Are you thinking about setting up a Trust?

This article will be useful to those who are thinking about setting up a Trust, as well as to some founders and beneficiaries of Trusts.

There are 2 types of Trusts:

(a) an Inter- Vivos Trust, which is created between living persons (living trusts), e.g.: Family Trusts; and
(b) a Testamentary Trust, which is created in a valid Last Will and Testament.

Registration and Costs

It takes a few months to prepare and register an Inter-Vivos Trust (Family Trust), but once that process is complete it can immediately function and transact. All costs for the setting up and registration of this type of Trust as a legal entity are therefore payable upfront.

A Testamentary Trust can, however, only be established and registered upon the death of the Testator, and is further subject to any conditions set out within the Will regarding it. The upfront costs will only be the cost of getting the Will with Testamentary Trust provisions expertly drafted. These types of Wills are more expensive than general Wills as they must set out a very comprehensive set of provisions that eventually become the Trust Deed upon the Testator’s death. This investment is considered to be an invaluable part of estate planning in an estate that, for example, has minor beneficiaries who will receive large inheritances that need to be administered well on their behalf.

The registration and establishment costs for the Testamentary Trust would, therefore, only be payable during the winding-up process of the estate of the Testator, during which time the Trust will be registered.

The Master and the Process

In South Africa, all Trusts are registered with the Master of the High Court. There is a specific process that must be complied with for the registration, amendment, and de-registration of Trusts, as well as for the appointment, resignation, and removal of Trustees. This entire process and the Trusts themselves are further governed by the Trust Property Control Act 57 of 1988.

The all-important Trust Deed

The Trust Deed is a very important document. It establishes and governs the Trust for its entire duration. It also provides the terms and clauses by which the Trust will be administered in detail, such as:

• how the Trust will be administered;
• how the beneficiaries will be paid;
• how and when the Trust will be terminated;
• how trustees will be appointed and held accountable;
• what amount or degree of discretion a Trustee will have;
• what balance exists (if any) between a Trustee’s discretion and other interested parties, such as legal guardians and beneficiaries in decision making;
• the perpetuity or life term of a Trust;
• how Trust income is to be distributed.

In my practice, I have found that:

• Beneficiaries who are unfamiliar with the terms or clauses of the Trust Deed from which Trust they benefit can be at a significant disadvantage as a result, and are often left at the mercy of the Trustees’ integrity;
• The founders of Trusts should invest in getting expertly drafted Trust Deeds otherwise contradictory clauses, unintended consequences, and even abuses of provisions and powers can abound as a result of a poorly drafted Deed;
• It is imperative that the clauses of the Trust Deed be generally understood by the Founders of the Trust, upon the drafting of the Deed, for them to ensure that their intentions are correctly voiced and expressed, as these clauses will have very long-term effects and this will especially affect their intended beneficiaries;
• The Trustees and the beneficiaries should also have access to the Trust Deed when the Trust is established, and as each party becomes significant to the Trust, for each party to fully comprehend their role, responsibilities, and benefits. This process of transparency and accountability will also enable the parties to better manage future expectations;
• The Tax laws regarding trusts have changed quite a lot over recent years and taxation has increased on Trusts. It is therefore advisable to consult with a financial or tax expert as well about Trusts, Taxes, and Capital Gains Tax (CGT) so that you are in full appreciation of all potential costs and your available options;
• Some of the benefits that Trusts have been used for are asset protection from creditors, saving estate winding-up fees at death (in the case of a living trust), and protecting beneficiary interests and even beneficiary interests in perpetuity.

Are there any maintenance fees payable?

There are no maintenance costs payable to the Master after the registration and establishment of the Trust. You will only incur fees payable to the Master again if you want to make changes or amendments, appoint or remove Trustees, terminate the trust, and so on.

Conclusion

Trusts are useful legal entities and are still widely used. It is advisable to have a good team of accountants and tax practitioners around you in the regulation and running of a Trust and to have expert legal advice in the drafting of your Trust Deed and for the registration of a Trust.

I hope that this article has assisted you in thinking through some essentials of Trusts.

Disclaimer: This article is for information purposes only and not intended as legal advice. You should contact an Attorney for specific advice applicable to your circumstances.