten away with labeling trusts as ‘dormant’ trusts, in an attempt to excuse themselves from having to comply with trust laws.

Is there such a thing as a ‘dormant’ trust?

People often refer to trusts that do not have much activity and for which they do not want to pay money to administer, as ‘dormant’ trusts. There is no such thing as a dormant trust – it is either alive or it is dead! The word ‘dormant’ is used to describe something that is temporarily inactive, or where its normal physical functions are suspended or slowed down for some time, or where it is in a deep sleep. Another definition refers to ‘dormant’ as not being active, not growing, or not being used at the present time, but which is capable of becoming active later. In the context of a trust, a trust can never be ‘dormant’ and activated at a later date since it is not possible to suspend a board of trustees’ functions – there are simply too many things for that board to do on an ongoing basis. A testamentary trust exists from the testator’s date of death, and an inter vivos trust comes into being with the signing of the trust instrument. After the trustees have received their Letters of Authority from the Master of the High Court, they must actively, and on an ongoing basis, administer the trust.

Section 1 of the Income Tax Act defines a trust as “any trust fund consisting of cash or other assets which are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person.” Here, the concept of a trust is defined in relation to the trustees and the trust’s assets. A fiduciary duty is an onerous, legal obligation (a duty of loyalty and care) of a person managing property or money belonging to another person to act in the best interests of such a person. All trustees must act jointly in respect of trust matters since they share a common fiduciary obligation towards the fulfillment of the objects of the trust (Hoosen v Deedat case of 1999). This implies active administration of trust assets, even if it is just the initial donation, which can be as small as R 100. Since every trust has to be registered for Income Tax, and the trustees have to submit tax returns, a trust can hardly ever be classified as ‘dormant’.

Can one label a trust a ‘passive’ trust?

Although there is no such thing as a dormant trust, the South African Revenue Service (SARS) has reacted to a call for simpler tax returns for trust that do not have too much activity. SARS labelled them as “passive trusts” from 2023 years of assessment and onwards. A “passive trust” can be referred to as a trust that was formed, but limited activities were initiated during the year of assessment. This will be very useful for trusts that are typically formed to protect assets and serve as generational wealth transfer tools. The trust definitely serves a purpose and SARS has met those trustees halfway to reduce the compliance time and costs. Some of the excluded fields for these tax returns are local income received and or accrued, foreign income received and/or accrued, capital gain/loss and amounts considered non-taxable. Interesting that SARS views this as an annual election.

Active trusts

When the estate planner and/or trustees are of the view that the trust still serves a purpose, they have no other option but to actively administer the trust in terms of the law and the trust instrument. That implies the trust will have to have a bank account, be registered with SARS as a taxpayer and submit tax returns, resolutions for its transactions through the participation of all trustees, minutes of meetings, supporting documents for all transactions such as contracts, and so on. The trustees also now have to keep record of their interactions with “accountable institutions” and submit “beneficial ownership” information to the Master on a real-time basis. Even if the trust is ‘passive’, trustees would have to comply with these requirements. It was only a ‘favour’ of SARS to reduce the tax burden on such trusts.