What exactly is a trust?
November 18th, 2017 09:33
Why are so many trusts in trouble? When people are advised to structure their assets in trust, they are often not informed about the uniqueness of a trust as an estate planning vehicle. This ignorance, and the resulting mistreatment thereof, leads to the vast majority of trusts getting into trouble at some point, such as when creditors (including the South African Revenue Service (SARS)) attack trusts, when people divorce, when an estate is wound up, when beneficiaries are becoming unhappy, and so on.
As many court cases have proved, the fact that you have a trust does not mean you are protected. It is important to actively administer your trust, knowing exactly how different legislation regards trusts, because a lack of administration in line with such requirements, may cause your trust to be disregarded, should somebody attack it.
The courts acknowledged for the first time in the Braun v Blann & Botha case of 1984 that a trust is in fact something “unique”. It is therefore critical to understand the trust animal, to ensure that the benefits unique to a trust is not lost.
The key element of the trust arrangement is the transfer of ownership and control of the trust assets from the founder to one or more trustees, who hold the trust assets, not in their personal capacities, but for the benefit of the trust beneficiaries. A trust generally speaking is therefore an arrangement that allows someone to hold assets (without owning them), for the benefit of the trust beneficiaries. This requires a clear separation between control and enjoyment of assets held in trust.
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). The selection and involvement of these parties should be carefully considered when you set up your trust in order to avoid serious repercussions down the line, in terms of taxation, and then in terms of exposing your assets.
The Trust Property Control Act contains a rather cumbersome definition of a trust, but the short version is that a trust is a structure into which property is transferred, which is then administered by trustees on behalf of one or more beneficiaries in accordance with the trust instrument, which could be a trust deed or a will. This Act defines a trust as “an arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed…”. This Act does however not define what is meant by “arrangement”. A general definition of “arrange” is a plan for how something will happen.
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 (taking care of someone else’s money/assets in a suitable way) and the trust’s assets. This Act also sees a trust as a “person” for tax purposes and must therefore be registered with SARS, as a result of this definition.
The Deeds Registry Act, Transfer Duty Act, Value Added Tax Act and the Insolvency Act do afford a trust legal personality, similar to a company or close corporation, in terms of these acts.
The courts on the other hand, hold that a trust is, in essence, a contract. However, it is clear that a trust is much more than a contract. A trust, through its trustees, may enter into a contract, while a contract cannot enter into a contract with others. A trust acts through its trustees, while contracts are merely enforced and adhered to by parties thereto and do not have the capacity to act themselves. Trusts may, through its trustees, enter into litigation, while contracts will, at most, provide the basis for litigation. The fact that trusts are afforded juristic personality by certain legislation, as explained above, certainly sets them apart from ordinary contracts, as we know them. The fact that a trust is considered a contract, however, enables the amendment thereof by the parties to the trust, similar to any other contract.
All role players in a trust should understand how trusts are viewed in South Africa in terms of various legislation and our courts. A lack of this understanding and knowledge may compromise the effective execution of the founder’s objective as set out in the trust deed, and may cost him/her dearly.
~ Written by Phia van der Spuy ~