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TRUSTS

A LEGACY OR A LIABILITY?

TRUSTS

Benefits of a Trust

• Ensures the smooth handover of assets from one generation to the next.

• Cares for assets for those who are unable to look after the assets themselves.

• Preservation of wealth– Example: a farm or holiday house passed

from one generation to the next – EDT and CGT.

Benefits of a Trust• Reduction of death duties which are made

up of :-– Deemed CGT– Exec fees– Estate duty tax

• Protection of assets from creditors.

Benefits of a trust

• Income tax, Capital gains tax and donations tax:

– Donations tax.

• If a natural person makes a donation greater than R100k then donations tax.

• From a trust then no donations tax.

– Income Tax and capital gains tax in the trust – discuss at a later stage.

Disadvantages of a trust

• In order for a valid trust to come into existence the donor must hand over ownership and control to the trustees.

• The trustees become owners of the asset.• Decision making is now made in terms of the deed

and not by 1 trustee ie the original donor.• Costs: Banks normally charge between 1 – 2% of

capital.

Inter Vivos v Testamentary

• Pro-active planning v Re-active planning.

• Testamentary trust is more ridged and it cannot be altered.

• IV Trust is normally open ended with regards to vesting date whereas a TT usually has a fixed vesting date.

TRUSTEESHIP

Role of independent trustee

• Now required after decision of Land & Agricultural Bank v Parker.

• Shouldn’t just appear in name.

• Must be party to all decisions and should attend all trustee meetings.

• His/her conduct could show if the trust is a bona fide trust or a sham.

Roles and duties of a trustee• Ensure that the trust property is adequately insured.• Funds are properly invested by measuring fund managers performance

to approved benchmarks.• Determine the short, medium and long term income and capital needs

of the beneficiaries.• Ensure that the provisions of the trust deed are complied with and

upheld at all times.• Ensure that all the trusts’ statutory requirements are complied with.• Prepare and maintain a trust asset register (investments and fixed

assets).• Conduct trustee meetings (annually, bi-annually or quarterly).• Record minutes of the trustee meetings and investment decisions.• Maintain and safe keep the minute book.• Ensure loan agreements are kept.

AREAS OF CONCERN

Problem clauses in trust deeds

• Dynamic document that must be reviewed regularly. Tax laws and trust laws change.

• Experience at least 9 out of 10 trusts either have wrong clauses or are missing clauses.

Examples• The trust deed is drawn up in such a way that the trustees are subject to the

control of the founder in exercising their duties. The result is that, although the founder gives up control in form, in substance this is not the case.

• i) “The trustees have the authority to nominate and appoint additional trustees of their own choice subject to the following:

– During his/her life Mr A has the exclusive right to nominate trustees for the trust of his choice or to remove trustees at his discretion.”

• The mere fact that a founder has the right to appoint or remove trustees should not in itself indicate that the founder/donor never intended to give up control of the trust assets. As long as the appointment is in the best interest of the beneficiaries, and not to protect the interests of the founder/donor, then the substance of the trust should not differ from its form.

Examples• “Notwithstanding anything to the contrary herein

contained, for as long as Mr B acts as a trustee he shall be entitled to veto any resolution proposed by the trustees.”

• Where the veto right is structured positively in the sense that one of the trustees (who is also a beneficiary) can overrule the rest then this will have negative implications with regards to income tax, capital gains tax and estate duty tax.

Examples

• “All resolutions by the trustees will be taken by a majority vote provided that the vote of Mr B is one of the majority votes.”

• Where the right is structured as a ‘negative veto right’ it appears as if this right does not bring section 3(3)(d) or section 7(6) and section 71 into operation.

Example• “Mr C has the right to act alone in all matters

concerning the trust without consulting the other trustees.”

• Once again this veto right is positively structured in the sense that one of the trustees (who is also a beneficiary) can overrule the rest. This will have negative implications with regards to income tax, capital gains tax and estate duty tax.

Example• “ It is determined specifically that Mr D will have the right

to, in his will, prescribe the formula for the distribution of Trust assets amongst the principal beneficiaries at the termination of the trust, and this indicates which part of the assets will go to which beneficiary and these allocations need not be equal in size, value or extent.”

• If Mr D is the donor/founder, trustee and also a beneficiary (especially a capital beneficiary) then it appears as if this clause falls within the scope of section 3(3)(d).

Example• Testamentary clauses often have the following supplementary clauses

added to neutralize the estate duty tax implications.• “Notwithstanding anything else to the contrary stated in this deed, no

trustee shall at any time qualify as an income or capital beneficiary of this trust or receive any benefits as such for so long as he is competent to dispose of trust property for his own benefit or for the benefit of his estate in the spirit and wording of section 3(3)(d) of the estate Duty Act No 45 of 1955 or any later amendment thereof.

• “The reservation of the testamentary power shall never be interpreted in such a way that the conclusion be drawn that the donor/founder/trustee (who is given the right) has the right to allocate the trust income or capital to himself or his estate.”

• Although the above clauses will neutralize the estate duty implications they do not have the same effect with regards to the income tax and estate duty tax implications.

TAXATION

Taxation of Trusts

• Income tax and capital gains tax.

• Distribution to beneficiaries – Sect 25B & paragraph 80.

• Attribution – Sect 7 & para 68 – 72.• Taxation in the trust at 40% and 20%

CGT.

Inter Vivos TrustsTaxation of trusts.

– Income tax

• Income is taxed in the hands of the trust at 40%. No rebates are granted.

• Income is distributed to the beneficiaries and taxed in their hands at their tax rates. Income retains it’s identity.

• Opportunities through distribution i.e. university fees for children and school fees for grandchildren.

• Attribution of income to the donor.

Example• Ian and his wife Leigh-Ann have 3 children, namely Lisa

20, Paul 18 and Greg 16. Ian and Leigh-Ann are both employed and both earn in excess of the maximum marginal rate of 40%. Lisa and Paul are both at university and have no source of income and Greg is still at school. In order to minimise his death duties and on the advise of his tax advisor Ian established an inter vivos trust. He transferred R5 million in cash and other growth assets to the trustees and they in turn invested it in various portfolios. At the end of the financial year the trust had earned R120,000 in taxable interest income.

Example continued …• The trustees can distribute income to Lisa and

Paul as they are both over 18. They would each receive R60,000 which they need to declare in their tax returns. Owing to the fact that they receive no other income their tax liability would each be R0. Both Lisa and Paul can now use these funds to pay for their education.

• There is now no need to distribute to Ian or Leigh-Anne or to retain the income and tax it in the trust.

Inter Vivos TrustsTaxation of trusts cont …– Capital Gains Tax

• Gains are taxed in the hands of the trust at 20%. No rebates are granted.

• Gains are distributed to the beneficiaries and taxed in their hands at their tax rates. Maximum rate would then be 10%.

• Attribution of gains to the donor.

SYNERGY BETWEEN TRUST AND TESTAMENT

Trusts and your will• Don’t take it for granted that you can

automatically bequeath assets to your IV trust. If the definition of beneficiaries are too wide the bequest could fail Braun v Blann & Botha.

• Leaving the primary abatement to an IV trust.• Nominating a replacement trustee.• Great opportunity to transfer fixed property as

there are no transfer duties.• Section 9(4) of the transfer duty act.

Inter Vivos TrustsConclusion– Ensure that one of the trustees is independent.– Ensure that your trust deed is “compliant” with

current legislation and case law.– Ensure that all the statutory requirements are

complied with i.e. trustee meetings, minutes of all decisions etc.

– Ensure your will “compliments” your trust.– Remember, both are dynamic documents and

should be reviewed on a regular basis!