Are your and your family’s wealth protected in a trust?

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A real life example illustrates the risk of being compromised as a beneficiary of a trust. A businessman was asked by his friend to sign as surety for his debt as a developer. The businessman was happy to do that, as all his assets were transferred to a trust, which protected the assets from any creditors. Unfortunately the friend experienced financial difficulty and the bank approached the businessman who signed surety for his friend’s debt to recover its loan. When the businessman informed the bank that he did not hold any material assets in his personal name, the bank decided to sequestrate the businessman. The effect of this was catastrophic – this action caused the businessman to be removed as trustee and beneficiary of the trust. How could that happen?

The framework within which trustees have to act

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A trust instrument should clearly set out the purpose of the trust and trustees’ powers should be stipulated in the trust instrument to support and achieve such purpose. Trustees should continuously be guided by the purpose of the trust in exercising their duties. Trustees are required to exercise their powers independently and objectively.
Trustees hold a fiduciary position and therefore must always exercise their powers to the advantage of the beneficiaries, and act within these powers.

Funders of trust structures be ware of the looming tax changes

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It is well known that trusts and estates have been under the magnifying glass of the South African Revenue Service (SARS) for a while now. This led to the introduction of an anti-avoidance measure (Section 7C of the Income Tax Act) effective from 1 March 2017, whereby SARS accesses growth in a trust. SARS wanted a way to access growth in assets, which people historically deliberately moved into a trust and thereby “froze” the value of the estate for estate duty purposes. As an example, a farmer transferred his farm into a trust many years ago at a value of R1m and created an interest-free loan for that amount to the trust. Therefore, upon his death, thirty years later, the farm in the trust may be worth R50m, but the loan of only R1m is reflected in his estate. SARS could therefore not access the growth in the farm upon his death, as the trust is a separate entity.

Time to review your trust deed?

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The beginning of a year is a good time to review a trust deed to ensure that it is still relevant and to understand how changes in circumstances can impact a trust arrangement.

Be careful of your automatic removal as trustee

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Often estate planners sign trust deeds without reading it first. This creates a huge risk, as many trust deeds are ‘copied and pasted’ and do not reflect the wishes and personal circumstances of estate planners and their families. One particular aspect the estate planner has to pay attention to is the appointment and removal of trustees in terms of the trust deed. Unintended consequences may arise if the trust deed automatically removes a trustee on the happening of an event specified in the trust deed. This may have dire consequences, as the estate planner, who may have been appointed as a trustee, may be automatically removed and then loose the ability to participate in trust decisions.

Is there such a thing as a dormant trust?

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Often people refer to their trusts as ‘dormant’ trusts that do not need any work and that they do not want to pay a lot of money for to administer. Is there such a thing as a dormant trust? I do not think so – a trust is either alive or it is dead. The word ‘dormant’ is used to describe something that is temporarily inactive or when its normal physical functions are suspended or slowed down for a period of time, or it is even in a deep sleep. Another definition refers to something that is dormant as not being active, growing, or being used at the present time, but which is capable of becoming active later.

The role of the founder of a trust

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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). Therefore a trust is either a contract (Crookes v Watson case of 1956) that is brought about by a person (the founder) when he/she is alive or it is a testamentary disposition that is brought about on the death of a person. A trust can also be created in terms of a court order (court order trust), such as a divorce order.

Trustee, be mindful of your mental capacity

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When transferring assets to a trust, tax savings is not the only consideration. It is also about a strategy to protect your assets, to create continuity and liquidity upon your death, as well as other considerations—such as a contingency plan should you develop a mental illness such as Alzheimer’s Disease or senile dementia. Registering a trust, in which you build wealth, acts as “insurance” should something go wrong with your mental health. If you have created a trust during your lifetime and become afflicted by one of these dreadful conditions, your financial affairs would continue as before, with persons that you entrusted as trustees of the trust. Therefore the appointment of trustees should be carefully considered in anticipation of these circumstances.