1. Welcome

2. .
TRUSTS: A BENEFIT OR A
LIABILITY?

3. What is a Trust?
• A Trust is NOT like a company or cc
• A Trust is a contract – a stipulatio Alterii
• Some basic terms that will be used in the
discussion’
– Founder
– Donor
– Trustee
– Beneficiary

4. Benefits of a Trust
• A trust should not be set up purely to avoid tax
• Preservation of wealth
– Example: a farm or holiday house passed from one
generation to the next. – EDT and CGT
• Protection of people and promotion of causes
• Continuity
• Death Duties made up of
– Deemed CGT
– Exec fees
– Estate duty tax

5. Example
• Client purchased a property in Plett in 2003
for R1,8m. The property is now valued at
R8m.
• Savings so far are;
– CGT – R6,2m x 10% = R620,000
– Exec fees – saved R6,2m x 3,99% = R247,380
– EDT – R6,2m x 20% = R1,240,000
– Total saving of R2,107,380

6. Benefits of a trust
• Income tax, Capital gains tax and donations tax
• Donations tax.
– If a natural person makes a donation greater than
R100k then donations tax.
– From a trust then no donations tax.
• Income Tax and capital gains tax in the trust –
discuss at a later stage.

7. Disadvantages of a trust
• In order for a valid trust to come into existence the
donor must hand over ownership and control to
the trustees.
• The trustees become owners of the asset.
• Decision making is now made in terms of the deed
and not by 1 trustee ie the original donor.
• Costs: Banks normally charge between 1 – 2% of
capital. Sentinel at R11k per R10m tranche

8. Examples
• Jordaan v Jordaan & Badenhorst v
Badenhorst
• These are examples where the donor did not
relinquish control of the assets.

9. Taxation of Trusts
• Income tax and capital gains tax
• Distribution to beneficiaries – Sect 25B &
para 80
• Attribution – Sect 7 & para 68 - 72
• Taxation in the trust at 40% and 20% CGT

10. Example
• Ian and his wife Leigh-Ann have 3 children, namely Lisa
20, Paul 18 and Greg 16. Ian and Leigh-Ann are both
employed and both earn in excess of the maximum
marginal rate of 40%. Lisa and Paul are both at university
and have no source of income and Greg is still at school.
In order to minimise his death duties and on the advise of
his tax advisor Ian established an inter vivos trust. He
transferred R5 million in cash and other growth assets to
the trustees and they in turn invested it in various
portfolios. At the end of the financial year the trust had
earned R120,000 in taxable income.

11. Example continued …
• Before the Act changed the tax position would have been as follows;
• If the trustees had distributed the income to any or all of the children
then the full amount distributed would have been taxed in Ian’s hands
at 40% ie R120,000 x 40% = R48,000. Ian would then pay the
university education with this post tax income ie R72,000
• If the trustees had distributed the income to Ian or Leigh-Ann then the
income would have been taxed in their hands at 40% and Ian or
Leigh-Ann would still have to pay the university education with this
post tax income.
• If the trustees had elected to retain the income in the trust then owing
to the attribution rules of section 7(5) the full R120,000 would still
have been taxed in Ian’s hands.

12. Example continued …
• After the 1 July 2007 the tax position is as follows;
• The trustees can now distribute income to Lisa and Paul as
they are both over 18. They would each receive R60,000
which they need to declare in their tax returns. Owing to
the fact that they receive no other income their tax
liability would each be R3,060. Therefore their combined
tax liability amounts to R6,120 which is R41,880 less than
if it was taxed in Ian’s hands. Both Lisa and Paul can now
use these funds to pay for their education.
• There is now no need to distribute to Ian or Leigh-Anne or
to retain the income and tax it in the trust.

13. Trusts and your will
• Don’t take it for granted that you can
automatically bequeath assets to your IV trust. If
the definition of beneficiaries are too wide the
bequest could fail Braun v Blann & Botha.
• Leaving the primary abatement to an IV trust.
• Nominating a replacement trustee
• Great opportunity to transfer fixed property as
there are no transfer duties.
• Section 9(4) of the transfer duty act

14. Inter Vivos v Testamentary
• Pro-active planning v Re-active planning
• Testamentary trust is more ridged and it
cannot be altered
• IV Trust is normally open ended with regards
to vesting date whereas a TT usually has a
fixed vesting date
• TT could be classified as special trusts and
taxed at the beneficiaries tax rate (must be
below 21)

15. Existing trusts
• Dynamic document that must be reviewed
regularly. Tax laws and trust laws change.
• Experience at least 9 out of 10 trusts either
have wrong clauses or are missing clauses.

16. Examples
• The trust deed is drawn up in such a way that the trustees are
subject to the control of the founder in exercising their duties. The
result is that, although the founder gives up control in form, in
substance this is not the case.
• i) “The trustees have the authority to nominate and appoint
additional trustees of their own choice subject to the following:
– During his/her life Mr A has the exclusive right to nominate trustees for
the trust of his choice or to remove trustees at his discretion.”
• The mere fact that a founder has the right to appoint or remove
trustees should not in itself indicate that the founder/donor never
intended to give up control of the trust assets. As long as the
appointment is in the best interest of the beneficiaries, and not to
protect the interests of the founder/donor, then the substance of the
trust should not differ from its form.

17. Examples
• “Notwithstanding anything to the contrary
herein contained, for as long as Mr B acts as
a trustee he shall be entitled to veto any
resolution proposed by the trustees.”
• Where the veto right is structured
positively in the sense that one of the
trustees (who is also a beneficiary) can
overrule the rest then this will have negative
implications with regards to income tax,
capital gains tax and estate duty tax.

18. Examples
• “All resolutions by the trustees will be taken
by a majority vote provided that the vote of Mr
B is one of the majority votes.”
• Where the right is structured as a ‘negative
veto right’ it appears as if this right does not
bring section 3(3)(d) or section 7(6) and
section 71 into operation.

19. Example
• “Mr C has the right to act alone in all matters
concerning the trust without consulting the
other trustees.”
• Once again this veto right is positively
structured in the sense that one of the
trustees (who is also a beneficiary) can
overrule the rest. This will have negative
implications with regards to income tax,
capital gains tax and estate duty tax.

20. Example
• “ It is determined specifically that Mr D will have the
right to, in his will, prescribe the formula for the
distribution of Trust assets amongst the principal
beneficiaries at the termination of the trust, and this
indicates which part of the assets will go to which
beneficiary and these allocations need not be equal
in size, value or extent.”
• If Mr D is the donor/founder, trustee and also a
beneficiary (especially a capital beneficiary) then it
appears as if this clause falls within the scope of
section 3(3)(d).

21. Example
• Testamentary clauses often have the following supplementary
clauses added to neutralize the estate duty tax implications.
• “Notwithstanding anything else to the contrary stated in this
deed, no trustee shall at any time qualify as an income or capital
beneficiary of this trust or receive any benefits as such for so
long as he is competent to dispose of trust property for his own
benefit or for the benefit of his estate in the spirit and wording of
section 3(3)(d) of the estate Duty Act No 45 of 1955 or any later
amendment thereof.
• “The reservation of the testamentary power shall never be
interpreted in such a way that the conclusion be drawn that the
donor/founder/trustee (who is given the right) has the right to
allocate the trust income or capital to himself or his estate.”
• Although the above clauses will neutralize the estate duty
implications they do not have the same effect with regards to the
income tax and estate duty tax implications.

22. Getting assets into a trust
• Donate but will attract donations tax at
20%.
• Interest free loan.
• Bequest in terms of a will

23. Trust and Divorce
• If a spouse has received a benefit at any time
in the past then they become a party to the
stipulatio alterii.
• This means that the trustees cannot
unilaterally remove.
• Trustees were removed due to animosity
between trustees & beneficiaries. Erasmus &
Others v Venter & Others.
• Control of trusts: Jordaan & Badenhorst

24. Role of independent trustee
• Now required in terms of decision of
Land & Agr bank v Parker
• Shouldn’t just appear in name
• Must be party to all decisions and
should attend all trustee meetings
• His/her conduct could show if the trust
is a bona fide trust or a sham

25. Roles and duties of a trustee
• ensure that the trust property is adequately insured
• funds are properly invested by measuring fund managers performance
to approved benchmarks
• determine the short, medium and long term income and capital needs
of the beneficiaries
• ensure that the provisions of the trust deed are complied with and
upheld at all times
• ensure that all the trusts’ statutory requirements are complied with
• prepare and maintain a trust asset register (investments and fixed
assets)
• conduct trustee meetings (annually, bi-annually or quarterly)
• record minutes of the trustee meetings and investment decisions
• maintain and safekeep the minute book
• ensure loan agreements are kept