What is a Trust and who are the parties to a Trust?

A trust is a separate legal entity but not a legal persona or a juristic person per se; a Trust is created by a contract called a Trust deed which is entered into by certain parties. The document is stamped and lodged with the Master of the Local High Court and is then allocated a registration number called an IT number

A Trust is not a juristic person as in the case of a Company, Certain statutes accord a Trust separate legal personality, such as the Income Tax Act. A Trust can be described as a legal relationship created by a person (The Founder/Donor), by placing assets under control of  another person(The Trustee/s, during the Founders lifetime (known as the Inter Vivos Trust), or on the Founders death (The Testamentary Trust )for the benefit of third parties (The Beneficiaries).

Parties to a Trust

The parties to a Trust are the Founder, the Trustees and the Beneficiaries.

Founder/Donor

The Founder is the person who creates the Trust and makes the initial funds available to the Trust and is also known as the Donor. The Founder should be of majority age.

• A juristic person or another Trust can also be the Founder of the Trust.
• The Founder in essence sets out the terms and reasons for the creation of the Trust.
• Contrary to belief the same person can be the Founder and Trustee and Beneficiary of a Trust, on the condition that the Trust deed is correctly structured, failing which the asset protection, estate duty, and certain tax benefits may be compromised.

Section 9 of the Transfer Duties Act, affords transfer duty benefits if the Beneficiaries to the third degree consanguinity are related to the Founder.

Trustees

The Trustees are appointed in the Trust deed and are charged with the administration of the Trust. The must comply with the Trust Property Control Act and act in accordance with the Trust deed.

• A Trustee may only act on behalf of the Trust once they have received the letter of Authority that is issued by the Master of the High Court.
• Trustees should be of majority age, Note that the age of majority is now eighteen years of age, a word of caution though, whilst the age of majority has been lowered, the individual should always be responsible to handle the obligations imposed on them.
• There should always be a minimum of two Trustees, one of those being totally independent from the Founder and Beneficiaries.
• A juristic person may be appointed as a Trustee. The juristic person will nominate a natural person to represent it as a Trustee of the Trust. A non- resident or citizen may also be appointed as a Trustee.

Choosing the Trustees are very important. The Trustees must be persons of integrity, someone that will act with care, diligence and skill reasonable expected of a person who manages the affairs of another. A Trustee should be someone who owes the utmost good faith toward the Beneficiaries in carrying out the obligations imposed upon them by the Trust Deed.

In the event that one is married, discretion should be exercised whether to include a Spouse to the board of Trustees. Careful consideration and deliberation on this point must be taken, as the Trustees are the parties who control the Trust, therefore a Spouse needs to consent to decisions to be made on behalf of the Trust.

There is potential risk to a Spouse who acts as a Trustee, or in the event that a family member is appointed to the board, as they may be subjected to sing sureties, guarantees or warranties on behalf of the Trust, further there could be exposure to liability to SARS or creditors claims, which may result in personal liability. Please carefully plan and then make your decision.

Independent Trustees

It is very important that the Board of Trustees has a certain degree of independence and not be mere agents of the Beneficiaries and the Founder.

• Appointing an Independent Trustee, in other words at arms length person, will go a long way to effectively satisfy SARS and any other third party or creditor that there is indeed a clear distinction between control and enjoyment of the Trust assets, thereby protecting the integrity and efficiency of the Trust as a separate entity.
• The independent Trustee will also ensure impartiality in decisions what need to be made on behalf of the Trust and can act as a mediator in the event of disputes.

In appointing an Independent Trustee, ensure that it is a person, firm or company that is knowledgeable about Trust, Trust Law, Trust administration and the taxation of Trusts.

Replacement Trustees

Provision in the Trust deed for replacement Trustees must be made.

• These Trustees will then step into the shoes of the Trustees who have been originally nominated in the Trust deed, upon the event of their death, resignation or sequestration.
• It is imperative that you always know who will act as replacements on the Board of Trustees after the death of the Founder.
• The position of Trustee is a very important one along with the responsibilities attached to the role. Ensure the right people are running your Trust in the future.

Beneficiaries

Any person can be a Beneficiary of a Trust.  In most instances, the Beneficiaries would be the persons that you would normally nominate to benefit from your estate in your will.

• There is also no limit to the number of Beneficiaries to the Trust. Persons other than natural persons can also be Beneficiaries such as, duly registered Trusts, juristic persons, associations, foundations, funds, the state or any organ of the state, companies and partnerships.
• Unborn persons can also be specified as Beneficiaries.
• Minors can indeed be beneficiaries.  One of the main advantages of a Trust is the Fact that it protects the interest of the minors on the event of a death of a parent or guardian and ensures that benefits due to a minor are not placed under the control of the Guardians fund.
• A minor may however only accept a benefit with assistance. The minor’s parent or guardian has authority to accept on the minor’s behalf. The Trust deed may also provide for the Trustees to make a distribution to a minor and retain the benefit in the Trust for administration on behalf of such minor.

It must be remembered that an Inter Vivos Trust is a contract for the benefit of a third party. The Beneficiaries therefore only obtain rights when and if they accept the benefits of the contract. When they accept these benefits they become part of the contract. These rights are however still subject to the terms and conditions of the Trust deed.

It is advisable that the Beneficiaries should be Discretionary Beneficiaries to the income and capital of the Trust. In such a case, the Beneficiaries shall have no rights whatsoever to claim Trust benefits as and when they please. The Trustees must exercise their discretion and resolve to distribute a benefit to beneficiaries.

This will also result in the assets being secure from the creditors of the Beneficiaries and further that such benefits do form part of the estate of the Beneficiary to determine and calculate taxes and duties on death.

Alternative Beneficiaries

In order for a trust to continue to exist validly a Trust must always have a Beneficiary, otherwise if fails. In other words a Trust without a Beneficiary is a nullity.

If there is no beneficiary then the Trust assets revert back to the Founder and failing the Founder to the State. Always ensure that replacement or successive Beneficiaries are listed in the Trust deed.

Pitfalls

It is absolutely critical that when forming a Trust, that a number of pitfalls are avoided. We have already alluded to a number of them, such as the nomination of an Independent Trustee.

• Ensure you are the Founder and the deed must clearly stipulate that the Founder, specific Trustee or any party to the Trust does not have control of the Trust assets.
• Some of the other areas of concern relate to unclear objectives of the Trusts; distribution clauses, early termination clauses, capital gains tax and income tax benefits are sometimes unwittingly restricted.
• Distinguish between capital and income Beneficiaries only if absolutely necessary as this can arise to unforeseen hardships going forward.
• Ensure Trustees have the necessary powers
• The Trust needs to be flexible yet there should be checks and balances to ensure that all and any changes are always equitably made.
• Ensure adequate insolvency protection for all parties related to the Trust.
• Alternative Beneficiaries must always be specified.

Information provided by –  Trust Specialist

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