Ten things to know about trusts

1. A trust is a legal entity consisting of a donor/founder, trustees and beneficiaries. The founder holds assets (without owning them) for the benefit of the trust beneficiaries. In South Africa, trusts are governed by the Trust Property Control Act of 1988, and are registered by the Master of the High Court. The trust division of the Master’s office maintains a trust file and controls any queries regarding trusts.

2. A trust beneficiary is entitled to benefit under the trust arrangement, from vested or discretionary rights determined by the trust deed. Beneficiaries of a trust are usually natural persons, but may also be a juristic person, such as a company. All trusts must have ascertainable beneficiaries.

3. There are two types of trusts:

  • Testamentary trust: These trusts are generally used to protect assets of minors or people who are not capable of looking after their own interests. Usually, the will directing the registration of a testamentary trust also contains a clause to determine the termination of the trust. This might be connected to a certain time period or a specific future event.
  • Living trusts: These trusts are created by agreement between living people. They are very useful for keeping assets for generations on end. The Founder establishes the trust during his/her lifetime; this constitutes an agreement between him/herself and the trustees. The five types of living trusts are: Family Trust, Guardian’s Trust, Umbrella Trust, Charitable Trust, and Special Trust.

4. The registration of either trust entails particular steps:

  • Testamentary trusts: for registration, the Master requires a will of the deceased and a bond of security (should the will not exempt the trustees from furnishing security). The Master will send a letter of authority to the trustees when all the requirements for registering a trust have been met.  
  • Living trusts: Several documents must be lodged with the Master of the High Court in the area where most of the assets to vest in the trustees are situated. These documents include: the original Trust Deed (or notarial certified copy thereof), proof of payment for the registration, original written acceptance of trusteeship, original written acceptance of Auditor, and a bond of security by the trustees (if required by the Master).

5. A trust does not have legal personality because it is only an accumulation of assets. In some circumstances (e.g. for tax purposes), it is considered to have a separate legal identity. A trust can, however, have legal capacity and the trustees may perform juristic acts, provided the trust deed allows this.

6. Trusts can be used for employee share schemes where the trust can hold the shares for the benefit of employees and dividends are distributed to the beneficiary are distributed to the beneficiary employee. Without the need for ownership of the shares to change when employees join or leave the company.

7. Trusts are subject to income tax (at a rate of 40%), and capital gains tax. Trust income may be distributed to the trust’s beneficiaries through the conduit principle. This means that tax is only paid at the individual marginal tax rate of the recipient beneficiary. Generally, no estate duty is payable by the trust on the assets transferred to a trust on the death of the transferor.

8. All information regarding a trust is contained in the deed of trust, which is a contract between the founder/donor and the trustees. The trust deed is a kind of manual for the trustees and sets out all the information regarding the founder/donor, trustees, beneficiaries, the objective of the trust, any possible conditions that may apply, and the powers and functions of the trustees.

9. A trust may be used to hold and protect personal or business assets, which is particularly helpful if there occurs, at some point, liquidation, sequestration, or divorce. Trust may also be used to hold shares in businesses and to ensure the continuity of ownership of assets.

10. The Act does not make provision for termination of a trust; that is provided for in the trust deed. The trust will terminate by written agreement, on the date set out by the founder, or upon the achievement of the trust objective, or upon the realisation that the achievement of the trust objective is impossible.