Make sure you make it clear who the trust beneficiaries are

WHO CAN BE a beneficiary of a trust?

Beneficiaries are those persons initially named by the founder in the trust deed and subsequently selected by the trustees from time to time, in terms of the trust deed stipulations, set by the founder.

Any natural person (unborn or alive) can be a beneficiary of a trust. If a minor (a person under the age of 18) is a beneficiary, he/she must be supported by a guardian when a beneficiary’s decision is required. Persons other than natural persons can also be beneficiaries of a trust; for example, trusts, juristic persons such as companies, associations, and so forth.

The founder of a trust may also be a trustee and/or a beneficiary of a trust. The founder is, however, not permitted to be the only trustee of a trust, due to the fact that a trust is a contract and a person cannot contract with oneself. This stems from the legal principle that a trust deed executed by a founder and trustees of a trust for the benefit of others is akin to a contract for the benefit of a third party, a beneficiary.

The same principle also requires a beneficiary to be a different person from the trustee. It is therefore clear that there could not only be one trustee and one beneficiary, who is the same person, as the principle makes it clear that the beneficiary has to be a third party.

Therefore, for this principle to be satisfied, as a minimum, there should be one trustee with at least two beneficiaries, or at least two trustees with one beneficiary. In a 1974 court case it was, however, held that the same person may be the founder, a trustee and a beneficiary of a trust.

Beneficiaries in discretionary trusts are generally widely defined, so as to allow the trustees to exercise their discretion in terms of the distribution of benefits from the trust. Typically, the founder will list his/her family as beneficiaries by name, together with their descendants, so that the trust deed does not have to be amended each time a beneficiary passes away.

Contingent beneficiaries should be stipulated in the trust deed should there be no living beneficiaries. The founder’s heirs should ideally be made the contingent beneficiaries. Sufficient consideration should be exercised by the founder to accommodate his/her personal circumstances.

There is no limit to the number of beneficiaries of a trust. It may be risky to create a long list of beneficiaries, especially if you are simply looking to show generosity or to win favour. Beneficiaries will become parties to the trust deed – a contract – and you may require their permission to amend the trust deed. Beneficiaries are usually defined as income and/or capital beneficiaries.

Income beneficiaries

Income beneficiaries may benefit only from the income generated and distributed by the trust. They have no expectation to benefit from the trust capital, whether it is a distribution of the actual trust assets or a gain from the realisation of the trust assets. Income beneficiaries will usually freely make use of trust assets (for example, a house). Where income is not distributed within a given year, it is usually capitalised to the trust capital. This allows the capital beneficiaries to benefit from this income in the future, at the expense of the income beneficiaries.

Capital beneficiaries

Capital beneficiaries benefit only from the distribution of trust assets, as well as profits from the sale of such assets. Capital beneficiaries typically receive irregular distributions, usually when trust assets are sold or when the trust assets are distributed to the beneficiaries.

Consequences of different types of beneficiaries

The estate planner can provide different benefits to different beneficiaries through the utilisation of these two types of beneficiaries. If there are different beneficiaries allocated to the two different types of beneficiaries, the trustees may experience difficulty ensuring that their actions do not prejudice either type of beneficiary, because their needs may be in conflict.

Selling an asset for a large profit, for example, may serve to benefit only the capital beneficiaries, if the trustees decide to distribute the total proceeds to the capital beneficiaries, instead of deciding to retain the asset in the trust to earn income, such as interest, which would benefit the income beneficiaries. This example illustrates the conflict between the two types of beneficiaries.

What benefits the one does not necessarily benefit the other. The apportionment of expenses to income and capital beneficiaries may also become a challenge when attempting to establish fairness. Ideally, to avoid conflict, the estate planner should ensure that the income and the capital beneficiaries are the same people.

Can trustees appoint beneficiaries?

Many trust deeds state that the trustees can appoint beneficiaries at their discretion at some point in the future. Such power exceeds the trustees’ specific power of appointment and may invalidate the trust. The founder should rather appoint the beneficiaries and name them in the trust deed, but leave it to the trustees to select which beneficiaries from those listed should benefit.

Can beneficiaries be added, replaced or removed from a trust?

Estate planners often create trusts and add beneficiaries, assuming that these beneficiaries can be removed or replaced over time. There are two problems with this assumption: During divorce, for example, the estate planner may recommend removing the ex-spouse as a beneficiary of the trust. It may be difficult to simply remove a beneficiary if he/she has already accepted benefits of the trust. That is when a beneficiary has received any distribution from the trust, and/or has merely written a letter to the trustees accepting his/her benefits. If this is the case, you may need his/her approval to do so.

The South African Revenue Service closed a loophole in 2002, since when individuals are no longer permitted to “sell” their trusts, which hold property, in order to avoid paying Transfer Duty. If you substitute or add a beneficiary to a discretionary trust, that holds residential property, Transfer Duty will become payable on this transaction.

Can a trust exist without beneficiaries?

A trust deed is akin to a contract for the benefit of a third party. The beneficiaries are the third parties, for whose benefit the founder and the trustees are contracting. Without beneficiaries a trust doesn’t exist.