Be careful if you distinguish between trust beneficiaries

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Trustees should act in the best interests of all the beneficiaries, in line with the terms of the trust instrument. In the Griessel v de Kock case of 2019 the Court held that the “role of a trustee in administering a trust calls for the exercise of a fiduciary duty owed to all the beneficiaries of a trust, irrespective of whether they have vested rights or are contingent beneficiaries whose rights to the trust income or capital will only vest on the happening of some uncertain future event”. If income and capital beneficiaries are not the same people, it may present a potential conflict which the trustees would have to manage.

Can you still reduce your loans to trusts with tax-free donations?

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You can donate R 100 000 (the annual Donations Tax exemption applicable to each South African resident individual) a year without paying Donations Tax (Section 56(2)(b) of the Income Tax Act). In effect, the exemption allows a couple to donate R 200 000 a year to a trust or other beneficiaries without incurring any taxes. However, you cannot accumulate this exemption. If the exemption is not used in one tax year, it cannot be carried through to the next tax year. It is, therefore, important to make use of the exemption every year. You can also use the R 100 000 annual Donations Tax exemption applicable to each South African resident individual to reduce your loan to a trust, which is an asset in your estate, until the loan is fully repaid. For as long as the loan has a balance outstanding, trust assets are at risk, as a liquidator or executor may have the trust assets liquidated for the trust to settle the outstanding loan. However, be mindful that SARS may now apply Capital Gains Tax as a result of such ‘waiver’.

Preference share and trust structure loophole closed by SARS

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Traditionally, people moved their assets into trusts (typically on interest-free loan accounts) to stop or freeze the growth on those assets in their personal estates for Estate Duty purposes. Consequently all the growth on those assets took place in the trusts, rather than in the hands of the estate planners. SARS has been unhappy about Estate Duty capping for years and has considered measures whereby South African resident individuals would be taxed on the growth in their estates based on the growth that is taking place within ‘their’ trusts (both South African or foreign resident trusts). The tax that SARS introduced to compensate for their loss of Estate Duty (in terms of Section 7C of the Income Tax Act) falls within the ambit of Donations Tax, which is charged at the same rate as Estate Duty. Estate planners and their advisors moved quickly and converted their loans to preference shares as part of a scheme in an attempt to circumvent these provisions. After spending material amounts on these structures, the benefits were short-lived, as SARS recently closed this loophole.

Why should trust beneficiaries (and trustees) have valid wills?

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It is estimated that the average person spends 76 800 hours on building their estate, yet very few people spend any time ensuring that their estates are not diluted by more than 30% upon death through death taxes.

The Court in the Raubenheimer v Raubenheimer case of 2012 concluded that estate planning, wills, succession, and the administration of deceased estates are inevitably linked to the proper drafting of a will, and the following was said:
“It is a never-ending source of amazement that so many people rely on untrained advisors when preparing their wills, one of the most important documents they are ever likely to sign. This is by no means a recent phenomenon".

Is the trust at risk if the founder did not make the initial donation?

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The trust assets defined in the trust instrument should be physically transferred by the founder to the trustees. The founder has to relinquish control over those assets. The trust should be structured in such a way as to ensure there is a clear separation between control and ownership and enjoyment of trust assets. If that is not achieved, the trust may be at risk of attack.

How is a trust defined in our legislation?

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Trusts became part of South African law after the British occupied the Cape in 1806. In South Africa, a trust is not a special type of legal device because our legal system is based on Roman-Dutch law, which does not recognise the concept of a trust. South African trust law as we know it today was developed incrementally as a combination of English law, Roman-Dutch law (also known as South African common law) and South African rules, through the mechanism of contract.

Can trustees delegate their authority?

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It often happens that trustees do not actively participate in trust matters on an on-going basis – such as when soon-to-be-ex spouses do not want to face one another in trustee meetings, or when people are simply relying on an (invalid) clause in a trust instrument to abdicate their responsibility as trustee. This article takes a closer look at what our law allows.

Has time run out for trustees to hide from Sars?

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The South African Revenue Service (SARS) presented a webinar on 29 July 2021 called Trust and Tax obligations, wherein they made it clear that there is a great focus on trust tax compliance. With approximately only 11% of trusts being tax compliant in South Africa, SARS will have a field day with the implementation of their nine strategic objectives, leaving trusts at great risk due to non-compliance. This may in turn lead to trustees being held personally liable by beneficiaries for not fulfilling their fiduciary obligations. 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.” This definition was inserted following the decision in CIR v Friedman case of 1993, in which it was held that under common law a trust is not a “person”. 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. The following strategic objectives were discussed, which trustees should take to heart and get their affairs in order (as a matter of urgency) to avoid surprise attacks from SARS, which may costs trusts – and potentially trustees – dearly, financially.