Principles laid down by the Courts regarding the inclusion of trust assets upon divorce

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Trusts are frequently used (and abused) by spouses as a vehicle into which they transfer their assets, using the trust for their own benefit and not for the benefit of third parties (the beneficiaries). There have been a number of Court judgements where it was held that one of the factors that a Court may consider is when certain substantial assets were held in trust by one of the parties who used the trust as his/her "alter ego". It is important to note that the marriage regime is a determining factor in the judgements.

How do people still use trusts as tax planning vehicles?

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The advantages of proper tax planning in a well-structured trust are clearly defined in the tax legislation. Even minor beneficiaries can enjoy tax-friendly distributions. Estate planners use the following principles in structuring their financial affairs to enjoy maximum benefit...

Should trust assets in the instance of a divorce be included in the estate of a spouse?

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Trusts are excellent asset protection, succession planning and estate duty planning vehicles, but to enjoy protection from a spouse, creditors and the South African Revenue Service (Sars), the trust must be properly drawn up; the trust deed must contain no pitfalls; and the minutes, resolutions, administration, accounting and tax affairs of the trust must be in order. It is important that the trust is seen to be legally and factually independent from all individuals (including yourself) if the assets held within the trust are to be protected while you are happily married.

Why does SARS target transactions with “connected persons” in relation to a trust?

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The South African Revenue Service (SARS) attempts to limit the abuse of trusts as a means of tax evasion by individuals. SARS identifies persons and entities that are closely connected to the beneficiaries of the trust - especially where income and capital gains have been transferred to such persons and entities - since the beneficiaries are the parties who will directly benefit from all income and capital gains accrued in the trust.

Your marriage regime may affect your claims in a divorce where a trust is involved

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The reality is that almost half of all marriages end in divorce. It is also a reality that future-to-be-ex-spouses usually attack trust structures set up by their spouses in an attempt to maximise their claims. Aside from being an emotionally traumatic life event, divorce can often have a severe impact on a person’s financial security and quality of life. Divorce generally goes hand in hand with a great deal of distress over the manner in which the assets, that have been built up during the marriage, are to be divided.

Are trusts taxed more punitively?

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Many people deliberately set up trusts with a view to save or avoid tax. This is problematic because the South African Revenue Service (SARS) has, over the years, introduced many anti-avoidance provisions to combat the use of trusts for tax avoidance schemes. Trusts serve many purposes, but saving tax is not one of them. If you have set up a family trust to protect your assets from creditors, and if you have administered the trust properly, you have the advantage of saving Estate Duty upon your death, and SARS cannot attack your trust because of this.

Does a trust require an independent trustee?

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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 or donor), 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.

What does it mean that trustees of a trust have to act jointly?

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I met a trustee of a trust last week, who was confident that he could manage “his” trust alone, as a result of a resolution which he got signed by all trustees, which empowers him to do as he wishes with the trust’s assets. Such a red flag was raised, as many people are of the opinion that they can retain control over trust assets and act alone, without really involving other trustees in trust decisions. They were obviously not educated that such actions may have serious repercussions for the trustees, as well as the trusts’ assets.