Your Trust
What is a Trust?
A trust is a legal relationship created inter vivos (during one’s lifetime) or on death (testamentary trust) by a person, the settlor/founder, when assets are placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.
Trusts can either be inter vivos, formed during lifetime of the founder, or testamentary, created in terms of the founders will. Although it is a recognized legal entity it is not a juristic person (like a company or close corporation).
Estate Pegging – Trusts
It frequently happens that assets are accumulated in one’s estate, which exhibits substantial growth potential. The longer the assets remain in one’s personal estate, the greater will be the estate duty liability attracted by these assets. In order to alleviate the estate duty problems, it becomes necessary for planners to transfer the growth assets out of the personal estate to another entity, thereby ensuring that any future growth occurs in the hands of the latter entity, thereby pegging the value of the assets for estate duty purposes. With regard to the “pegging” of assets, the purpose is to reduce estate duty. The settlor, the trust or the beneficiaries will be liable for income tax.
The planner should not be the sole trustee since, in this event, he would be deemed to have been competent to dispose of the assets, thereby defeating the object of the pegging exercise. The mode of transfer of assets to trust needs to be considered. If the settlor donates the assets, there is a liability for donations tax, which requires an up-front cash payment. The other mode of transfer is that of sale, and since the trust would not have the means with which to fund the purchase price, the sale would be on a loan account. Whether the loan account is to be interest-bearing or not must be considered. This loan account must be dealt with in the Will of the Testator.
The Trust Property Control Act 57 of 1988 defines a trust as follows:
“Trust means the arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed: To another person, the trustee, in whole or in part, to be administered or disposed of according to the provision of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument; or To the beneficiaries designated in the trust instrument, which property is placed under the control of another person, the trustee; to be administered or disposed of according to the provision of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument, but does not include the case where the property of another is to be administered by any person as executor or curator in terms of the provision of the Administration Estates Act, 1965 (Act No 66 of 1965)
For a trust to be created, the founder must legally transfer or deliver the asset to the trustee or become legally obliged to do so. There must either be an actual transfer or delivery or obligation to deliver or transfer.
The founder must actually divest himself or be legally obliged to divest himself of a portion of his legal rights in respect of the trust property. A trust cannot be created if the founder is to remain the sole trustee of the assets as this would not amount to a disinvestment by the founder. The founder can, however, be a co-trustee.
The founder can be a beneficiary or the sole beneficiary. The trustee can also be a beneficiary, but he cannot be the sole beneficiary, if he is also the sole trustee.
Types of trusts
Inter Vivos Trust
An inter vivos trust is one created during the lifetime of the founder (the estate planner who creates the trust). The inter vivos trust is used primarily in the context of estate pegging.
ADVANTAGES
- Flexibility
- Ease of formation and maintenance
- Relative low cost of formation
- Low cost of maintenance
- Suitability as a vehicle for overall control and administration of an estate (this is particularly the case after the death of the estate planner)
- Suitability as an estate pegging vehicle (freezing the value of growth assets)
- Savings in estate duties and income tax
- Allowing for changes of investment avenue to meet changing circumstances
FLEXIBILITY OF TRUSTS
A trust is flexible because of its methods of administration, the number of trustees, their method of appointment and replacement, their management system and most important of all, the amount of discretion they have and the time in which they are to administer the trust property can be specified by the founder.
The founder can also keep a close watch on the activities of the trustees and can retain the right to nominate more trustees.
Testamentary trusts
A testamentary trust is one that is created in terms of Will. A testator directs that certain or all of his assets must be held in trust and administered for the benefit of specified beneficiaries (who also may be his heirs). It is evident that a testamentary trust only comes into existence upon the death of the testator.
In order to set up a trust in terms of a will, the testator must:
- Indicate his intentions to create a trust
- Specify which assets will form the subject matter of the trust
- Name the beneficiaries of the trust
- Appoint a trustee/s to administer the trust on behalf of his beneficiaries
- Define the powers of the trustees
- Define the objective if the trust (which must be lawful)
- Provide for matters such as the duration of the trust and the division of income and capital amongst the beneficiaries.
In addition, the will in terms of which the trust was created, must be a valid will. When a trustee or administrator is appointed in a will, it is the duty of the executor to collect the debts owing to the estate, pay the creditors of the estate, reduce the estate into possession, and render accounts and to distribute the property to the heirs and legatees.
If a trust has been created by the testator in his Will, the executor must then deliver or transfer the property concerned to the trustee instead of distributing such property to the heirs or legatees. The trustee must then administer and manage the assets which have been entrusted to him for the benefit of the beneficiaries of the trust.
Reasons for information
The formation of a testamentary trust is often to provide for minor beneficiaries. The trustee then administers and manages the assets for the minor beneficiaries until such time as they may be distributed to the beneficiaries in accordance with the testator’s wishes. The same rationale would apply to inexperienced business heirs.
In the case of a farmer whose wealth is tied up in the land, a testamentary trust could be utilized to ensure that all the heirs have an interest in the property. This would also be the case with respect to any assets which are indivisibly by law or indivisible or difficult to divide by nature (a racehorse or hotel).
There may be instances where a testator wishes to retain property within the family to ensure that it devolves upon beneficiaries as yet unborn. By means of a testamentary trust a testator may confer benefits on successive generations. In addition, if the testator were to make direct bequests to succeeding generations instead of utilizing a testamentary trust, this would delay the winding up of an estate.
A testamentary trust is a versatile way in which a testator may direct exactly how monies are to be paid to beneficiaries.
Discretionary testamentary trust
The testamentary discretionary trust of which the surviving spouse is to be a beneficiary has the following advantages:
The surviving spouse’s interest, as a discretionary beneficiary to the capital, is exempt from estate duty, as it is income from the trust paid to him/her at the discretion of the trustee Income, which is not necessary for the maintenance of the surviving spouse, will not be paid to him/her. Thus, the payment of tax on such income will be avoided, which would not have been the case if the surviving spouse has the right to receive such income. The surviving spouse only pays on the amount of income actually received once the trustee has exercised his discretion.
If the testator has directed in his will that the trustee have discretion, instead of paying income to the widow, they can use it for the benefit of the children and pay such income to the children direct; the income that the children receive will be taxable in their hands and not in the hands of their mother. Thus the tax burden will be split between the mother and the children, thereby obtaining the benefit of lower tax rates.
