A trust is an agreement between the founder and the trustees in order for the trustees to manage the assets in a certain manner that will benefit the trust beneficiaries. A trustee is a person who holds and administers property received from another for the benefit of the trust beneficiaries. There are three types of trusts and these are testamentary trust, bewind trust and intervivos trusts. The Trust property Control Act No. 57 of 1988 (“the Act”) regulates the control of trust property. The trust cannot be sued as it is not recognised as a legal person in South Africa, it is the trustees in their official capacity who can be sued. The Master of the High Court (“the Master”) is not the adjudicator in trust matters but is merely a record keeping office. The courts of South Africa adjudicate on trust matters.
Types of Trust
3.1 Testamentary Trust
It is the most common trust used in South Africa. It is especially suited for the protection of the interests of minors and other dependants who are not able to look after their own affairs. This type of trust comes into being only after the death of testator. The trust is administered by trustees appointed in terms of the will and the administration by the trustees ends after a predetermined or at a determined time such as a minor turning 18. Assets that form part of an estate may be moved to this type of trust. The testator appoints the trustees in a will. A trust is formed by placing a trust clause in a will which serves the same purpose as a trust deed. During the estate settlement period the trustees apply for letters of appointment from the Master in the same office were the estate is registered.
3.2 Intervivos Trusts
These are known as living trusts which are ideal for keeping growth assets out of your estate and are a good medium to limit estate duty and to protect assets from generation to generation. A living trust comes into being during the lifetime of the founder with the signing and registration of the trust. A living trust is formed as an arrangement between the founder and the trustees. The parties interested in a living trust are the founder, trustees, the people or company appointed to take control of the assets and take responsibility for their administration and management and the beneficiaries who in terms of the trust act are entitled to the income of the trust. A living trust can take various forms which are:
Name of Trust What It does
Family Trust This type of trust comes into being through the agreement of the founder and the trustees.
Assets are sold to the trust and a loan account is created.
Assets can also be donated to the family trust, although this carries donations tax implications. The trust may obtain other assets through purchases or inheritance.
Charitable Trust This trust is classified as non-taxable in terms of section 10 of the Income Tax Act No.58 of 1962.
Capital loans are made to a trust which is structured in a way that it pays no income tax.
The trustees make donations to charities, schools, churches etc. on behalf of the trust and according to the wishes of the trust. Large donations can be made as no income tax is applicable.
Umbrella Trust This type of trust is linked to and used by life insurance and retirement fund group schemes.
It allows unapproved funds to deposit death benefits to beneficiaries who are unable to handle their own affairs to be managed on their behalf, and for their sole benefit, as prescribed by the authorities and relevant legislation.
Guardian’s Trust When minor children are the beneficiary of life policy proceeds insurers are obliged to pay this money to a natural or legal guardian to manage on the children’s behalf.
If the guardian decides to mismanage the funds the children will not benefit from the money. Setting up a trust will be the ideal solution as benefits paid by life policies to minor beneficiaries can be managed on their behalf for their benefit by the trustees of the trust.
Special Trust Special trusts are taxed at the same rate as a natural person and may only be created to benefit a person suffering from serious mental illness as described in the Mental Illness Act 18 of 1973 or who suffers from serious physical deformity.
Property Trust It is a type of trust where assets have been placed in a fiduciary relationship between the founder and trustee for a beneficiary. Trust property may include any type of asset such as cash, real estate or life insurance policies.
3.3 Bewind Trust
The founder transfers ownership of the trust’s assets to the beneficiary, while the trustee is responsible for the administration of the trust assets. The beneficiary is the actual owner of the trust assets. The beneficiary acquires ownership of the assets while the trustees only have administrative control.
Benefits of a Trust
4.1 Asset Protection
Trusts serve a wide variety of personal needs and desires such as the protection of your assets from creditors. The creditors of trustees or beneficiaries can have no claim against the trust.
4.2 Tax considerations
Living trusts are considered tax payers. Two types of tax apply to living trusts namely income tax and capital gains tax. A trust pays income tax at a flat rate of 40% and individuals pay according to their income. The trust’s income can be taxed in the hands of either the trust or the beneficiary. A trust pays capital gains tax at the rate of 20%. Trusts do not pay deceased estate tax.
Duties and obligations of Trustees
The trustees are required in the performance of their duties to act with care, diligence and skill which can reasonably be expected of a person who managers the affairs of another as stated in section 2 of the Act. Any provision contained in a trust instrument will be void should it have the effect of indemnifying a trustee against liability for a breach of trust where he fails to show the degree of care, diligence and skill as required.
Once a trustee has been appointed, the trustee would have to act in the best interests of the beneficiaries of the trust and cease to act on the instructions of the founder. This is shown in the case of PPWAWU National Provident Fund v Chemical Energy Paper Printing Wood and Allied Workers Union 2008 (2) SA 351 (W) the court stated that the trustee’s obligation was to exercise an independent judgement regardless of the views of the trade union which appointed him and the trustee did not exercise independent judgement. The court stated that the trustee had erred in following the union’s policy on the matter as the trustee had acted in breach of his fiduciary duty to act in the best interests of the beneficiaries.
Trusts are heavily regulated and trustees need to understand and appreciate what is required of them on an ongoing basis. The trustees must be well acquainted with the trust deed. When trustees act contrary to the provisions of the trust deed their acts are ultra vires and invalid. If a trust deed does not contain an express or implicit power which allows the trustees to pursue a certain activity the trustees have no power to proceed with such activity.
A trustee must not, without the written consent of the Master, destroy any document which serves as proof of the investment, safe custody, administration, control or distribution of the trust property before the expiry of a period of 5 years from the termination of the Trust.
Trustees hold office and cannot do as they please, as certain duties and obligations flow from holding office. In the case of Doyle v Board of Executors 1999 (2) SA 805 (C) the court stated that the office of trustee requires the trustee to act with the utmost good faith.
When exercising discretion the trustees have to consider the needs of discretionary beneficiaries and they may not do as they please.
Trustees must perform the duties imposed on them by the trust instrument. If they fail to do this the Master or any person having an interest in the trust property can apply to court for an order directing the trustee to perform such duty.
The trustee may resign sending a notice in writing to the Master and the beneficiaries of the trust who have legal capacity, or the tutors or curators of the beneficiaries of the trust under tutorship or curatorship. When such notice is served to the master the resignation is valid.
A trust is a contract for the benefit of a third party. Therefore a founder of a trust and a trustee can by agreement between them vary or cancel a deed of trust before the third party has accepted the benefits conferred on him or her by the trust deed. Once the beneficiary has accepted those benefits the trust deed can only be varied with his or her consent. In the case of Potgieter v Potgieter NO 2012 (1) SA 637 SCA the founder and the trustee attempted to vary a trust deed without the consent of the beneficiary who had already accepted the benefits conferred by the trust. The court stated that a trust deed varied without the beneficiary’s consent after the latter has accepted the benefits conferred by the trust deed, is invalid.
Family Trusts should not be controlled solely by family members. The Supreme Court of Appeal in Land and agricultural Bank of SA v Parker 2005 (2) SA 77 (SCA) stated that the Master should ensure that an independent outsider is appointed as a trustee to each trust in which all the beneficiaries are trustees and all the beneficiaries are related to each other.
Trustees must keep an asset register in accordance with section 11 of the Act.
Trustees must act jointly as ownership vests in the trustees equally.
Requirements for the registration of a trust
In terms of an intervivos trust the trust deed and supporting documents must first be lodged with the Master for registration. The trust deed must be accompanied by a R100 revenue stamp. A person appointed to act as trustee may not act in such capacity until he or she has been authorised to do so by the Master through the letter of authority. This is stated in section
6 (1) of the Act.
6.1 Acquisition and lodgement of the trust instrument
Section 4 (1) of the Act states that the trustee must lodge the trust instrument with the Master. The Trust deed is the constitution of the trust. The trustees must ensure that they acquaint themselves with the constitution and ensure that they have copies of their own.
6.2 Notice of Address
The trustee must notify the Master of his/her address for the purpose of serving notices on him/her. If such address changes the trustee must notify the Master within fourteen days.
6.3 Control over trust property
A trustee must obtain control over the trust property as soon as possible after assuming the office of trustee. The type of trust will determine the form of control the trust property will take. Trustee should compile a full inventory of trust property under his or her control.
6.4 Conservation of trust property
A trustee is obliged to conserve trust property. This does not mean that the original property must at all times remain intact. Trustees are empowered to alienate trust property and to acquire new property.
6.5 Opening a Trust Account
Section 10 of the Act states that the trustee must deposit the money he /she receives for the trust into a trust account in a bank. The Act does not indicate what kind of account has to be used nor does it indicate whether the account should be opened in the name of the trust or in the trustee’s own name. In practice financial institutions allow accounts to be opened in the name of the trust. It is within the trust’s discretion whether a savings, cheque or other account is to be opened.
A trustee must render trust property productive. Debts due to a trust must be collected with all reasonable diligence. A reasonable return must be obtained on trust property which is or can become income producing.
Investment of trust funds
A trustee should invest money which accrues to the trust fund and which is not required for immediate payment without delay. A trustee is under a duty to invest trust funds if he/she is instructed and empowered by the trust deed.
7.1 Separation of trust property from private property
Trust property does not form part of a trustee’s personal estate. Trust property must be held in a manner that always renders it identifiable. This affords protection to third parties with claims against a trustee’s personal estate as it facilitates the exclusion of trust property from the ambit of such claims.
Section 11 of the Act states that a trustee, shall indicate clearly in his book keeping the property which he holds in his capacity as trustee;
Register trust property or keep it registered in such manner as to make it clear from the registration that it is trust property; and
Make any account or investment at a financial institution identifiable as a trust account or trust investment.