Which laws impact trusts in South Africa?

Trusts became part of South African law after the British occupied the Cape in 1806. South African trust law as we know it today was developed incrementally as a combination of English law, Roman-Dutch law and South African rules. The South African government is working on improving the regulation of trusts. Currently, the law of trusts in South Africa is not contained in any single set of legislation. Trusts in South Africa are, in fact, largely unregulated, which frequently leads to their abuse. 

The main statute that governs South African Trust Law is the Trust Property Control Act 57 of 1988, which regulates certain administrative aspects relating to trusts. South African trusts are also governed by the Income Tax Act, Estate Duty Act and common law.

Trusts can also be governed by a particular statute. For example, the Companies Act envisages a trust to hold shares that have been issued but not fully paid for, and the Financial Institutions (Protection of Funds) Act provides for the safe custody and administration of trust property by financial institutions.

A trust is not an independent entity or juristic person that can be owned, sold, or transferred as would be the case with a company or a close corporation. 

A trust does not have a legal personality because it is simply an accumulation of assets. Because of this, a trust cannot own property. Any property held in trust is held by the trustees in their capacity as trustees. A trust itself cannot be sued, because it is not recognised as a legal person in South Africa, unless a statute defines it as such. The Deeds Registry Act, Transfer Duty Act, Value Added Tax Act and the Insolvency Act afford a trust legal personality. The trustees, in their official capacity, can, however, be sued. 

Despite its lack of legal personality, a trust has legal capacity, and the trustees may perform juristic acts, provided the trust instrument allows this.

The following legislation is important for trusts:

The Trust Property Control Act 57 of 1988

The purpose of the Trust Property Control Act (as per its Preamble) is to regulate the control of trust property, and to provide for matters relating to it. Much of the Trust Property Control Act is aimed at establishing firmer control over trustees and their administration of the trust. This Act consists of 27 Sections and was promulgated in June 1988. In the three decades that it has been in existence, it has not kept track of the changes in the legal landscape in South Africa. Although the text of the Trust Property Control Act is not divided into chapters, the following aspects are covered: 

• Definition clause; 
• Documents deemed to be trust instruments;
• The role of the High Court in respect of trusts and trustees;
• The role of the Master of the High Court in respect of trusts and trustees;
• The duties of trustees; and
• The powers of beneficiaries/interested parties

Income Tax Act

Prior to 1998, trusts were not defined as taxpayers under the Income Tax Act, unlike individuals and companies. This gave rise to a considerable amount of abuse of trusts for tax saving purposes. The Government has since made various amendments to this Act to combat these practices. The Income Tax Act sees a trust as a “person” for tax purposes. All trusts must be registered with SARS, as a result of this definition.

Various taxation sections and anti-avoidance measures have been introduced relating to trusts. SARS is currently reviewing trusts, and estate planners should stay abreast of any changes that may impact them. 

Estate Duty Act

The Estate Duty Act (Section 3(3)(d)) is relevant where the trust instrument contains a provision that empowers the deceased, immediately prior to his/her death, to:

• appropriate or dispose of property; or
• revoke or vary the provisions of any donation, settlement, trust, or other disposition made by him/her
  
  for his/her own, or his/her estate’s benefit.

A trust deed may typically contain clauses which attempt to protect the estate planner, such as the inclusion of a casting vote, a testamentary reservation, etc. In stead of  providing the necessary protection for the estate planner, it will rather compromise him/her. In such a case, the trust property will be included in the estate of the deceased as deemed property and attract estate duty; so it is important to be mindful of inserting problematic provisions when you draft your trust deed. It is not even a requirement that the estate planner in fact benefitted from such favourable provisions; the mere fact that such a person had the ability to deal with the assets in the way envisaged in the Act, the day before he/she dies, will result in the assets being included in the estate of such a person upon death. If you have registered a trust, please review and amend your trust deed and remove any provisions which may impact your estate negatively, especially if you have not made provision for additional Estate Duty and Capital Gains Tax payable upon your death, as a result. There are better ways to structure a trust deed to provide the estate planner with some level of influence without falling foul of this onerous provision of the Estate Duty Act. 

Common law

Common law is the body of law developed by judges and Courts. The defining characteristic of common law is that it arises as legal precedent that can be applied to similar situations. Common law systems originated during the Middle Ages in England, and spread to the colonies of the British Empire. Today, one third of the world's population (including South Africa) live in common law jurisdictions, or in systems mixed with civil law. Due to the limited legislation relating to trusts in South Africa, huge reliance is placed on legal precedent relating to the treatment of trusts.