The formation of trusts inSouth Africa
A trust exists when the founder of the trust has handed over or is bound to hand over to another the control of property which, or the proceeds of which, is to be administered or disposed of by the other (trustee or administrator). Anyone who has the capacity to undertake contractual obligations or to make a will may create a trust. In addition, a trust may be set up by the court, by statute, or by statutory authority. In each case, however, an intention to create a trust must be present: By means of an agreement This trust is created by means of a stipulatio alterio. Inter vivos trust comes into existence through a contract between the trust founder and trustee which contains stipulations in favour of a third party. The beneficiaries acquire certain rights in the trust property only when they accept the benefit of the stipulation. Where there is no acceptance, there is no right (Crookes v Watson 1956 (1) (SA) 277 (A)). By means of a will In the case of a trust created by a will, the trust is formed by a testator bequeathing assets either to the beneficiaries, but because of incapacity such as when a minor is a beneficiary, the testator then also appoints trustees to administer the property so bequeathed to the minor, or the testator bequeaths assets to the trustees to administer it for the benefit of the beneficiaries (usually subject to some conditions and discretionary powers given to trustee). A testamentary trust must at all times comply with the formalities prescribed by the Will Act 7 of 1953. By means of a court order Although in some instances the court can be regarded as the founder, the initiative for creation usually comes from the parties seeking the order. Such a trust is normally created to address a particular problem such as the awarding of damages, or an amount of compensation to a person who is not capable of handling his own affairs or in a divorce where the parties seek to protect a family asset such as a house for children. In all these instances the tax implications (such as donations tax, transfer duty, capital gains tax and income tax) cannot be ignored and the trust deed as well as the passing of any funds or assets to the trust need to be structured very carefully in order to retain the protection qualities of a trust. Written by SINAZO MAU-MAU This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Who qualifies for a special trust and how is it taxed?
Unlike “conventional trusts” that are taxed at a flat tax rate, a special trust is taxed on the same sliding scale applicable to natural persons. The Income Tax Act provides for two types of special trusts: a so-called type-A and type-B trust. In essence, a type-A trust is created for a person (or persons) having a disability, while a type-B trust is created on a testator’s death and can exist only while it has a minor as a beneficiary. The distinction between a type-A trust and a type-B trust is vital because a type-A trust qualifies for specific relief from capital gains tax but the same is not granted to a type-B trust. This article focuses on the characterises of a trust in order for it to qualify as a type-A trust. Characteristics of a type-A trust A type-A trust can either be: an inter vivos trust created during the lifetime of the founder of the trust; a testamentary trust created by, or under, the will of a deceased person (testator); or a trust created as a result of a court order in favour of a specified natural person. Type A special trusts must have the following characteristics to qualify for the favourable tax dispensation: The trust must be created solely for the benefit of one or more persons with a disability. In essence, this means that the trust deed must not provide for the possibility of any beneficiary who does not have a “disability” for as long as the person(s) with a disability is or are alive. For a trust to be a type-A trust, its beneficiaries must be incapacitated as a result of their disabilities from – earning sufficient income for their maintenance; or managing their own financial affairs. It is a requirement that at least one of the beneficiaries, for whose sole benefit the trust was created, should be alive on the last day of February of the relevant year of assessment of the trust. A trust will accordingly cease to be a type-A trust from the commencement of the year of assessment during which all the beneficiaries with a disability for whose sole benefit the trust was created, are deceased. A trust that is created solely for the benefit of more than one person with a disability must be for the benefit of persons with a disability who are each other’s relatives. The relationship between the founder or settlor and the beneficiaries is of no consequence. The requirement is that the beneficiaries having a disability must be relatives, not the founder or settlor. Accordingly, The relationship between the beneficiaries and founder or settlor has no impact on whether a trust qualifies as a type-A trust. It is important that where persons of disability are reliant on trust income to support their livelihood, these requirements be carefully considered and that the trust is correctly registered as a type-A trust with the South African Revenue Service. Should you require assistance in this regard, feel free to contact your tax adviser for more detail. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Think twice before choosing an executor
The nomination of an executor is an important aspect of a Last Will and Testament. An executor is nominated in a Last Will and Testament and, upon death, he or she administers and distributes the estate in accordance with the testamentary wishes of the deceased. Importantly, although a person can nominate an executor, the executor is appointed by the Master of the High Court through the issuing of Letters of Executorship. The executor is responsible for, amongst other things, interpreting the Last Will and Testament, collecting information on all the assets and liabilities of the deceased, and distributing inheritances to beneficiaries in accordance with the Last Will and Testament. Although it is possible to appoint a family member as executor, it should be kept in mind that, not only is executorship an onerous and complex task, but the Master may in some cases refuse to appoint a nominated executor, or only grant Letters of Executorship if the nominated executor is assisted by a fiduciary professional or provides security, normally by way of an insurance policy, to the satisfaction of the Master. It is also important to keep in mind that, should a family member be nominated, the family member will have to make decisions about the administration of the estate during an emotionally difficult time, and it may become difficult for the family member to remain impartial and objective. In a recent case in the Western Cape High Court it was found that the executors, the daughters of the deceased, were conflicted and not in a position to exercise their fiduciary duty as executors properly. The facts in the matter of Brimble-Hannath v Hannath & Others were as follows: Hannath was married to Brimble-Hannath when he passed away. Hannath’s daughters were, in terms of his Last Will and Testament, the nominated executors of his estate and were appointed as such by the Master of the High Court. In terms of his Last Will and Testament, his surviving spouse Brimble-Hannath receives a lifelong right to inhabit and use the residence where she lived with the deceased, while the residue of his estate was bequeathed to a trust of which his daughters are trustees and beneficiaries. The Last Will and Testament did not provide any settlement on the surviving spouse to provide for her maintenance. She submitted a claim under the Maintenance of Surviving Spouses Act, amounting to more than R6m. It was not disputed that she is entitled to make a claim against the deceased estate. Hannath’s daughters, in their capacities as trustees of the trust, instituted a claim of R4m against the estate based on a loan extended by the trust to the deceased to finance the purchase of the residence in question. Brimble-Hannath brought an application for the removal of Hannath’s daughters as executors in their late father’s deceased estate. The Court emphasised the basic principle that nobody should be the judge in his/her own case and that because the executors had to take decisions about two competing claims which would influence their own interests, they were insurmountably conflicted. “I am accordingly satisfied, in the context of the applicant [Brimble-Hannath] disputing of the trust’s claim against the estate, woolly as her grounds for doing so might appear to be at this stage, that it is undesirable that the first and second respondents [Hannath’s daughters], who are the co-trustees and beneficiaries of the trust, should remain in office as executrixes of the deceased’s estate,” judge Binns-Ward found. The judge ordered the Master to appoint a substitute executor to wind up the estate. In view of this, it is advisable for you to consult your attorney or a fiduciary expert before deciding who to nominate as the executor of your estate in your Last Will and Testament. Reference list: Brimble-Hannath v Hannath and Others (3239/2021) [2021] ZAWCHC 102 (25 May 2021) This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)