On 12th November 2014 Gordon Stuart presented at the Kruger Lowveld Chamber of Business and Tourism networking breakfast. The topic under discussion was “Trusts and Wills – ‘A legacy or Liability’ - Pitfalls in Estate planning.

1. TRUSTS

2. TRUSTS:
A LEGACY OR A
LIABILITY AND WHAT
ABOUT THE
ADMINISTRATION?

3. BENEFITS OF A TRUST
• Ensures the smooth handover of assets from
one generation to the next.
• Cares for assets for those who are unable to
look after the assets themselves i.e. minors and
elderly battling with dementia. Alternative to
the Guardians Fund.
• Donations tax.
 If a natural person makes a donation greater than
R100k then donations tax at 20%. A distribution from
a trust attracts no donations tax.

4. BENEFITS OF A TRUST
• Reduction of death duties which are made
up of :-
– Deemed Capital Gains Tax – max 13.3%.
– Executor fees – max 3.99%.
– Estate duty tax – 20% .
• Ability to split income and capital gains to
multiple beneficiaries to reduce income tax.
• Possible protection of assets from creditors.

5. ESTATE GROWTH vs. DEATH DUTIES

6. DISADVANTAGES OF A TRUST
• In order for a valid trust to come into existence the
donor must hand over ownership and control to
the trustees.
• The trustees become owners of the asset.
• Decision making is now made in terms of the deed
and not by 1 trustee i.e. the original donor.
• Costs: Banks normally charge between 1 – 2% of
capital to act as trustees plus 6% on income
collected.

7. TRUST DEED AND ADMINISTRATION

8. TRUST DEED
1. The Deed of Trust is the trustees’ constitution and if
a responsibility, duty or power is not expressly stated
then it cannot be implied by the trustees. The
trustees have no authority to ‘assume’ that they may
carry out a particular duty or power and if they do so
then they are acting ultra vires.
2. It is a dynamic document that must be reviewed
regularly. Tax and trust laws change!
3. Experience has shown that at least 9 out of 10 trusts
either have wrong clauses or are missing clauses.

9. SUMMARY OF PROBLEM CLAUSES
1. Key terms used throughout the trust deed are not
adequately defined or are incorrectly worded.
2. Incorrect Beneficiaries.
3. Mistakes dealing with the power and authority of
trustees.
4. Insufficient clarity when dealing with administrative
matters.
5. Manner in which income and capital are allocated.
6. Termination date of trust. Pre-emptorary clauses.
7. Control clauses granted to one trustee.

10. IMPROPER MANAGEMENT OF TRUST
1. Requirements as laid down in the Trust Deed are
not complied with by the Trustees.
2. All the Trustees are not fulfilling their fiduciary
responsibilities.
1. Ensuring property is adequately insured.
2. Determining the correct risk profile.
3. Determining the asset allocation to match the income
requirements of the Beneficiaries.
3. Trust income is paid directly to a Trustee /
Beneficiary and not into the Trust bank account.

11. IMPROPER MANAGEMENT OF TRUST
4. Trustee meetings are not held.
5. Trustee /s never attend meetings.
6. Trust transactions are not recorded through
minutes or resolutions.
7. Annual Financial Statements are not prepared.
8. Trust income / capital gains are not treated in the
most efficient manner.
9. Testator / testatrix Wills are not synchronized
with the trust.

14. MYTHS & LEGENDS #1
SARS will use section 3(3)(d) to
deem assets to form part of your
estate!

15. MYTHS & LEGENDS #1
By Default this section can only
be applied on death as it forms
part of the Estate Duty Act and
not the Income Tax Act! SARS
cannot use it during your
lifetime.

16. MYTHS & LEGENDS #1
Section 3(3)(d) states:
Property which is deemed to be property of the deceased
includes —
property (being property not otherwise chargeable under this
Act or the full value of which is not otherwise required to be
taken into account in the determination of the dutiable
amount of the estate) of which the deceased was immediately
prior to his death competent to dispose for his own benefit or for
the benefit of his estate.

17. MYTHS & LEGENDS #1
For purposes of paragraph (d) of subsection (3)—
(a) the term “property” shall be deemed to include the profits of any
property;
(b) a person shall be deemed to have been competent to dispose of any
property—
(i) if he had such power as would have enabled him, if he were sui
juris, to appropriate or dispose of such property as he saw fit
whether exercisable by will, power of appointment or in any
other manner;
(ii) if under any deed of donation, settlement, trust or other
disposition made by him he retained the power to revoke or
vary the provisions thereof relating to such property;

18. MYTHS & LEGENDS #1
“Alter ego” = Control
• 2 Test for control:
1. Control is given to a specific person in the trust deed.
Stipulations in the deed can establish de jure control.
2. Check the facts whether, irrespective of the stipulations of
the trust deed, a trustee has exercised / abused his / her
powers on his / her own and ignored the rest of the trustees
and the trust deed. These surrounding facts will determine
de facto control. (This is the most common)

19. MYTHS & LEGENDS #1
First stage of test for control:
1. First check the powers to control in the trust deed
e.g.:
• Sole trusteeships,
• Veto rights especially positive veto rights,
• Sole right to appoint and dismiss co-trustees,
• Sole right to amend trust deed i.e.
“testamentary reservation”.

20. MYTHS & LEGENDS #1
• These reserved powers, on their own, may not be
conclusive to establish control on the part of an individual.
Simply because the trust deed contains certain powers to
control being bestowed on one person is not indicative of
whether those powers have indeed been used or abused.
• There can even be no stipulation in the deed reserving
control power in the hands of one person but the conduct
of one individual may reveal an abuse of power and
control.
For this abuse of power the person’s conduct has to be
checked in the 2nd tier of the test (i.e. for de facto
control).

21. MYTHS & LEGENDS #1
2. The second stage of the test is the important de facto
control check for a party’s conduct during the
existence of the trust. A trustee may actually abuse
his position as a trustee even in a trust deed which,
on its face value, may appear to be “clean” of any
specific powers of control granted/reserved for one
person.

22. MYTHS & LEGENDS #1
In Badenhorst v Badenhorst 2006 2 SA 255 (SCA)
(Delivered on 29/11/05) Combrinck AJA held the
following on the two tier test for control:
“That control would have to be de facto and not
necessarily de jure, and to determine whether a party
had such control it was necessary to first have a regard
to the terms of the trust deed and to consider how the
affairs of the trust were conducted during the marriage”.

23. MYTHS & LEGENDS #2
Trusts ALWAYS pay Income Tax at 40% and
Capital Gains Tax at 26.6%!

24. MYTHS & LEGENDS #2
• Section 25B & paragraph 80(2);
• Income / capital gains are distributed to the
beneficiaries and are taxed in their hands at
their tax rates. Income and capital gains
retain their identity. Trust is ignored for tax.
• Opportunities through distribution i.e.
university fees for children and school fees
for grandchildren.

25. MYTHS & LEGENDS #2
• Section 7(8) & paragraph 70;
• Attribution of income and capital gains to the
Lendor. Income and capital gains retain their
identity.
• To the extent that the trust has benefitted from the
interest-free loan the income and/or capital gains
is deemed to belong to the Lendor.
• Income and / or capital gains is taxed at natural
persons rates with no impact on loan account.
• Attribution MUST be applied! Not an option.

26. MYTHS & LEGENDS #3
Loan must attract interest!

27. MYTHS & LEGENDS #3
Decision of Commissioner, South African Revenue
Services v Brummeria Renaissance (Pty) Ltd and Others
2007 (6) SA 601 (SCA)
• Only if there is a quid pro quo relationship
between the lender and the borrower.
•Reason is the right to retain and use loan capital
on an interest-free basis constitutes a right
which has an ascertainable money value which
accrues to the borrower.

28. MYTHS & LEGENDS #4
Independent trustee must be a professional!

29. MYTHS & LEGENDS #4
Post the decision in the Land and Agricultural Bank
of South Africa v Parker 2005 2 SA 77 (SCA) the
Master has to insist on the appointment of an
‘independent trustee’ in situations where all the
beneficiaries are related and some or all of them are
also the only trustees. This independent outsider can
be a person related to the other trustees, provided
that such person is not a beneficiary to the trust. In
terms of Cameron’s judgement in the above
mentioned case the independent outsider;

30. MYTHS & LEGENDS #4
“does not have to be a professional person, such as an
attorney or accountant, but someone who with proper
realisation of the responsibilities of trusteeship
accepts office in order to ensure that the trust
functions properly, that the provisions of the trust deed
are observed, and that the conduct of the trustees who
lack a sufficiently independent interest in the
observance of substantive and procedural
requirements arising from the trust deed can be
scrutinised and checked”.

31. ROLE OF INDEPENDENT TRUSTEE
• As mentioned it is now required after
decision of Land & Agricultural Bank v
Parker.
• Shouldn’t just appear in name.
• Must be party to all decisions and should
attend all trustee meetings.
• His/her conduct could show if the trust is a
bona fide trust or a sham.

32. TRUSTS AND YOUR WILL
• Don’t take it for granted that you can
automatically bequeath assets to your IV trust. If
the definition of beneficiaries are too wide the
bequest could fail Braun v Blann & Botha.
• Nominating a replacement trustee.
• Great opportunity to transfer fixed property as
there are no transfer duties.
• Section 9(4) of the transfer duty act.

33. Inter Vivos Trusts
Conclusion
– Ensure that one of the trustees is independent.
– Ensure that your trust deed is “compliant” with
current legislation and case law.
– Ensure that all the statutory requirements are
complied with i.e. trustee meetings, minutes of
all decisions etc.
– Ensure your will “compliments” your trust.
– Remember, both are dynamic documents and
should be reviewed on a regular basis!

34. QUESTIONS?