Estate planning: A guide to setting up your trust

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Living trusts can be highly effective estate planning tools if used appropriately for your circumstances. However, this area of financial planning can be complex and, in order to ensure that your trust is validly formed, it is essential to get the registration process right the first time. In this article, we go through the incremental steps required for the registration of a valid trust.

Step 1: Be clear on your objectives

Before setting up your inter vivos trust, it is imperative that you fully understand the role it will play in your overall estate plan. Trusts can serve several purposes which, in turn, will have bearing on how they are structured, what assets are housed in the trust, and the type of trust you choose, amongst other things, so be sure that you are clear on what you intend your trust to achieve. A living trust can be used effectively to protect assets for future generations, keep personal assets separate from business activities, protect assets from creditors, or reduce estate duty – so it’s important to be clear on its purpose from the outset.

Step 2: Choose the appropriate type of trust

Once you’re clear on the trust’s role in your overall estate plan, you will need to determine whether a vesting or discretionary trust is most appropriate for your needs:

  • A vested (or bewind) trust: Ownership of the trust assets ultimately rests with the beneficiaries while the administration of those assets remains the duty of the trustees. The trustees are tasked with taking control of the assets and managing them in the best interest of the beneficiaries. As the trustees only have administrative control over the assets and do not have any discretion, it is important that the trust deed is absolutely clear in respect of the beneficiaries and their respective benefits.
  • A discretionary (or ownership) trust: In this type of trust, ownership of the trust assets transfers from the trust founder to the trustees whose job it is to manage the assets in line with the mandate set out in the trust deed. The trustees are entitled to use their discretion regarding the trust assets and income, including whether or not those assets ultimately vest in the beneficiaries. This means that while the beneficiaries do not own the trust assets, they have a contingent right to the income or assets of the trust.

The next step is to determine an appropriate name for your trust and, in this regard, you have freedom to choose any name you deem fit. Remember, your trust will be registered with the Master of the High Court and not with the Registrar of Companies, meaning that you do not need to reserve a name for your trust.

Step 3: Determine which assets will be transferred to the trust (and how)

As the trust founder, you need to identify exactly which assets will be transferred into a trust and what mechanism for transfer should be used. One option is to use your annual donations tax exemption of R100 000 per year (R200 000 in the case of couples) to move assets into a living trust. Another option is to sell assets to the trust and to create a loan account in favour of the seller, although it is important that such transaction is clearly recorded in the form of a sale agreement to avoid it being deemed a donation – which, in turn, would have donations tax implications. Most importantly, in transferring the assets to the trust, the trust founder must relinquish control of those assets to the trustees in order for the trust to be valid.

Step 4: Select your trustees

The trustees that you appoint will have a fiduciary duty to manage the trust assets in the best interests of the trust beneficiaries, and it is, therefore, important to choose your trustees wisely. Ideally, you should consider someone who has financial acumen and/or experience in managing trusts. If possible, avoid appointing an even number of trustees as this could result in a stale-mate situation when it comes to decision-making. Further, appointing too many trustees can cause logistical problems when it comes to setting up meetings, obtaining signatures, or attending in person. In the case of family business trusts, where the trustees and beneficiaries are members of the same family, it is advisable that one of the trustees is an independent person. Your trust deed will need to clearly set out the duties, powers, and responsibilities of your trustees, how they will be remunerated, and the extent of their mandate.

Step 5: Name your beneficiaries

You will be required to clearly nominate your beneficiaries and ensure that they are easily identifiable in terms of your trust deed. The rights of your beneficiaries will depend largely on whether the trust is vested or discretionary in nature, but keep in mind that your trust deed should be clear on how you wish your beneficiaries to benefit from the trust. In a discretionary trust, your beneficiaries will not have a fixed entitlement to the assets, and it remains the responsibility of your trustees to determine how the assets and income will be distributed to your beneficiaries. On the other hand, beneficiaries to a vested trust will have a fixed entitlement to the trust assets and it is therefore important that the trust instrument clearly stipulates your intentions – bearing in mind that, as the trust founder, you can treat each beneficiary differently in terms of the benefits they stand to receive from the trust. Remember also that removing or adding beneficiaries at a later stage is not a simple process, so it is important that you are intentional about choosing your beneficiaries when setting up the trust.

Step 6: Draft your trust deed

A trust is a ‘creature of document’ which means it is imperative that the trust deed is accurate and definitive in setting out the details of the trust, the powers of the trustees, how the trustees should be remunerated, and how you wish the trust assets to be managed in the interest of your beneficiaries. The trust deed should also set out the administrative procedures of the trust, such as meetings, voting, and decision-making procedures, as well as veto rights in the event of a deadlock. Your trust deed should also include requirements for auditing and accounting, minute-keeping and reporting, as well as the duration of the trust. Being highly complex in nature, your trust deed should ideally be drafted by an experienced fiduciary expert.

Step 8: Register your trust

You will need to register your trust at the Master’s Office in whose area of jurisdiction the greatest portion of the trust assets are situated, and such registration will require the following documentation:

  • A covering letter to the Master of the High Court
  • Trust Registration Form
  • Two signed trust deeds
  • Acceptance of trusteeship signed by each trustee together with a certified copy of each ID
  • A sworn affidavit by the independent trustee (where applicable)
  • Beneficiaries declaration form
  • JM21 forms
  • Proof of payment for registration
  • Final certified court order

Your trust will be given a registration number that starts with the letter IT followed by a number issued by the Master’s Office, followed by the year in which your trust is registered. As soon as the trust is registered, the trust founder must make the initial donation or sale to the trust, failing which no trust will come into existence. Once the Master of the High Court is satisfied that the documents are in order, he/she will issue what is referred to as Letters of Authority which provide the trustees with authority to act on behalf of the trust. It is important to note that your trustees may not conduct business or enter into contracts on behalf of the trust until they have received authority to do so. Once duly mandated, the trustees must open a bank account in the name of the trust and register the trust with SARS.

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