Estate planning is not only about the accrual and use of your assets during your lifetime – it also involves the final division of your assets at your death for the benefit of your family. To ensure that you successfully transfer your wealth from one generation to the next, it is important that you plan appropriately and by means of professional advice. A trust is a safe and effective channel to ensure that your assets are managed objectively, since it is controlled in accordance with your will’s instructions via a trustee who is bound by the Trust Property Control Act.
Types of Trusts
Trusts are created primarily in two ways, namely through a will, known as the testamentary trust, or a written agreement between the founder and the first trustee during the founder’s lifetime, known as the inter vivos trust. A testamentary trust is created in a will and comes into operation only at the time of your death. After your estate has been finalised, your executor must transfer the inheritance or trust assets to the trustee. Only then does the trustee take control of the assets. No trustee may act on behalf of a trust or make any decision on a trust asset before the Master of the High Court confirms the appointment by means of a letter of authority. This is the official registration document that contains the registration number, the name of the trust and the full names of all the trustees.
Types of Beneficiaries
There are two types of beneficiaries in a trust:
- The income beneficiaries (those who are entitled to the income generated by the trust); and
- The capital beneficiaries (those who are entitled to the capital assets).
It is possible to be both an income beneficiary and a capital beneficiary at the same time.
When should one consider a Testamentary Trust?
There are several reasons why people create trusts:
- To protect immature or dependent beneficiaries. Minor children under the age of 18 cannot receive their inheritance until they reach maturity and if there is no testamentary trust, their inheritance must be paid into the Guardian’s Fund of the Master of the High Court. A testamentary trust on the other hand can make provision for the income to be used for the maintenance, education and general welfare of the minor and, if the income is insufficient, even capital can be used. The will can make provision for the capital to be invested in a wide range of investments, for example fixed property, shares, unit trust investments, policies, money market accounts and so on. Payments can be made on a regular basis (monthly) and/or on an ad hoc basis. If the money is transferred into the guardian’s fund, income is payable only quarterly and no ad hoc payments are allowed. The capital can be invested only in cash investments.
- For a child who is physically or mentally challenged. In such cases the will can make provision for the income to be used for the benefit of the child and make the capital payable to other beneficiaries after the death of the said child.
- To protect other beneficiaries, such as a child who is insolvent, or even in the event of a child who is married in community of property and the spouse of the said child is in a business with a high element of risk.
- Trusts can be used when assets, such as a farm, cannot be divided among several heirs.
- A trust also offers several estate planning techniques, which require accurate planning.
- If you want to leave assets for charity and it must be administered ad infinitum, a trust is the answer.
Limitations of a Testamentary Trust
- Because of certain legal principles, a major is entitled to access the inheritance once s/he reaches maturity.
- When a trust terminates as stipulated in the will and assets are transferred to the beneficiaries, the assets are vested in their personal estates and thus increase their dutiable estate for estate duty purposes.
Because the legal age of maturity has been reduced from 21 to 18 years, it is recommended you specify the age at which the beneficiary reaches maturity in terms of the trust. You might wish to specify that the beneficiary needs to reach age 23, for example.
Acknowledging Standard Executors & Trustees
Dissolving a Trust
As with companies and CC’s, a trust mostly has a continuous existence that is not linked to the life-and-death battle which the creator or the beneficiaries deal with. However, a trust is not as everlasting as one might think and a number of reasons might cause the trust to dissolve. “Lastly, legislation changes have either forced a trust to implode or have raised the question if trusts should not be reconsidered and, where deemed appropriate, be given a death sentence,” says Venter.
Reasons for terminating a trust
More natural reasons for the termination of trusts are typically one of the following:
- The amount left in the trust makes it uneconomical to continue with the trust and the beneficiaries are better off managing the assets in their own estates or rather receiving income from a single premium annuity purchase for them by the trustees, from the trust funds.
- The trust has served its purpose and either the trust deed dictates that one should call it a day, or the trustees make this decision and transfer the assets to the beneficiaries.
- The trust might fail due to the purpose it was set up for is no longer reachable or all the beneficiaries might have passed away already.
- The trustees just decide they have had enough and put the trust ‘to the sword’.
- “From a legislation point of view, we have seen two recent disruptions in the otherwise peaceful life span of trusts,” SARS has granted a window period for the transfer of residential property from a trust and once the property has been transferred the trust must terminate within six months. This is a non-negotiable term and one that must be complied with. Then, the last comments in the annual budget speech have, of course, sparked fears of a punitive tax dispensation for housing assets in a trust. “We have yet to see the draft legislation, but the words expressed in the budget do seem troubling.”
The process of terminating a trust
In all the above cases, including to be followed when terminating a trust.
- The trustee must sign a resolution containing the reason of the decision the trust is terminated.
- All assets must be transferred from the trust to the beneficiaries and all debts paid so as to leave the trust devoid of an assets. The trustees must confirm this fact in a resolution.
- The trust bank account needs to be closed and proof of this needs to be at hand. If the trust did not have a bank account (which it should have had!) the fact must be declared oath by the trustees.
- All beneficiaries must sign a letter stating that they know about the trust and that they feel they have received their fair share. This is quite a tricky requirement to adhere to in many cases.
- The account of the trust must confirm in writing that the trust has neither assets nor liabilities and that the final steps of deregistering the trust will be undertaken by the accountant (like deregistering with SARS).
- Documents 1 to 5 need to be submitted to the Master of the High Court, in whose jurisdiction the trust was created, together with the original letter of authority (as an affidavit stating that it is lost) and the certified ID’s of all trustees and beneficiaries.
- “All the beneficiaries need to agree to the distributions and closure of the trust,” Venter says. “If the trust still has minors or the will does not allow for termination of the trust, the trust can be closed based on the face that it has served its purpose.”
In the event that a trust’s liabilities exceed its assets, one needs to sequestrate a trust in terms of the insolvency Act, which is a totally different process.
Louis Venter and FAnews – April 2013
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The items listed below give a general guideline of things that need to be taken care of when someone dies. The information below does not cover every eventuality – only the most basic straightforward cases...