Gone are the days of waking up to a large pile of IFRS books and Acts by my bedside. I wake up, in the early hours of the morning, to the screeching sounds of all types of motor vehicles, increasing traffic and different individuals walking to work. This is all driven by the need to survive, provide for families and aid in bettering the crisis faced economy. As a junior trainee accountant, I have been recently exposed to the day to day life of a working class individual. This is after years of being surrounded by university walls and surviving on the “pocket money” that I received from my parents. I hardly thought what they had to go through to earn the income or worse still, what would happen when that source of income was permanently eliminated. All I thought about was a beep on my phone confirming a deposit at the end of every month. However, there are events in life that we can never avoid, including death at some point and the consequences that come with it for your loved ones.  Did I think of any plan of action laid aside for me in the event of the termination of “my source of income?” Who would finance me from that day and onwards?

Trusts are created by a founder mainly to protect the assets and funds to be distributed when a certain event has occurred or by virtue of a will that was created during the lifetime of the deceased. This is to make sure that the family and beneficiaries continue to survive and live normally as if the deceased family member was still alive. There are two types of trusts - inter-vivos trusts and testamentary trusts. A testamentary trust arises upon the death of the testator and an inter vivos trust is created during the life time of an individual.

Our economy has seen a growing number of inter-vivos trusts and the question that stems is, “are all of these inter-vivos trusts legitimate and serving the true purpose of a trust?”

Ethics must be taken into account when it comes to the reasons behind forming a trust. In simple terms, ethics is the ability to view what is right and wrong. High value assets could be transferred to a trust to prevent seizure when debt commitments are not met and the individual’s assets are sought by debt collectors. For example, they could be transferred due to uncertainty of the outcome of divorce proceedings of marriages in community of property. When it comes to the issue of tax avoidance on disposal of such assets by the individual as compared to a trust, it gets technical. The founder forms a trust and transfers his assets to the trust. The founder makes himself the sole beneficiary. Technically these assets are not owned by the founder anymore but are in the possession of the trust for future distribution, a financial and tax benefit.

On the other hand, quite a number of inter-vivos trusts are legitimate. The founder ensures that in the event of their death, the beneficiaries are able to survive. The assets and funds are both distributed fairly.

The legitimacy of trusts is still questionable. The Davis Tax Committee is looking at the treatment of trusts. For reference, we previously published an article on the Davis Tax Committee Estate Duty Report which looks at the recommendations and proposals made by the Davis Tax Committee. The concern not only used to be the formation of trusts to reduce estate duty but also the attribution provisions which were used to reduce tax. Trusts have been used as a significant tool to escape from estate duty. It is anticipated that a second round of proposals will be released due to negative feedback received in respect of the first round of proposals that were available for comment until the 30th of September 2015.

There are also non-academic factors to be taken into account when dealing with the issue of the creation and running of trusts. These include social responsibility, the future of the beneficiaries involved and their sustainability. Therefore, how can we ensure that trusts have been created for legitimate purposes, that is, for the protection and ensured survival of families when death has occurred? Are there measures in place to ensure that trusts serve the purpose for which they are expected to be created for and not contribute to the potentially collapsing economy?

Kuda Mukwata

Trainee, Johannesburg