Trusts have been in the spotlight in recent years, and SARS is imposing more stringent laws on trusts. It is therefore important to ensure that trusts are set up for the right reasons and that they are properly administered by the trustees to ensure the consequences of mismanagement are avoided.
Some of the important components of a trust, of which all founders and trustees should be aware, include the following.
Registration and set up
Trusts must be registered with the Master of the High Court, and must have a trust deed which is lodged with the Master’s office, if they are inter vivos trusts (created during the lifetime of the founder). The service of an attorney should be sought to ensure the trust deed is drawn up properly and contains the important information that will empower the trustees to administer the trust. Such information would include, but is not limited to, the rights and obligations of the trustees, the rules regarding the distribution of income to the beneficiaries, and the names of the beneficiaries. A testamentary trust (created by a trust clause in a will after the passing of the testator), will be governed by the relevant will that created it. Trusts are also governed by the Trust Property Control Act, 57 of 1988. There are various other acts with which trusts must comply including, but not limited to:
- The Income Tax Act, 1962 as amended
- The Tax Administration Act
- The Banks Act, 1990
The Master requires trusts to have a minimum of three trustees with one of them preferably being an independent third party. Trustees must be trustworthy and honest individuals with high integrity and must always act with care, diligence and skill. If trusts are not managed properly, trustees may be removed from office by the Master of the High court. A trustee is personally liable for breach of his or her fiduciary duties.
Furthermore, non-residents may not be trustees of South African registered trusts. This is important to note where trustees decide to emigrate.
Operation and assets
A trust must be treated as a separate juristic person, and its identity shouldn’t be confused with that of the trustees or beneficiaries.
All trust assets must be registered in the name of the trust.
A bank account in the name of the trust must be opened with a ‘Banking institution’ as defined in the Banks Act, 23 of 1965. This must be a transactional account. All income and expenses, as well as any other trust related receipts or payments must flow through the trust’s bank account.
All withdrawals should be authorised by the trustees by way of a resolution and should be in compliance with the powers of the trustees in terms of the trust deed.
Books of account must be regularly maintained and financial statements should be prepared annually. The trust deed should provide guidance regarding whether or not an audit is required.
Any distributions to beneficiaries must be in accordance with the trust deed and should be authorised by the trustees by way of a resolution in the financial year that the distributions are allocated to such beneficiaries. Beneficiaries should be given distribution notices so they may disclose any distributions awarded to them in their personal income tax returns.
A minute book must be maintained in which all resolutions should be kept. This book serves as a record of the trustees’ decision making process and will assist with possible dispute resolution.
Potential tax issues associated with Trusts
The following trust related tax issues need to be considered and the advice of a tax consultant should be obtained when dealing with these issues:
- Tax consequences of interest free loans to trusts
- Tax effect of retaining income in the trust versus distributing it to beneficiaries
Trusts are set up for many reasons. Some of these include estate planning and safeguarding of assets for future generations. Trusts should not be set up purely for tax saving reasons. They are not cheap to run if properly administered. Founders should carefully consider their motives before setting up a trust and, once set up, trustees should ensure the trust assets and operations are totally separate from their personal financial affairs.
Sidney Penfold & Nicolette Weymouth
Accounting services, Durban