Trusts are very useful estate planning tools and can be used for a wide variety of purposes. It basically means that a person (founder) puts his/her trust in someone else (trustee) to manage assets on behalf of someone (beneficiary). The type of trust will depend on when the trust is set up, the intention of the person who sets up the trust and who is meant to benefit from the trust. Although the creation of a trust has many advantages, a person must ensure that they comply with the legal requirements to prevent the trust from being regarded as an alter-ego, such as for the purpose to conceal assets.

 

What is a trust?

  • A trust is a legal arrangement where assets (for example, money or immovable property) are controlled and administered for the benefit of someone else.
  • The relevant parties to a trust are:
    • Founder – a person who creates the trust by donating or selling assets to the trust or leaving assets to the trust in their Will. The founder can also stipulate the purpose of the trust, who the beneficiaries will be, who must be appointed as trustees and so on.
    • Trustee – a person who controls the trust assets, separate from their own personal assets, on behalf of the beneficiary. There is no legal limit on how many trustees must be appointed, however, in practice it is quite common to appoint three or five trustees in order for there to be a majority decision (depending on the different circumstances and needs of the trust and founder). 
    • Beneficiary – a person who is entitled to benefit from the trust and who has certain rights arising from the trust. A beneficiary can be a natural person or a juristic entity (such as a company).
  • There are various different reasons for using a trust, such as a charitable trust for the benefit of a children’s home or a business trust formed to carry on business with a profit incentive.

  • Generally, a trust is used to protect the interests of minors and other persons who may not be able to look after their own affairs. 

     

What are the basic requirements for a trust?

  • A trust must be created in a written document, such as a trust deed or a Will (“trust instrument”).
  • The following must be clear from the trust instrument:
    • That the founder has an intention to create a trust and to transfer the control of the relevant trust assets to the trustees.
    • The purpose of the trust must be lawful and clearly stated.
  • The identity of the founder, the trustees and the beneficiaries.
  • The powers and duties of the trustees.
    • A proper description of the trust assets.
  • When and how the trust is to be wound up.
    • There must be at least one beneficiary. If no trustees are appointed in the trust instrument, the Master of the High Court (“Master”) has the power to appoint a trustee. If there is only one trustee and one beneficiary, the trustee and the beneficiary may not be the same person.

 

What are the different types of trusts?

  • The two most common forms of trusts can be identified by looking at when it is created and the type of trust instrument used: 
  • Living trust (inter vivos):
    • This type of trust is created while the founder is still alive and is regulated by a trust deed. This means that the drafting of the trust deed, registration of the trust and so on happens during the lifetime of the founder.
  • The founder may also be one of the trustees and/or beneficiaries, however, they cannot be the sole trustee and/or beneficiary.
  • Testamentary trust (mortis causa):
    • This type of trust is created after the death of the founder and is regulated by a Will. This means that the drafting of the trust (by the testator in the Will) will be done while the founder is still alive, but the registration of the trust and so on only happens after the death of the founder.
    • Unlike living trusts, the founder cannot appoint themselves as a trustee or a beneficiary as they will not be alive to fulfil these roles.

 

What basic procedures must be followed to register a trust?

  • In order for a trust to be registered, the original trust instrument must be lodged with the Master. However, the Master may accept a copy that has been certified by a Notary.
  • The trustee must provide security as confirmation that they will duly and faithfully perform their duties as a trustee. The Master or the trust instrument may exempt a trustee from providing security.
  • The Master must issue the trustees with written authorisation to act as a trustee.
  • The following documentation must also be lodged:
    • A trust registration form.
  • Proof of payment for the lodgement of the trust instrument. This is not a requirement for a testamentary trust.
  • Original written acceptance of the trustees.
  • Original written acceptance of the auditor.

 

Who can be appointed as a trustee of a trust?

  • As a general rule, any person can be appointed as a trustee except for the following persons:
    • in the event of a testamentary trust, a person who signs the Will as a witness or who wrote the Will in his/her handwriting;
    • a minor child;
    • a mentally disabled person; or
    • the Master of the High Court.

  • A trustee will not be appointed if s/he is the only beneficiary in the trust.

     

    What are some of the advantages and disadvantages of a trust?

  • The advantages of a trust are:
    • A trust continues to exist after the death of the founder and can stay in existence for multiple generations.
    • A person’s assets can be protected from creditors if it is placed in a trust, as it no longer forms part of that person’s estate.
    • Each trustee can contribute to the trust through knowledge and skills. This will allow the trust assets to be used in a way which is most beneficial to the beneficiaries.
    • Trust assets are less likely to be squandered by the beneficiaries as it is placed in control of the trustees.
  • The disadvantages of a trust are:
    • Due to the complexity of drafting a trust deed, an expert’s assistance and advice might be needed. This can lead to a costly formation and administration of a trust.
    • When dealing with taxation of income earned by the trust, a flat rate of 45% will apply in respect of income tax.  
    • There are quite a lot of administrative requirements that trusts must comply with, such as annual financial statements and so on.

 

Are trusts regulated by law?

  • Trusts are regulated by the Trust Property Control Act 57 of 1988, which forms the framework within which trusts must operate.
  • However, the Trust Property Control Act does not deal with every aspect of trusts and court judgments and the common law must also be taken into account when dealing with trusts.

 

What if the trustee exercises too much personal control over the trust assets?

  • The Act states that the trustees of the trust must keep their personal estates separate from the trust’s estate. This means that the trustees are not to control the trust assets as their own. 
  • On the other hand, the founder of the trust must also not take any decisions regarding administration of the assets (unless s/he is also a trustee). 
  • If the founder or a trustee exercise too much control over trust property as if it is his/her own property, it can be argued that the founder or trustee is actually the same as his/her trust. 
  • This means that the trust is actually the “alter ego” of the founder or the trustee and that the affairs of the trust are managed, not for the benefit of the beneficiaries, but for his/her personal welfare.  
  • If a court does find that the trust is effectively the “alter ego” of the founder or trustee, all or some of the assets will be regarded as part of their personal estate, which may be taken into account, for example, during divorce proceedings.
Legal content disclaimer

The information contained on this website is aimed at providing members of the public with guidance on the law in South Africa. This information has not been provided to meet the individual requirements of a specific person and LegalWise insists that legal advice be obtained to address a person’s unique circumstances. It is important to remember that the law is constantly changing and although LegalWise strives to keep the information up to date and of high quality, it cannot be guaranteed that the information will be updated and/or be without errors or omissions. As a result, LegalWise, its employees, independent contractors, associates or third parties will under no circumstances accept liability or be held liable, for any innocent or negligent actions or omissions by LegalWise, which may result in any harm or liability flowing from the use of or the inability to use the information provided.