The trust as taxpayer

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A trust is different to a company or a close corporation in that it is the trail of each transaction with the trust that will determine whether it is the trust that is liable for the payment of any tax on income or capital gains earned within the trust, or a person connected to the trust, such as a funder, donor, or beneficiary.

Because the South African Revenue Service (Sars) has begun to view trusts as a means of structured tax avoidance, a number of measures have been introduced over the years resulting in the income of trusts being taxed at 45% - the highest rate applicable to individuals - and capital gains being taxed at 36% - the highest effective rate applicable to any taxpayer (although the effective tax rate for a capital gain distributed to a shareholder in a company is now at a higher rate of 37.92% after the increase of the dividend tax rate in February 2017).

Trustees can manipulate a trust

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Trustees are the guardians of a trust’s assets. They are also the decision makers of a trust. The founder should ensure that the trust deed, the constitutive charter of the trust, deals in sufficient detail with the appointment and removal of trustees. If it does not, trustees may manipulate the trust and may cause the objective of the trust not to be met. Many court cases deal with the abuse by trustees of trust assets and the appointment and removal of trustees to influence voting.

When to act and when not to act as a trustee

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The trustees are the custodians of the assets in a trust. The trustees act of behalf of the trust and, in their capacity as trustees, can bring and defend actions concerning the trust. That is why it is so important to understand when someone can act, and be held liable, as a trustee and when someone can no longer act, and be held liable, as trustee. Misconceptions regarding when one can and should act as trustee may result in invalidating trust actions and may even lead to abuse by dishonest trustees.

Does a trust's books have to be audited?

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It is not a legal requirement that a trust’s books are audited, and it may add an unnecessary cost in the administration of a trust. However, a trust deed may specifically require the books of a trust to be audited. A number of the older trust deeds stipulate that the trusts’ books have to be audited. If the trustees do not meet this requirement, they will be in breach of their obligations as set out in the trust deed. It is therefore important to understand the requirements of the trust deed.

When it comes to the administration of a trust, the onus is on the trustees to clearly identify and record trust property (in terms of Section 11 of the Trust Property Control Act (“the Act”)) and to deliver to the Master of the High Court any trust documents and records when requested to do so (in terms of Section 16 of the Act).

Trusts: separating control and enjoyment

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Trustees can incur personal obligations and liabilities if they act improperly or outside of their capacity and specific powers provided in the trust deed. Therefore sometimes trustees are reluctant to exercise powers given to them in a trust deed to for example make interest-free loans to a beneficiary or to bind the trust as surety, as the trust deed may also require the trustees to invest the funds of a trust productively. Different provisions in the trust deed can therefore cause a conflict between the trustees’ different powers and obligations. Case law in general expects trustees to invest trust assets productively, wisely and in accordance with sound governance principals. Estate planners should therefore carefully consider their true intentions when they create trusts and ensure that the trust deed wording properly reflects that. It is also a good idea for estate planners to review current trust deeds and correct trust deeds which were typically incorrectly copied and pasted, while they are still alive.

Trust lessons for spouses and partners

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The real life story shared in this article provides certain lessons for spouses and partners where trusts are involved. Although trusts have been around in the world for almost a thousand years, it remains one of the most misunderstood and sometimes abused vehicles where families’ assets are housed.
Although there are remedies for the abuse of trust assets, which spouses and partners have access to, it is critical to ensure that you are either a trustee and/or beneficiary, depending on what entitlement you would have had to the trust assets in terms of your marriage regime, if a trust was not used. Without being a trustee and/or beneficiary you have no right to trust information and you cannot question or influence any decisions trustees make.

Do trustees have rights to remuneration?

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Trustees are the guardians of the trust assets and have a duty to manage these assets in the best interests of the beneficiaries, as outlined in the trust instrument. The trustees have a fiduciary duty to the beneficiaries of the trust. They may not act in a way that violates this duty or is outside the parameters of the trust instrument. Trustees could find themselves personally liable for losses suffered by the trust if it can be proved that they did not act with the necessary care, diligence and skill that can reasonably be expected of a person who manages the affairs of another. With this role comes certain rights, including the right to remuneration. Very few people know that trustees have a right to remuneration. The question remains – how much are trustees allowed to charge for their services that are commensurate with the risk undertaken by them for acting as trustees of a trust.

Are half of the trust assets yours upon divorce?

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Many spouses, and unfortunately to date a lot of women, get the short end of the stick when their marriages break up and there are trusts involved. The following questions can be used as guidelines when determining whether the assets in trust are at risk to any one of the spouses upon divorce:
Is the trust a trust in the real sense, or merely a “corporate veil”?
When was the trust created?
What was the intention of the founder of the trust?
Is there a conflict of interest?
How were the assets moved into the trust?