The basics of a trust
A trust is an entity that will “outwit, outplay & outlast’” an individual. It will not terminate (unless decided by the trustees), therefore it can own properties and assets for generations, and pass the portfolio of assets to the next generation tax-free. A trust is the only vehicle which allows the accumulation of wealth and the transfer of assets from one generation to another without incurring costs and taxes. The growth in the estate is “pegged” upon the creation of the trust and the value will increase in the trust and not in the hands of the individual. A trust creates a separate legal entity that owns the assets outside of the individual’s personal estate, and therefore the trust assets do not form part of your personal estate for the calculation of Estate Duty. The type of trust we refer to is an inter vivos discretionary trust, a living trust that is set up while you are alive, not a testamentary trust, which is created after death.
Why do you need a trust?
A trust is an efficient and flexible way to ensure that your assets are protected and preserved. A trust is the arrangement through which control and ownership in property is by virtue of a trust instrument made over or bequethed to another person or persons (trustee/s) for the benefit of beneficiaries in accordance with the terms and conditions of the trust deed. The trustees have bare ownership (otherwise referred to as legal ownership) of trust property, not beneficial ownership.
There must be a clear separation of control from enjoyment of trust assets, otherwise SARS and the courts may label it as an alter ego trust (an extension of yourself or of your estate) and then the trust will be disregarded and the whole objective of setting up a trust in the first place will be disregarded. Trustees control the trust assets for the enjoyment of it by the beneficiaries. All trustees assume significant responsibility when accepting an appointment as a trustee. Any breach of fiduciary duties by any trustee will result in significant exposure for the trustees.
Importance of an independent trustee
The appointment of an independent trustee will mitigate this real risk of attack. An independent trustee must at all times act in favour of the trust and not any individual. A well-known court case, Land Bank of South Africa vs. JL Parker and Two Others (the Parker case) irrevocably changed the requirements for independent trustees to be appointed and placed renewed focus on the duties and responsibilities of all trustees. As a result of the Parker case, most Masters of the High Court now require an independent trustee to be appointed in addition to the trustees who are beneficiaries of the trust, and therefore will not issue Letters of Authority without at least one independent trustee being appointed. An independent trustee will be a person who is not related to the founder, the other trustees or the beneficiaries. This independent trustee does not necessarily have to be a professional person, but it must be someone who fully realises the responsibilities he/she is accepting when agreeing to act as a trustee, and is qualified in the view of the Master of the High Court to act as a trustee. The less an independent trustee is related to the other trustees, the more independent it would seem to creditors and SARS.
All trustees (independent or not) are charged with the responsibility to ensure that the trust functions properly to the greatest benefit of the beneficiaries. These responsibilities include, but are not limited to:
- ensuring compliance with the provisions of the trust deed
- ensuring compliance with all statutory requirements
- conducting of proper trustee meetings
- recording of proper minutes of all meetings and decisions by the trustees
- proper maintenance and safekeeping of minute books
In many cases, the trustees who are not independent, do not have sufficient knowledge of and experience in the proper administration of trusts. Furthermore, they might also lack expertise in utilising the vehicle of the trust in order to maximise the benefit for the beneficiaries. This expertise includes negotiating and entering into business contracts, holistic tax and succession planning, and ensuring the optimal growth of the trust assets. It is in the best interest of the trust that this person also has sufficient knowledge of the impact of statutory requirements, such as compliance with relevant tax law and the effect of changes in legislation on the trust.