Do the benefits of a trust justify the costs?

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People often ask this question. Trusts do cost money to set up, but using the cost of setting up a trust as an excuse to not set one up may be penny wise and pound foolish. It may cost you more by not having a trust. The cost of Income Tax, Capital Gains Tax, Estate Duty and Executor’s Fees, during your life and upon your death, can be expensive if you do not take advantage of setting up a trust timeously. It can be a costly exercise to move assets, acquired by you, into a trust at a later stage, so the perfect time to establish a trust, as part of your estate plan, is when you start building wealth, in order to avoid unnecessary costs – now or in future.

Why a trust requires its own bank account

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Often people are of the view that trusts do not require their own bank accounts. Trustees and even service providers justify why separate trust bank accounts are not maintained for trusts – from being convenient, to saving costs, to being ‘dormant’ trusts - to name a few. Little do they know that it is in fact a legal requirement for each trust to have a separate bank account. The main rationale is to prevent any mingling of trust funds with any other non-trust funds, which may place the trust at financial risk.

Trust investments can’t be too risky or too conservative

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The trustees are required to administer the trust in terms of the law and the provisions of the trust instrument and act with the highest degree of diligence and caution. Trustees are required to be more careful and prudent with the affairs of the trust than they would be with their own affairs. In carrying out their duties, trustees fulfil a fiduciary position. A fiduciary duty is an onerous, legal obligation of a person managing the affairs of another to act in the best interest of such a person. A fiduciary relationship arises from the nature of the actual relationship undertaken; i.e. in the instance of a trust the trustees should act in the best interest of the beneficiaries. When there has been a breach by a trustee of a fiduciary duty, the beneficiary may claim the trustee’s gain out of a transaction, or may hold the trustee liable for breach of trust, even if the trustee did not financially benefit. Trustees are not permitted to play an inactive role in the administration of the trust, and may be held accountable should they behave in this manner. Trustees cannot exempt themselves from their fiduciary duties as is often found in trust instruments – that is against the law.

The uniqueness of a trust from a legal perspective may pose a risk for estate planners

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The uniqueness of a trust from a legal perspective may pose a risk for estate planners

The importance of valid trustee decisions

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All trustees must act together when making decisions that affect the trust, not simply the majority of the trustees. It is not the majority vote, but the resolution (signed by the entire complement of trustees) that binds a trust. A trust operates on resolutions and not on votes.

How wide is a trustee’s discretion?

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Discretionary trusts are the more common forms of inter vivos trusts. In these types of trusts, the vesting of benefits or assets in beneficiaries is done at the sole discretion of the trustees. The beneficiaries only have contingent rights (a right that depends on a future event or the performance of an action by the trustees such as a decision to make a distribution) to the income, capital gains, assets or trust capital of the trust. Payments of income, capital gains and/or capital are made at the discretion of the trustees, and all non-allocated income and capital gains are taxable in the hands of the trust.

Do financial statements demonstrate trust compliance?

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Often estate planners, and their family members serving as trustees with them in family trusts, hold the view that the preparation of financial statements by their accountants is sufficient to demonstrate their compliance as trustees. Little do they know that financial statements are not even a requirement in terms of the Trust Property Control Act (the Act) and certainly do not, on their own, serve as evidence that the trusts are compliant. What is required is that trustees collectively, actively manage the trust and document decisions for each transaction. It is imperative that all decisions made by trustees are recorded in minutes of meetings or resolutions taken - each important transaction should be supported by a duly authorised resolution of the board of trustees. This is critical to actively demonstrate the management of the trust with the necessary audit trail when substantiating actions taken by the trustees.

Trustee be mindful to purchase trust assets

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In a typical South African discretionary trust trustees have full discretion to deal with trust assets. Trustees, however, are the custodians of such assets, for the benefit of beneficiaries, no one else, and their decisions should reflect that. In exercising their responsibilities they have to observe the law, the trust objective (which typically includes the preservation and maintenance of the trust’s assets for the benefit of well-defined beneficiaries) and further relevant terms of the trust instrument.