Death eventually knocks on everyone’s door and this necessitates proper estate planning to ensure that when the time comes, one has made the necessary arrangements for loved ones to be taken care of. Although there are many different tools that can be used in estate planning, trusts (especially family trusts), have been one of the most popular tools for quite some time now.
The inter vivos trust has in many ways become the hallmark of most modern estate plans, despite the adverse tax rates, attempts at tax regulation mostly by the South African Revenue Services, and special scrutiny by the courts.
The flexibility of trusts contributes greatly to their popularity, as trusts, unlike for example companies and close corporations, are not subject to rigorous and extensive legislature regulations. In fact, it has been said that “the great virtue of trusts is their flexibility and relative lack of formality in creation and operation”, thus allowing the founder to draft the trust deed as he deems fit.
A well-considered, carefully-constructed and properly administered inter vivos trust structure is very effective in achieving asset protection from claims arising from divorce and creditors. As far as estate planning is concerned, trusts provide an effective mechanism to minimise costs on death such as estate duty, capital gains tax and executor fees, as the estate planner is able to freeze that value of growth assets.
Contrary to popular belief, trusts are tax-efficient, which is found in the application of the conduit-principle. Furthermore, trusts provide protection to minor and incapacitated beneficiaries who cannot manage their own financial affairs and cause continuity of assets and preservation of wealth from a succession point of view.
Although there are many advantages in using trusts, there are also disadvantages such as the high costs of setting up and running the trust, the costs of paying professional persons to administer the trust to prepare annual financial statements and the income tax returns. These set up costs depend on a number of factors and the value of the assets that are going to be transferred into the trust.
Another disadvantage is loss of control over ownership and administration of the assets in the trust as the assets belong to the trust and are managed by the trustees of the trust. While there are some tax benefits associated with trusts, the earnings from the assets in the trust are taxed at 45% and interest exemptions do not apply to trusts and the inclusion rate for Capital Gains tax is far much higher than that for individuals.
However, the real challenge with trusts lies in their administration as there are added administration requirements in terms of the trust law. However, as the philosophers say: “The very thing that we have, is the very thing that we hate”. What is often neglected or simply ignored is the proper administration of trusts. Trusts, being often so intricately linked with families and their wealth, are mostly seen to be an extension of the founder or the family and this is where the fundamental problem lies. A trust is distinct and separate from the founder and should be administered as such.
The setting up of a trust should be carefully considered and not just be done blindly without weighing up the benefits and the disadvantages. The benefits of a trust can only be legitimately achieved if the trust is administered properly. Moreover, if trusts are used for the right reasons, the advantages often far outweigh any perceived or actual disadvantages.
“What you lose on the swings, you can gain on the roundabouts”. The real downside of trusts is that very often the people who have them do not administer trusts correctly, mainly due to their lack of knowledge and expertise in trust matters. This lack of proper administration often results in the loss of the very benefits of asset protection and estate planning that the founder of trusts sought to gain by establishing the trust structure in the first place.
The administration of a trust revolves mainly around the trustees and the particular relationship between the trustees and the beneficiaries. Unlike companies and close corporations, trusts are not separate legal persons and must act through their trustees who themselves must act at all times in the interests of their beneficiaries and, in terms of the trust deed, must create the trust.
Trustees have fiduciary duties to the trust beneficiaries and are required to act accordingly. When dealing with trust administration, the first port of call it is submitted to is the Trust Property Control Act, which contains various provisions regarding the administration of trusts. Given the complexities of administering a trust, it is important that the trustees have the necessary expertise to manage the family trust. Regrettably, many trustees who administer these trusts do not understand the fundamental principles and mechanisms of trusts, the real reason for their creation and, most importantly, their role and responsibilities towards the beneficiaries, co-trustees and the founder.
The creation of a trust structure is therefore only the beginning of the journey to reach the destination of asset protection. Effective estate planning trusts must be managed properly. Therefore, thorough and consistent administration of a trust is crucial and, unfortunately, it is the Achilles heel of many structures and, as our courts have shown, can be their undoing.
The law relating to trusts is in many respects underdeveloped. As a result, trusts have received much attention from our courts, the Master of the High Court, SARS and the Government to resolve disputes and prevent abuse of trusts while at the same time clarifying and developing trust law. The courts are increasingly becoming firm with trust administration, as they no longer view the trust form as an impenetrable suit of armour that the trust founders, trustees and trust beneficiaries can rely upon to conceal their dubious practices. The courts will no longer allow the misuse of the trust form and the ensuing usurpation of the powers of trusteeship, as witnessed in recent court cases.