Is there such a thing as a dormant trust?

Often people refer to their trusts as ‘dormant’ trusts that do not need any work and that they do not want to pay a lot of money for to administer. Is there such a thing as a dormant trust? I do not think so – a trust is either alive or it is dead.

The word ‘dormant’ is used to describe something that is temporarily inactive or when its normal physical functions are suspended or slowed down for a period of time, or it is even in a deep sleep. Another definition refers to something that is dormant as not being active, growing, or being used at the present time, but which is capable of becoming active later.

In the context of a trust, a trust can unfortunately never be ‘dormant’ and be activated later, as there are too many things that the board of trustees have to do on an ongoing basis to label it as ‘dormant’. One can unfortunately never suspend any functions trustees have to perform in a trust until a later date.

Section 1 of the Income Tax Act, for example, 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. This implies active administration of trust assets (even if it is just the initial donation, as small as R100). Every trust has to be registered for Income Tax, and the trustees have to submit tax returns, so it can hardly ever be classified as ‘dormant’.

In the context of estate planning, a trust can be described as a legal relationship which has been created by a person (known as the founder, donor, or settlor) through placing assets under the control of another person (known as the trustee) during the founder’s lifetime (an inter vivos trust) or on the founder’s death (will trust, testamentary trust or trust mortis causa) for the benefit of third persons (the beneficiaries). A trust, generally speaking, is an arrangement that allows a person to hold assets (without owning them) for the benefit of the trust beneficiaries. This can never be an inactive role one plays.

The Trust Property Control Act also requires ongoing action from the trustees:

Section 10:

Trust account Trustees shall deposit all money received for the trust in a separate trust bank account at a banking institution. This is required by law, which means that trustees have no discretion in terms of whether they want to open a bank account or, for example, use one or more of their personal accounts. It must be a separate bank account in the trust’s name.

Section 11:

Registration and identification of trust property Trustees are required to clearly indicate the trust property held by them in their capacities as trustees in the bookkeeping records. Registered trust property should be clearly indicated as such. Any account or investment at any financial institution should be identifiable as a trust account or investment. An asset register should be maintained by the trustees that clearly describe the assets, including their purchase dates, values and locations. This will prevent exposing the trust assets to risk in the event of a trustee being sequestrated or liquidated.

Section 12:

Separate position of trust property This section requires trust property to be held separately from the trustees’ personal estates. Even though a trust is not a legal ‘person’, a trust has an existence, separate and apart from the founder, the trustees and the beneficiaries. It should therefore achieve a separation between ownership/control and enjoyment, otherwise a trust does not come into existence. In the Raath v Nel case of 2012 it was held that “the separateness of the trust estate must be recognised and emphasised, however inconvenient and adverse to the respondent it may be”, even though it is not a ‘person’.

A certain amount of administrative responsibility is created and certain requirements must be adhered to when operating a trust. Some of these administrative burdens, as a minimum, include:

• The compilation and retention of trust records from inception of the trust to at least five years after the trust has been deregistered.

• Trustees’ minutes and resolutions about all transactions must be drafted and retained.

• Maintenance of a separate bank account for all monies flowing in and out of the trust. Many people think this is not important, but how are you going to prove, for example, that you have made the initial cash donation of, say, R 100 that is stipulated in the trust deed?

• Maintenance of an asset register (Section 11 of the Trust Property Control Act). This will prevent exposing the trust assets to risk in the event of a trustee being sequestrated or liquidated. Although Section 12 of the Trust Property Control Act provides a statutory safeguard by stipulating that trust property will not form part of the personal estate of a trustee (except in so far as the trustee, as a trust beneficiary, is entitled to trust property), it will only be effective if the requirements of Section 11 are met, by clearly identifying and recording trust property.

• Adherence to any other specific administrative requirements stipulated in the trust instrument. Ensure that you understand the trust instrument, together with the duties that are expected of you.

It is important to demonstrate that a trust is managed as a separate entity to the founder and its beneficiaries. If there are no resolutions, minutes, a separate bank account, or tax submissions, SARS and creditors, including a soon-to-be-ex-spouse, may request that the Court declares the trust your alter ego, resulting in the disregard of the trust. This “cost” may be significantly higher than the effort required to administer the trust on an ongoing basis. Therefore, even if a trust does not have a lot of activity, it has to be administered on an ongoing basis and can therefore never be classified as ‘dormant’.