Things to consider before registering a living (inter vivos) trust

Anyone thinking of setting up a trust needs not only to make sure that he/she is creating a valid legal structure, but also to understand the nature of the trust, the duties of trustees, and the rights of beneficiaries. Before you create a trust, do your homework and make doubly sure that a trust is suited to your needs and circumstances and that you are committed to follow the rules. 

Considerations before you register a trust

• Are you willing to relinquish direct control over assets transferred to the trust? If not, the trust may be regarded as an alter ego of yourself, be disregarded, and your reason for registering a trust may be defeated. 
• Does a trust fit into your overall estate plan? 
• Will the trust be used mainly to avoid paying taxes? If so, chances are good that the South Afrian Revenue Service (SARS) will attack the trust, and may even disregard it. 
• Does the benefit of the trust justify the cost and administration involved in setting up and running the trust? Benefits include any amounts that you can calculate, as well as risk mitigation that is difficult to calculate accurately. 

What are the formalities?

You must decide on the following before you can have a trust deed drafted by a professional: 

• The desired name of the trust

Preferably not your name and/or surname, which would make it easy for creditors or SARS to track your trust. Trusts are registered at the Master of the High Court. You do not have to first reserve a name, as you would do when registering a company. For example, you could have more than one trust with the same name. A trust is given a registration number when it is registered and operates on the same basis as a motor vehicle, which has its own individual registration number. Although you can change the name of your trust - should the trust deed allow for this - the trust number will always remain the same and be the identifier of your trust. The registration number of an inter-vivos trust starts with the letters IT, followed by a number issued by the Master of the High Court’s office, followed by the year the trust was registered. As an example, registration number IT 3293/18 indicates that this was the 3 293rd trust registered at the Master of the High Court’s office, where the trust was registered in 2018. A trust will always be registered with reference to the Master of the High Court’s office where it was registered. Each Master of the High Court’s office has its own sequence of numbers for every year.

• The type of trust

Decide whether you want a discretionary or a vested trust. In a discretionary trust, the trustees have the right to decide how much income (or capital) to award to each beneficiary, whereas in a vested trust, the income and capital gains vest in the beneficiaries. Take note that complications can arise in vested trusts, in the event of a beneficiary’s insolvency or death. 

• The purpose or object of the trust

It is critical to define the purpose and object of the trust clearly in the trust deed, without which the trust may not legally exist. 

• The name of the founder

The founder is the person (can be more than one) who sets up the trust. This has to be the person who intended setting up the trust and who transfers at least the initial donation to the trust. The founder may not be the lawyer who sets up the trust, or his/her secretary. This person cannot reserve any sole rights in the trust deed, as it may have negative tax and other consequences. 

• The names of the proposed trustees 

Great care should be taken here. Previous experience in running a trust and knowledge of accounting are highly recommended because it will minimise the risk of the Master of the High Court requiring the trustees to put up security for the discharge of their duties. As a general rule, do not appoint your children/grandchildren as trustees while you and/or your spouse are still alive. Too often children have different goals and motives to their parents. They may decide to out-vote their parents, which can lead to a great deal of unnecessary stress, especially when the parents are relying on the trust as their sole source of income. Rather only allow your children to take over the management of the trust when both of you are no longer alive. It is recommended that you add a clause to your will where you appoint your children as follow-up trustees. This will ensure continuity. Appointing too many trustees could make decision making difficult or even impossible. Choose a minimum of two trustees, so that the decision making is not left in the hands of only one person. Nominate a maximum of four or five trustees, depending on your individual circumstances.

• Is it necessary to appoint an independent trustee?

It has become a requirement to appoint an independent trustee for a family trust.

• Nomination of beneficiaries

Decide who you want to nominate as beneficiaries, and then decide whether they are to be income or capital beneficiaries (or both). This gives you the flexibility to treat each type of beneficiary differently. Remember that 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. You will need his/her consent to do that. In turn, the addition or substitution of beneficiaries (in a discretionary trust) at a later date may trigger Transfer Duty if the trust holds residential property. It is important to ensure that the description of the beneficiaries in the trust deed identifies them (by name) or makes them identifiable (such as your descendants). It is not permitted to have a provision in the trust deed whereby trustees can nominate their own beneficiaries, which will render the trust null and void. In terms of the object of a trust, it is important to remember that 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.  

• Trustees’ powers

The trustees’ powers, competencies and obligations, including a clear description of the trustees’ discretionary powers and duties, as well as their remuneration, must be clearly stipulated in the trust deed, as the powers given to the trustees in the deed are their only powers. 

• Administrative procedures

Administrative procedures, such as the calling for and conducting of trustees’ meetings, voting rights, decision making and dispute resolution procedures, along with any veto rights, should be clearly provided for in the trust instrument. It is equally important to ensure that the trustees can and will follow the “rules” set out in the trust instrument. Failure to achieve this may be indicative of an alter ego trust. Ensure that the provisions you insert into the trust instrument are practical, giving you the protection you require without being excessively onerous. Consider the implications of a majority decision requirement in the trust instrument. Requiring a unanimous decision could leave your trust in stalemate should certain trustees become obstructive. Excessive powers given to a specific trustee could amount to said trustee taking control of the trust, with resulting tax consequences.

Use the services of a professional, specialising in trusts, to draft your trust deed and ensure the trust deed is drafted according to your individual circumstances.