Assets and family outside SA, trusts and tax

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South African families who have created South African as well as foreign trusts may be living all over the world. Similarly, foreigners who have foreign trusts may be living in South Africa. The use of foreign trusts has been the subject matter of legislative intervention over the years. South African exchange controls were relaxed a number of years ago, allowing South Africans to invest offshore, many in so-called tax haven countries that impose zero or low rates of tax on trusts.

Paying tax on trust distributions you have not yet received?

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I recently received a phone call from a lady in her early twenties who was desperate for help. When she was a minor her parents registered her as a taxpayer and as trustees of their family trust distributed, but never paid, trust income to her in an attempt to avoid paying tax at a higher rate in the trust. Unfortunately they never paid the tax over to SARS on behalf of their minor child. When she started working after completing her university studies, she went to SARS to register herself as taxpayer, unaware that her parents have registered her years ago as taxpayer. She was confronted by SARS with a huge outstanding account of approximately R 5 million, consisting of outstanding taxes, penalties and interest. Although she has ever since tried to convince SARS that she was not the culprit, SARS insists that she owes the money to SARS. This causes her a lot of anxiety, as the family is no longer communicating to one another, her parents got divorced and the trust’s funds are depleted. There is no prospect that she will ever receive any cash from the trust in the form of distributions made to her, which remains payable to her. SARS keeps her liable for the outstanding amount. According to her, her parents “ruined her life”.

Don’t assume a trustee has the board’s authority to act

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Outsiders often assume that trustees have both the authority and the capacity to enter into transactions binding the trust. If trustees have not ensured that these requirements are met, to what extent can outsiders be deemed to have known?

Can a testamentary trust be amended?

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Often the testator or testatrix directs in his or her will that his or her assets be transferred into a trust to be formed upon his or her death. A testamentary trust is then formed upon his or her death and the terms of the last will and testament form the terms of the trust.
Unlike an inter vivos trusts, which is a contract, which the contracting parties (the founder, the trustees and potentially the beneficiaries) can amend in terms of our law, the trustees cannot amend the trust instrument of a testamentary trust on their own, as one of the contracting parties – the founder - is no longer around.

Termination of a trust does not automatically terminate trusteeship

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The Trust Property Control Act does not make provision for the termination of a trust and merely refers to the concept in Section 13, which makes provision for the fact that a court can terminate a trust, and in Section 17 setting the requirement to retain trust documents for five years after the termination of a trust. The Master of the High Court did, however, issue a directive in March 2017 setting out the Master’s requirements to deregister a trust. Even though the Trust Property Control Act does not make provision for the termination of a trust, in terms of our common law, a trust can terminate by operation of law in certain circumstances. Even though some people believe that their obligations as trustees terminate upon the happening of a termination event, the office of trusteeship comes to an end only when the trustee has duly disposed of all trust property and the Master has confirmed this. Only then will the trustees really have discharged their obligations.

What to consider when a trust is involved in legal action

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A trust itself cannot sue or be sued, because it is not recognised as a legal persona, but rather a legal persona sui generis (which means of its own kind or class), in South Africa (Rosner v Lydia Swanepoel Trust case of 1998). The trustees, in their official capacity, can, however, sue or be sued. All the trustees must join in suing and all must be sued (Mariola v Kaye-Eddie case of 1995). Therefore when a trust is sued or sues, the names of all trustees, rather than the trust itself, are to be sited in pleadings. Even though the names of the trustees will be cited in any action against a trust, it is the trust that will be liable in respect of any claims and not the trustees personally; the trustees merely act in their official capacities as trustees of the trust.

Minimum and maximum number of trustees

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The Trust Property Control Act does not prescribe a minimum or a maximum number of trustees, and a trust may be properly established with only a single trustee. The founder will be required to decide how many trustees he or she wants to appoint, given his or her specific circumstances. The Master of the High Court prefers trust instruments to stipulate a minimum and maximum number of trustees.

Can you access trust assets to settle a trustee’s debt owed to you?

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A recent webinar hosted with Business Report dealt with the importance of proper administration of a trust to prevent a trust from being labelled someone’s ‘alter ego’ (an extension of oneself), whereby the trust form is disregarded when is comes to claiming money from a person, resulting in the inclusion of the trust’s assets in calculating a claim typically against a trustee. This is a common strategy in divorce cases. The question however arises - can you ever recover a loan made to a trustee from a trust instead? The answer is you can, but only in certain circumstances, and only by choosing the right line of attack.