Setting Up a Trust
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Anyone thinking of setting up a trust needs not only to make sure that he or she is creating a valid legal structure, but also to understand the nature of the trust, the duties of trustees, and the rights of beneficiaries.
Before you create a trust, do your homework and make doubly sure that a trust is suited to your needs and circumstances and that you are committed to follow the rules.
Considerations before you register a trust
Make sure you have considered the following before you go ahead and register a trust:
- Are you willing to relinquish direct control over assets transferred to the trust? If not, the trust may be regarded as an alter ego of yourself, be disregarded, and your reason for registering a trust may be defeated. It is possible to structure a trust in such a way that you are a trustee and beneficiary, provided there is a clear separation between control and ownership, and enjoyment.
- Does a trust fit into your overall estate plan?
- Will the trust be used mainly to avoid paying taxes? If so, chances are good that SARS will attack the trust, and may even disregard it. Provided you set a trust up as part of your estate planning, SARS will not attack your trust.
- Does the benefit of the trust justify the cost and administration involved in setting up and running the trust? Benefits include any amounts that you can calculate, as well as risk mitigation that is difficult to calculate accurately.
What are the formalities?
A trust is created when property is transferred by written agreement, testamentary writing or Court order. Before you can do that, you need to have the necessary documentation in place.
You must decide on the following before you can have a trust deed drafted by a professional:
The desired name of the trust
Preferably not your name and/or surname, which would make it easy for creditors or SARS to track your trust. Trusts are registered at the Master of the High Court and not at the Registrar of Companies. This allows you to give a trust any name you desire. You do not have to first reserve a name as you would do when registering a company.
For example, you could have more than one trust with the same name. A trust is given a registration number when it is registered and operates on the same basis as a motor vehicle which has its own individual registration number. Although you can change the name of your trust – should the trust deed allow for this – the trust number will always remain the same and be the identifier of your trust. The registration number of an inter vivos trust starts with the letters IT, followed by a number issued by the Master of the High Court’s office, followed by the year the trust was registered. As an example, registration number IT 3293/17 indicates that this was the 3 293rd trust registered at the Master of the High Court’s office, where the trust was registered in 2017. A trust will always be registered with reference to the Master of the High Court’s office where it was registered. Each Master of the High Court’s office has its own sequence of numbers for every year.
The type of trust
Decide whether you want a discretionary or a vested trust. In a discretionary trust, the trustees have the right to decide how much income (or capital) to award to each beneficiary, whereas in a vested trust, the income and capital gains vest in the beneficiaries. Complications can arise in vested trusts in the event of a beneficiary’s insolvency or death.
The purpose or object of the trust
It is critical to define the purpose and object of the trust clearly in the trust deed, without which the trust may not legally exist.
The name of the founder
The founder is the person who sets up the trust. This has to be the person who intended setting up the trust and who transfers at least the initial donation to the trust. The founder may therefore not be the lawyer who sets up the trust, or his/her secretary.
The founder is required to physically pay the amount or transfer assets described in the trust deed as the initial donation.
There may be more than one founder of a trust. This person cannot reserve any sole rights in the trust deed, as it may have negative tax and other consequences.
The names of the proposed trustees
Great care should be taken here. Previous experience in running a trust and knowledge of accounting are highly recommended because it will minimise the risk of the Master of the High Court requiring the trustees to put up security for the discharge of their duties.
As a general rule, do not appoint your children/grandchildren as trustees while you and/or your spouse are still alive. Too often children have different goals and motives to their parents. They may decide to out-vote their parents which can lead to a great deal of unnecessary stress, especially when the parents are relying on the trust as their sole source of income. Rather only allow your children to take over the management of the trust when both of you are no longer alive. It is recommended that you add a clause to your will where you appoint your children as follow-up trustees. This will ensure continuity.
Appointing too many trustees could make decision making difficult or even impossible. Choose a minimum of two trustees, so that the decision making is not left in the hands of only one person. Nominate a maximum of four or five trustees, depending on your individual circumstances.
Each trustee will be required to complete a J417 Master form in order to be appointed as a trustee.
Is it necessary to appoint an independent trustee?
It has become a requirement to appoint an independent trustee for a “family business trust”.
Nomination of beneficiaries
Decide who you want to nominate as beneficiaries, and then decide whether they are to be income or capital beneficiaries (or both). This gives you the flexibility to treat each type of beneficiary differently.
Remember that as soon as a beneficiary receives any distributions from the trust (or accepts his/her benefits in writing to the trustees), removing him/her as a beneficiary of the trust without his/her consent is not a simple process. You will need his/her consent to do that. In turn, the addition or substitution of beneficiaries (in a discretionary trust) at a later date may trigger Transfer Duty, if the trust holds residential property (Section 1 of the Transfer Duty Act).
It is important to ensure that the description of the beneficiaries in the trust deed identifies them (by name) or makes them identifiable (such as your descendants).
It is not permitted to have a provision in the trust deed whereby trustees can nominate their own beneficiaries. Doing so will render the trust null and void. If the beneficiaries of the trust are clearly defined and the discretion given to the trustees is limited to selecting from amongst the defined group or class of beneficiaries, the trust will be considered valid.
It is important to ensure that the meaning of the term “beneficiaries” corresponds with its intended meaning in clauses dealing with, for example, the appointment of trustees or the amendment of the deed. If, for example, the term “beneficiary” is used to include “all those persons related by blood or affinity to the founder” and, if the agreement of all beneficiaries is required for the appointment of a trustee or to make a change to the trust deed, it may become a tedious task to trace and involve said persons in such an appointment or change.
In terms of the object of a trust, it is important to remember that without a clearly defined object, a trust does not come into existence. In a family trust, the object is the beneficiaries for whose benefit the trust was created.
The trustees’ powers, competencies and obligations, including a clear description of the trustees’ discretionary powers and duties, as well as their remuneration, must be clearly stipulated in the trust deed. It is important to remember that the trust is a “creature of document” and that the powers given to the trustees in the deed are their only powers. This is contrary to a company, which is a “creature of statute” possessing inherent powers.
Administrative procedures, such as the calling for and conducting of trustees’ meetings, voting rights, decision making and dispute resolution procedures, along with any veto rights, should be clearly provided for in the trust instrument. It is equally important to ensure that the trustees can and will follow the “rules” set out in the trust instrument. Failure to achieve this may be indicative of an alter ego trust.
Ensure that the provisions you insert into the trust instrument are practical, giving you the protection you require without being excessively onerous.
Consider the implications of a majority decision requirement in the trust instrument. Requiring a unanimous decision could leave your trust in stalemate, should certain trustees become obstructive. Excessive powers given to a specific trustee could amount to said trustee taking control of the trust. Refer to the provisions of Section 7(6) of the Income Tax Act, whereby all distributed trust income will be taxed in the hands of the donor/funder if he/she can veto distributions or terminate the trust. A similar provision applies to capital gains distributed to beneficiaries (Paragraph 71 of the Eighth Schedule to the Income Tax Act).
Other things to consider:
- The trustees’ exemption from security must specifically be dealt with in the trust instrument
- Provisions relating to payment of taxes should the founder, donor or funder become liable
- Rules and restrictions regarding the distribution of income and capital
- The name of the person who will perform the trust’s accounting duties (preferably an accountant) and whether the accounting records of the trust need to be audited. Although it is not a requirement that a trust’s records are audited, this can be done at the trustees’ discretion. In either case, remember to follow procedures in terms of how they are stipulated in your trust instrument. Failing to do so may indicate that you have failed to observe the trust deed.
- Do not stipulate the name of your accountant/auditor in the trust deed, as it will require you to amend your trust deed should you decide to replace him/her. Naming your accountant and then appointing a new accountant at a later date will mean appointing a new accountant with the Master of the High Court. The new accountant will have to submit a J405 Master form with the Master of the High Court.
- Avoid the temptation to insert a testamentary reservation – such as a formula to calculate the distribution of trust assets upon your death – into your trust instrument. The use of a testamentary reservation is not recommended due to major tax and other risks. Should you wish to provide guidelines to successor trustees, do this by way of an indication in a properly drafted letter of wishes, clearly indicating that no legally binding obligation can flow from such a wish. Include broad principles of what your intention was when creating the trust in your letter of wishes. This will protect the trustees from being accused of not using their discretion when carrying out your wishes. The use of letters of wishes is however not widely favoured.
- Because future circumstances may require the unbundling of the interests of beneficiaries in a single trust, provision can be made for the trustees to have the power to create further trusts, should they deem it necessary. Careful consideration should be given to the wording of such a clause to prevent the failure of the provision to create new or further trusts in the trust instrument on the grounds of vagueness or the rules concerning the power of appointment. If the discretions granted to trustees of a trust are too wide in scope, it may well be that the granting of such wide discretions to trustees will invalidate the appointment of the newly formed trust as a beneficiary. This delegation exceeds the scope of a mere power of appointment of income and/or capital beneficiaries from a specified group of persons and will therefore make this provision in the trust deed invalid.
- The empowering provision should be detailed enough to prevent any doubt as to the salient features of the potential new trust
- It is considered a delegation of will-making power in the case of a testamentary trust, where an individual’s will specifies that the trustees should create a new trust for certain beneficiaries, but the appointment of trustees of such a “roll-over” trust and the vital terms in respect of payment of income and/or capital is left entirely to the discretion of the trustees. This is not allowed.
- The procedures to be followed if the trust deed requires amending
- The duration, and procedures on termination, of the trust
The trust instrument can be handed to a professional, such as Trusteeze, to be drafted once you have decided on the above.
The following documents should be submitted to the Master of the High Court in the relevant provincial jurisdiction in terms of the requirements stipulated in the Trust Property Control Act, in order to have a trust registered:
- A cover letter to the Master of the High Court
- Trust Registration and Amendment form (J401)
- Two signed trust deeds
- Proof of payment of the Master of the High Court’s fee of R 250
- Master of the High Court’s Annexure B form for the R 250 fee
- Acceptances of trusteeship by trustee (J417) by each of the trustees, including a summary of the proposed trustees’ qualifications and their experience in managing trusts. The Master of the High Court must be satisfied that the trustees will be competent in discharging their duties. If the Master of the High Court is not satisfied, he/she may call for the trustees to put up security, and may even insist that the trust be audited.
- A declaration by trustees
- A sworn affidavit signed by the independent trustee
- A certified copy of the Identity Document of each of the trustees
- Beneficiaries Declaration (J450)
- An undertaking by the auditor/accountant (J405) to administer the accounting records of the trust in accordance with generally accepted accounting practice
Registration and other formalities
An inter vivos trust must be registered at the office of the Master of the High Court in whose area of jurisdiction the greatest portion of the trust assets are situated. If more than one Master of the High Court has jurisdiction over the trust assets, final jurisdiction will rest with the Master of the High Court in the area where the trust was first registered. Once the Master of the High Court is satisfied that the documents are in order, he/she will issue Letters of Authority appointing the trustees named in the trust deed.
Please take note that unless the Letters of Authority have been issued by the Master of the High Court, the potential trustees do not have the capacity to act as trustees. Do not enter into any commercial or legal transactions before you receive the Letters of Authority from the Master of the High Court, as those transactions will be invalid.
It is important that the founder makes the initial donation (as stipulated in the trust deed) as soon as the trust is registered with the Master of the High Court. If this donation is not made, it is deemed that the trust has not come into existence.
Both the Trust Property Control Act and the trust deed (in most cases) require that the trustees open a bank account. A bank account should therefore be opened as soon as the trust is registered with the Master of the High Court.
All trusts are required to be registered as taxpayers with SARS. An IT77TR form (Application for registration as a Taxpayer or Changing of Registered Particulars: Trust) must be completed for each trust. Trustees are required to present themselves to SARS in person in order to register the trust for Income Tax. SARS will usually accept the Main Trustee or the Representative Trustee to register the trust on behalf of the other trustees, but only if this has been authorised in writing by specific resolution, with the words “Main Trustee” and “Representative Trustee” stated therein.