Tackling the terminology of trusts

In South Africa, trusts are typically used to protect personal and business assets and to preserve wealth. This is because housing assets in a trust allows one to separate personal assets from your business interests or other financial risks, making trusts particularly useful estate planning tools. That said, the world of trusts is a complex one and before navigating, it’s advisable to familiarise oneself with the terminology.

Inter vivos trust: Also known as a Living Trust, this form of trust is set up during the estate planner’s lifetime to achieve certain estate planning goals. It can take the form of a bewind or ownership trust and can be either vested or discretionary – depending on the intentions of the estate planner.

Testamentary trust: A testamentary trust, also known as a Mortis Causa or Will Trust, is set up in terms of a Last Will and Testament and only comes into existence on the death of the testator. Such a trust is typically used to house and protect assets intended for minor children or children with special physical or mental needs who are unable to manage their own affairs.

Bewind trust: Unlike an ownership trust, in a bewind trust the ownership of the assets is transferred to the trust beneficiaries and not the trustees. For instance, a trust founder may set up a bewind trust to house the family holiday with her children as the beneficiaries. Ownership of the holiday home will vest in the children, but the trustees will manage and administer the property on behalf of the children. Any income or capital earned by the trust vests in the beneficiaries, and it is therefore important that the income and capital beneficiaries are clearly determined. Generally speaking, the trust deed will stipulate a future event at which the beneficiaries can claim their portion of the trust assets, for instance, when they reach a pre-determined age.

Ownership trust: In this form of trust, the ownership of the trust property vests in the trustees who then have a fiduciary duty to manage the assets in the best interests of the beneficiaries. Ownership trusts usually take the form of discretionary trusts where trustees are able to exercise discretion over the distribution of income and capital, and the ultimate vesting of the trust assets is determined by the trustees.

Curatorship Trust: Where a person is either mentally or physically incapacitated and cannot manage their own affairs, a curatorship trust can be set up to administer the trust assets on behalf of that person, such as in the case of a dementia sufferer.

Discretionary trust: In a discretionary trust, the trustees are given powers to make certain decisions regarding the distribution of income and capital to the beneficiaries.

Vested trust: Also referred to as a Bewind Trust where the trust assets vest in the beneficiaries but are administered on their behalf until a future, pre-determined event.

Offshore trust: South Africans holding assets in foreign jurisdictions can make use of offshore trusts for estate planning purposes, although this is a highly regulated and specialist area, and the costs of administering an offshore trust may be prohibitive.

Business trust: A living trust can be used to conduct business and generate profits, especially if the business is of a high-risk nature. In doing so, the assets of the business are protected from creditors and they are unable to claim against your personal assets. Generally speaking, the costs of administering a business trust are less than that of a registered company, and it is easier to dissolve a business trust than to register a company.

Family trust: Where the trust founder, trustees and beneficiaries are all family members, this is referred to as a family trust and, in such circumstances, an independent trustee would need to be appointed. The independent trustee should not be related or connected in any way to the family members so as to give creditors comfort that the trust has independent, impartial oversight.

Trust instrument: This is the founding document of the trust. When setting up a living will, the trust founder will draft a trust deed which is then referred to as the trust instrument. When setting up a testamentary trust, the estate planner’s Will is the trust instrument. In the case of a Curatorship Trust, the trust instrument would be in the form of a court order.

Trust donor: Also referred to the founder or settlor, this is the person who sets up the trust and who enters into a three-way contract with the trustees and the beneficiaries. Either by way of sale or donation, the trust donor is required to relinquish control of the asset or assets intended for the trust and to transfer ownership/control to the nominated trustees.

Separation of control: Key to the validity of a trust is that the trust founder relinquishes full control of the assets transferred to the trust. It must be clear that the trust founder hands over control of the assets to his nominated trustees and that he does not interfere or influence them in the fulfilment of their duties. If the trust founder is also a trustee, he must demonstrate impartiality and that his decision-making is in the best interests of the trustees and not his own personal interests.

Trustees: Trustees are tasked with the management and administration of the trust assets and have a fiduciary duty towards the beneficiaries. They are required to act impartially and in line with the powers set out in the trust instrument, and to act at all times in the best interests of the trustees. Their job is an onerous one and requires that they have a solid understanding of the legal framework relating to trusts and trust property, and a reasonable level of financial acumen. While a trust founder is free to nominate as many trustees as she likes, three is considered to be the optimal number when it comes to decision-making, logistics and power balance. Anyone over the age of 18 years who is a South African resident can act as a trustee.

Beneficiaries: Beneficiaries are those people or entities named in the trust instrument to benefit from the income and/or capital of the trust. A trust’s beneficiaries can either have vested rights (refer to the definition of a Vested Trust) where ownership of the trust assets vests in them, or discretionary rights (refer to the definition of a Discretionary Trust) where the trustees exercise discretion regarding the distribution of income and capital of the trust to the beneficiaries.

Income beneficiary: An income beneficiary is someone who is eligible for the distribution of income from the trust as per the trustee’s discretion.

Capital beneficiary: A capital beneficiary is someone eligible to receive capital distributions from the trust as determined by the trustees from time to time.

Fiduciary duty: In terms of the Trust Property Control Act, trustees are required to act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another.  As such, trustees are expected to act with the utmost good faith at all times and not act outside of their powers.

Independent trustee: Specifically in the case of family trusts where all parties are related, the Master may insist that an independent trustee is appointed. While the independent trustee does not need to be a professional person, it is advisable that such person has experience in fulfilling fiduciary duties and is able to appreciate the significance of accepting a trusteeship.

Loan account: One way of transferring assets into a trust is for the estate planner to make a loan to the trust, and for the trust to repay the loan over time. The loan account will be considered an asset in your estate, although any growth of the trust asset will be housed in the trust.

Letters of Authority: A letter of authority is effectively written confirmation by the Master of the High Court in the appointment of a trustee. A trustee can only act on behalf of the trust once he is in receipt of a letter of authority.

Alter ego trust: Where the trust founder fails to relinquish control of the assets and either continues to treat the trust property as his own or unduly influences the trustees to act on his behalf when managing the trust assets. This is often the case in acrimonious divorces where one party wishes to hide assets from the other but does not wish to relinquish control of the assets.

Sham trust: A trust can be considered a sham if the intentions of the trust founder and the trustees are not in line with the requirements of a valid trust. If the courts establish that the requirements for a valid trust have not been met, they can rule that the trust is void from inception, including all transactions that took place.

Piercing the veil: Where a trust founder uses a living trust to hide assets, fails to relinquish control over those assets, or uses the trust to deliberately hide assets from creditors, the courts can look through the veil of the trust and may deem the trust to be a sham. In such circumstances, SARS can order that ownership of the assets remain in the trust founder’s personal estate which can have far-reaching financial consequences.

Fiduciary practitioner: A fiduciary practitioner is someone who has the professional qualifications to act as a trustee and fulfil a fiduciary duty. To obtain the FPSAâ designation, the individual needs to be registered with the Fiduciary Institute of Southern Africa and must have successfully completed the Advanced Diploma in Estate and Trust Administration. Someone who holds the FPSAâ designation is qualified to provide advice with estate planning, drafting wills, deceased estates, and trust administration.

Trust assets: Trust assets can include immovable property, moveable property (such as antiques, jewellery, art, gold coins, stamps, vehicles, etc), investments (such as unit trusts), or a contingent interest in property. Most importantly, the trust founder must relinquish control of the assets, and the trustees must take all necessary steps to secure, inventory and protect the assets.

Estate-pegging: Living trusts can be used effectively to house growth assets outside of one’s personal estate to reduce tax and estate duty liabilities. For instance, if an estate planner wants to invest R1 million in an investment strategy targeted for growth, she may choose to house the investment in a trust by loaning the original investment amount to the trust. While the original R1 million loan will reflect in her personal estate as an asset, any growth achieved in the investment will accrue to the trust and will therefore not be taken into account for estate duty purposes.

Asset protection: Living trusts can be used to protect assets from creditors. This is because the assets held in trust do not form part of an estate planner’s personal estate and are therefore protected from claims against creditors. That said, keep in mind that where an estate planner transfers an asset to a trust via a loan account, the loan account will remain an asset in his personal estate until the trust repays it, which means that the original loan amount will not be protected from creditors.

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