What exactly is a trust?

In general, a "trust" is a legal entity that is able to own property and other assets. It is one of the oldest relationships known in the law. The Babylonians used trusts, and every society since then has used some sort of trust relationship. Essentially, it is established by a legal agreement defining how assets are going to be managed and distributed.

Who are the role-players in a Trust?

One person (the "founder or creator or grantor") in this case you, gives up property or "grants" property to another person (the "trustee"), who is "trusted" by the grantor. The trustee is trusted to take care of the property and use the property, not for himself, but for the "benefit" of a third person/s (the beneficiary/ies). The terms "trustee" and "beneficiary" are standard in every trust. However, the term "grantor" is often times replaced by "settlor", "founder", "creator", or "trustor".

The parties to a trust therefore include:
• - The founder - the person who creates the trust by bequeathing or donating property or assets to it.
• - The trustees - the people who make decisions regarding the management of the assets or investments in the trust.
• - The beneficiaries - the people who receive the income earned by the property or assets in the trust and who may be entitled to own the property or assets at a later stage.
• - The Master of the Court - the administrator of estates who ensures that the trust adheres to the relevant legislation and oversees the governance of trusts.
How is the Master of the High Court involved?

The Master's role is firstly of an administrative nature and secondly boils down to substantive supervision. All trusts are registered by the Mater of the High Court and Trustees are appointed by the Master to act in such capacity.

What are the legal requirements for a trust to be valid?
• - The founder (you) must have the intention to create the trust.
• - The agreement or deed must be legally binding.
• - Assets being placed under control of the trust must be identifiable.
• - The objective of the trust needs to be clearly stated and must be lawful.
• - Beneficiaries must be nominated.
Who can be Trustees of my Trust?

The Trustees must be someone you can trust. A trustee is someone that will act in good faith towards the beneficiaries with care and diligence. Any person who is qualified to act as a trustee may be appointed as such; therefore family members, friends etc may all be Trustees. The founder of the trust can also be appointed a trustee of the Trust as well as any beneficiaries of the Trust.

Who can be a beneficiary of a trust?

Any person can be a beneficiary. A person is defined in Law as a human being, others that can be beneficiaries are a duly registered trust, juristic persons, associations, foundations, funds, companies, partnerships, the state or any organ of the state. There is no limit to the number of beneficiaries to the trust.

Can I be a beneficiary and Trustee at the same time?

It is good practice to have at least one trustee who is independent and not a beneficiary of the trust in order to avoid the trust being regarded as a sham and not recognised for the purposes for which you set it up (such as to protect your assets or save estate duty). If you are the sole trustee, you have control of the trust and, as such, you should not also be a beneficiary of the trust. In almost 95 percent of the trusts set up in South Africa, there is a blurring between control of the trust's assets and enjoyment of them.

What rights do beneficiaries have over my trust assets?

A trust is a contact to the benefit of a third party; the beneficiaries therefore only obtain rights when and if they accept the benefits of the contract. It is advisable that the beneficiaries should be discretionary beneficiaries to the income and capital of the trust. In such a case the beneficiaries have no rights to claim benefits, except if and when the trustees have exercised their discretion.

Can the beneficiaries of the trust be amended?

The ability of the trustees to amend the deed is governed by the terms of the trust deed. In the absence of anything to the contrary the beneficiaries can be changed by a written agreement of the trustees in the form of a resolution lodged with the Master of the High Court.

What is a Trust Deed?

The trust deed is the document in terms of which the trust is established. It sets out the rules for what can and cannot be done in a trust, so you need to be careful about what you put in the deed.

What are the benefits of a trust?
• - The most important benefit is the protection of assets, whether personal or business. As seen in Roger's Story a trust protects both individuals and business owners from creditors should they ever face sequestration or liquidation.
• - Creditors will not be able to attach your assets. This can be extremely helpful if you are an entrepreneur as you will be able to freely conduct business without risking your family's future or wealth.
• - Trusts can also be used to hold shares in a business, to open a savings or cheque account.
• - Trusts allow the continuity of your assets.
• - Trusts also keep the assets secure from beneficiaries' creditors.
• - You won't lose everything in a divorce.
Are there any disadvantages for a trust?

Disadvantages may occur when a trust is not structured properly. For a trust to be effective the founder (you) has to give up control over the trust assets to the trustees.

How does one create a Trust?

A living Trust, also called an Inter Vivos Trust is created by means of agreement (a contract) between the founder and the Trustees, during the lifetime of the founder. The agreement is called the Trust Deed it is signed in accordance with the Law of Contracts and registered at the Master of the High Court where the initial Trust assets are based. A Testamentary Trust, also called a Trust Mortis Causa is created on the death of the Testator and set out in the testator's Last Will or Testament.

What powers do Trustees have?

A Trustee derives his power specifically from the Trust Deed. The trust deeds give a trustee extensive powers to preserve and protect trust assets.

What duties will do Trustees have?

The duties of a Trustee are set out in The Trust Property Control Act, 57 of 1988:
• - Act in accordance with the Trust Deed Act with care, diligence and skill.
• - Keep proper record of trust assets and be accountable.
• - Administer and protect Trust Assets.
• - Act in good faith towards Trust assets and beneficiaries.
What happens when a trustee die?

Most deeds cater for replacement or substitute trustees.

What happens to my assets when I transfer it to my trust?

When the assets are transferred to the Trust, ownership thereof passes in its entirety to the trust and the trustees become the custodians thereof.

Should creditors claim against you, then the assets no longer belong to you and therefore they cannot be attached. On your death the assets will not be included as part of your estate and no estate duty, CGT or executor's fees may be levied on it.

Do I need to have a bank account for my trust?

Yes, the trustee must open a bank account for the Trust. The bank account will be in the name of the trust.

Documentation needed to open an account:
• - A copy of the Trust deed.
• - A copy of the Letter of Authority issued by the Master of the High Court
• - A bank resolution whereby the Trustee in charge of the administration of the Trust has signatory powers over the bank account
• - FICA documentation of the trustees:
• - Certified copy of ID document
• - Proof of residential address
What will a bank request from a Trust for FICA purposes (Source: Standard Bank)
Information needed Acceptable verification documents
Identification
• Identifying name
• Identifying number
• List of named beneficiaries
• List of authorised trustees • Trust deed or other founding document in terms of which the trust was created.
• Trust deed or other founding document - it is noted that if beneficiaries are not named in the trust deed, information pertaining to how the beneficiaries are determined must be recorded.
• The authorisation given by the Master's Office to each trustee to act in that capacity (Section 7 of the Trust Property Control Act). In the case of a foreign trust an official document issued by an authority in the relevant country where the trust is created that reflects these particulars should be supplied.
• List of authorised trustees • The authorisation given by the Master's Office to each trustee to act in that capacity (Section 7 of the Trust Property Control Act). In the case of a foreign trust an official document issued by an authority in the relevant country where the trust is created that reflects these particulars should be supplied.
Address
• Address of the Master's office where the trust is registered As per authorisation given to the trustees above
Profiling information (only for new customers)
• Source of income
• Source of funds that the customer expects to use in concluding transactions in the course of the business relationship
• Type of activity that we can expect on the account No verification documents are currently required.


Trustees

All trustees must be identified as per the mandatory information for the category of customer within which they fall.

Beneficiaries

All named beneficiaries must be identified as per the mandatory information for the category of customer within which they fall.

Authorised signatories

All authorised signatories must be identified as per the mandatory information for individual customers.

Settlor/founder

The founder or settlor of the trust (the provider of the funds) must be identified as per the mandatory information for the category of customer within which they fall.

Persons who act on behalf of a trust
• They must be identified and verified as per the mandatory information for individual customers.
• Written confirmation that the person has authority to act on behalf of the trust is needed.
For individual related parties
• No residential address verifications are required
• No profiling information is required
• Contact details is an additional requirement.
Should I close my personal bank account and operate only through my Trust bank account?

Never! Always accept payment of your salary and earnings in your personal account. You can always transfer funds from there to your Trust account.

How do I move my assets to a Trust?

One cannot declare any assets owned by the trust as your own. Once you sell, donate or transfer an asset to a trust, it becomes the trust's asset and is no longer owned by you in person. You can sell your assets to a trust by way of a loan, but you must take care when you draw up your will not to write off the loan by bequeathing the loan amount to the trust. The writing off of the debt will incur capital gains tax for the trust.

A better option is to use the donations tax exemption of R100 000 each year to 'donate' money to the trust annually. The trust can then use this money to repay the loan to you.

For example, if you lend the trust R300 000, you can donate R100 000 each year tax-free to the trust. The trust can then use this money to repay the loan over three years.

If you sell your assets to a trust, there must be either a sale agreement or a loan agreement. In the absence of an agreement, the authorities will regard the transaction as a donation and, if the transaction exceeds the R100 000 exemption, you will have to pay donations tax at a rate of 20 percent of the transaction value over R100 000. The loan agreement does not necessarily have to include an interest rate but must include a repayment date.

How much cash can one deposit when establishing the family trust (or any trust)?

R100 is the settlement amount, one need to deposit it into the bank account.

What happens with my trust when I get divorced?

A trust is a complete separate from your personal estate.

As a general rule, assets belonging to a trust that was created by either party cannot be taken into account in terms of section 7 of the Divorce Act, 70 of 1997.

Only when the trust is not administered as a separate entity, in other words as a sham could assets be exposed to a divorce order.

When does a trust terminate?
• - On date of termination as set by the founder;
• - by written agreement between parties
• - when the trust objective has been achieved; or
• - when it has become impossible to achieve the trust objective.
Are there any FICA requirements for trusts?

FICA is an abbreviation for the Financial Intelligence Centre Act 38 of 2001 (as amended) which deals with the so-called "Know your client" term. For Trusts discretionary trusts which the requirements are as follows:
• - Trust IT (registration number);
• - address where the trust was registered;
• - letter of authority;
• - the contact details;
• - the income tax number (if issued by SARS);
• - name and Id number of the founder of the trust;
• - names and Id numbers of the trustees; and
• - names and Id number/s of the beneficiary/ies.

How will my Trust be taxed and do I need to register the Trust for income tax?

A trust is a regarded as a natural person for income tax purposes and subject to income tax therefore it must be registered with SARS. A Trust is taxed at a fixed rate of 40%. The good news however is that this applies to income that is retained in the Trust and not to income that is distributed to a beneficiary, which in the latter case will be taxed in the hands of the beneficiary. The so-called "split income" principle is but one of the advantages of a Trust. What this means is that income can be distributed in different proportions to beneficiaries, so in practice income can be distributed to for example a beneficiary who has not yet reached the highest average tax rate. Thus, some beneficiaries who have not reached the threshold can benefit by not being taxed at all.

Do I have to register my family trust for VAT?

One would not normally register for VAT.

Does a trust have any tax benefits?

By transferring assets to a trust, there is a huge saving on taxes payable at death. Simply put NO personal assets = NO estate duty.

Regarding Income Tax - Income in the trust at the end of the financial year is taxed at a flat rate of 40. By the trustees exercising their discretion, income can be distributed to the beneficiaries through what is called a "conduit principle", tax is then only paid once in the hands of the beneficiaries, (as natural persons), at their marginal tax rate.

Income can also be split between more than one beneficiary by the trustees, thereby taking advantage of the lower taxation rates of beneficiaries.

Capital Gains Tax: 20% is payable on capital gain at time of disposal of a trust asset. However, once again in terms if the conduit principle and taking into consideration paragraph 80(2) of the Eighth Schedule to the Income Tax Act 58 of 1962, such gain can be distributed to a beneficiary and taxable in their hands at the lesser tax rate.

Do trusts require an Auditor?

It is advisable to make use of accountants that specialize in trusts so that they can use your trust in the most advantageous way.

I already have a Will; do I still need a Trust?

On death all assets in your estate attract taxes and estate administration costs. For example, there's Capital Gains Tax or CGT. Since you are deemed to have "sold" all your assets at the current market value the day before you pass away, the difference between the market value and the initial cost will be seen to have resulted in a capital gain. The total gain is taxable at 10%.

Estate duties and Executors fees - Estate duty is calculated at 20% of the net value of your estate. Executors are entitled to a fee of 3.5% (plus VAT) of the gross value of your capital assets at the time of death, plus as a 6% (plus VAT) fee on all income after your death until the estate is wound up. A further problem is that the estate is frozen and the process takes time, which often leaves families in a very desperate situation. Heirs don't receive anything until all, legacies, creditors, taxes and administration costs are paid. Furthermore, minors (children) cannot inherit anything and all assets left to children are paid to the Guardians Fund. Placing their assets in the control of a trust can solve these problems.