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Trusts are significant institutions in the context of family ( estate) planning and serving as business vehicles. In order to understand the trust concept, the most important features are placed in perspective. Bear in mind that volumes can be written about trusts because this institution can be linked to many aspects of the law, accounting and taxation. For our purposes, and for this audience, a simplified workable version needs to be put into place on this website. When later more specialized aspects are highlighted, it will be easier to follow those aspects and place it in perspective.

1. A trust is a contract between the founder (settler) and other trustees thereto (akin to being managers/caretakers) for the benefit of the beneficiaries nominated in the trust document. A distinction could be made between capital and income beneficiaries. A vesting trust yields specific predetermined funds or advantages to a beneficiary, whilst a discretionary trust yields income or capital income to a beneficiary according to the discretion of the Board of Trustees appointed to control the trust funds.

2. A trust is a separate person (like a close corporation or a company) for the purposes of the law including the Income Tax Act and the Estate Duty Act respectively. A Trust is also styled a juristic person in the Companies Act, 71 of 2008. Due to a technical oversight of the legislature, a trust could recently not be liquidated, but should have been sequestrated. However, I am sure the legislature will rectify that oversight during the present parliamentary session, and should the point not let us lose our focus.

3. A trust should be administered in terms of the Trust Property Control Act, 57 of 1988 as amended. It means that the Master of the respective High Courts in the country are the custodians of trusts and jurisdiction is determined as to where the main asset of the trust is situated.

3.1. In order to mobilize a trust, assets need to be identified and segregated by the founder of the trust such as shares in a company, property or cash funds. (A trust may be the holder of shares in a company or act as a member in a close corporation). Close corporations have been phased out by the legislature and regarding the future, we can make the statement that trusts may be shareholders in companies.

3.2. The trustees have to be nominated and accept positions as such to administer the trust (normally two to three trustees). The Master of the High Court appoints the trustees by way of a Letter of Authority and identify each trust by way of a specific IT number, similar to a company registration number. A bank account is opened in the name of the Trust with signing powers to certain trustees.

3.3. The trustees take control over the assets on behalf of the trust and the assets become the property of the trust fund (the founder or donor loses control, otherwise it is not a trust !).

3.4. Specific directions in the trust document (the contract) will direct the trustees how to distribute which assets under what conditions to which beneficiaries from tax year to tax year. Ultimately the trustees report to the Master of the High Court. Any beneficiary which feels aggrieved about the trustees’ behavior, may approach the Master or the Court and beneficiaries may even institute legal proceedings against trustees for theft, maladministration and other unlawful actions for damages suffered due to actions by the trustees, or obtain an interdict.

4. A trust is either of a discretionary nature or a vesting trust (in practice a discretionary trust yields wide powers to the trustees).

5. Decisions are made by the trustees in the same way meetings are conducted in other business forms. It is therefore suggested that agendas and clear minutes of meetings are held and decisions filed accordingly. (In case of any confusion as to what the impact of decisions are, proof is needed, since creditors or other legal entities may wish to attack the validity and width of decisions). It also create certainty amongst trustees and beneficiaries in the same way as in a partnership or company structure.

6. In practice a distinction is made between a family trust and a business trust. The crucial difference between the two types are to be found in the intention of the trustees. Tax authorities will not, in applying tax laws, as a matter of principle, keep a blind eye to business intentions, even if a family or even a charitable trust has been created. It depends on the wording of the trust deed, the minutes of meetings, recorded business transactions, i.e. objective factors coupled with the intention of the trustees to make an ultimate decision whether a specific trust is of a business nature or not. It means that the form in which the trust is cast will not the determining factor of the tax consequences, but the rather the underlying substance and business processes used by and undertaken by the trustees.

6.1. Composition of a business trust

6.1.1. Normally the trustees controlling a business trust are also the beneficiaries, but an extra trustee is needed, to act as “umpire” in case of disputes between the “players”, the beneficiaries. These are terms the Masters of the High Court use nowadays to explain the difference between the trustees and the beneficiaries.

6.1.2. A distinction must be made between income distributed to beneficiaries during a specific tax year and income retained in the trust at the end of a specific tax year. It means that a trust is a separate taxpayer and the beneficiaries also taxpayers. The trust taxes are administered by the trustees as representative taxpayers.

6.1.3. A trust need not have an auditor as required in the case of certain companies in terms of the Companies Act, 2008. The master requires an at least an accounting officer to be appointed with a written undertaking by the accounting officer or auditor (if elected) as part of the contract. However, proper books should be kept by the trustees since the numerous stakeholders (beneficiaries, co-trustees, tax authorities, banks and creditors) may inquire about the internal workings of the trust.

6.1.4. The Trustees stand in the same fiduciary capacity to the trust and beneficiaries as a director to a company towards its shareholders. It means that the task is onerous and persons with knowledge should act as trustees.

7. Advantages of a Trust in comparison with a company structure

7.1. A Trust is ideally positioned as a shareholder, because it places shares in a structure which keep the share capital intact and an underlying shareholders agreement between different trusts will create peace of mind with shareholders / investors of capital into a company.

7.2. Continuity is guaranteed as the trustees keep on controlling the funds (hopefully for the benefit of the trust and its beneficiaries);

7.3. A trust can be used to conduct take-overs, control companies, and can provide the function of a holding structure; In practice change of shares in a company go hand in hand with trusts. Rarely will experienced business persons not use trusts as shareholders. In these instances, capital gains tax will normally play a role.

7.4. An administrative trustee is appointed or office used to conduct the day-to-day affairs of the trust.

8. The taxation regime of trusts is for all practical purposes now on par with that of companies as far as transfer duty is concerned.

8.1. Trust income which is retained in the trust fund will have to be filtered by anti-avoidance provisions contained in the Income Tax Act 58 of 1962 and are also applicable to trusts. Sections 7, 25B and 56 read with section 80A-80L of the Income Tax Act are applicable. These provisions are too complex to discuss in this summary and are the subject of whole university tax thesises. Expert advice is needed, depending on each set of facts, and intentions and document bundle.

9. Essentially nothing sinister remains about a trust in comparison to a company structure. Seconded or appointed trustees will be well advised to refer to the Trust Control Property Act, 57 of 1988 in performing their duties, keeping in mind that honesty and transparency good administration will take one far.

Adv Gerhard van Wyk ( B.Iuris, LLB, LLM (Admin Law) ; LLM (Tax Law) (RAU) Member Gauteng Branch of IAASA, ( Faculty of Advocates), Tax Practitioner;