The rules to follow when terminating a trust
SIMILAR to companies and close corporations, a trust may have a perpetual existence that is not attached to the life of a person. The fact that trusts can exist for generations is one of their core benefits. There are no rules that restrict the perpetuity of a trust, although, interestingly, it has been found that most trusts are deregistered after two generations of being handed down.
A trust will end at a time, or upon an event specified in the trust instrument. This is dependent on the wishes of the founder, which are reflected in the trust instrument.
It is important that the founder ensures that his or her wishes are reflected accurately in the trust instrument, in preparation for when he or she is no longer alive and unable to influence this decision.
Typically, trustees are given discretionary powers either to extend the termination date of the trust or to terminate the trust under specific circumstances.
Reasons for termination A trust can be terminated for the following reasons:
The trust assets have been fully distributed, making it uneconomical to continue with the trust.
The money remaining in the trust makes it uneconomical to continue with the trust.
The trust has served its purpose in terms of its stated objective. All the beneficiaries are deceased. The trustees are given the authority in the trust instrument to deregister the trust upon their decision, for whatever the reason.
Many of the older “vanilla” trust instruments stipulate that the trust will terminate upon the death of the founder, without this being the actual intention of the founder.
It is often the case that the trust founder does not read and fully comprehend the trust instrument before signing it, and as such, it does not reflect his or her true wishes.
Failure to read and fully comprehend the trust instrument can have dire consequences for future generations, with the objective of creating a trust in the first place being defeated, resulting in a legacy that should have been preserved for generations, being lost.
It is important to read the termination clause in your trust instrument – and correct it if necessary – while you are in a position to do so.
The trust instrument may provide for the termination of the trust at either a definitive future date, or an event, such as upon the death of the founder, or, alternatively, at a time and on a date determined by the trustees in their sole discretion.
The latter provision allows for greater flexibility and may serve to protect the interests of the beneficiaries from unknown future circumstances, which could adversely affect the continuation or termination of the trust.
The trust instrument should be observed to terminate a trust. It is unwise to not have a termination clause in your trust deed.
Failure to have a termination clause would mean that the interested parties would be forced to go to court to have it terminated, if they so wish.
Section 13 of the Trust Property Control Act also allows a “trustee or any person” having “sufficient interest in trust property” to apply to the court to end the trust, where the provisions of the trust are against the public interest, or jeopardise the beneficiaries’ interests or the trust’s objective.
In practice, the Master of the High Court favours the participation of beneficiaries in a decision to terminate a trust.
The trust deed should preferably pertinently state whether beneficiaries should be part of a decision to terminate the trust, or not.
Prior to the final distribution of the trust fund, the trustees must discharge all claims against the trust in respect any liabilities, including amounts owing to the South African Revenue Service and capital gains tax, where applicable.
Final statement Upon the termination of the trust, the trustees are required to prepare a final statement of administration and distribute the accumulated income, capital and other benefits accruing to the appropriate beneficiaries.
The balance of the income that has accrued but has not been paid out is added to the capital for distribution to the capital beneficiaries.
Although there are no statutory formalities, it is advisable to deregister the trust as a taxpayer and go on record with the relevant Master of the High Court that the trust has been terminated. Not formally terminating a trust with the Master may leave it open for abuse.
In the absence of any provisions in the Trust Property Control Act that require the deregistration of trusts, the Master of the High Court issued a directive in March 2017 detailing the requirements to be met when a trust is deregistered.
If the Master is requested to confirm the deregistration of a trust, it will close the file and confirm that the file was closed. This will take place when the Master has received the following documents from the trustees: reasons for the termination of the trust, or, where applicable, the original signed resolution terminating the trust. The resolution must: State whether the trust was dormant or active.
State whether a bank account was opened in the name of the trust, and if so, that it has been closed. Contain the original letters of authority. Contain bank statements reflecting a nil balance, or the final statements, or a letter from the bank confirming that the account has been closed, if a bank account was opened.
Contain proof that the beneficiaries have received their benefits.
Include an affidavit from the trustees confirming that the trust has been divested of all assets.
It is important to note that, following the termination of a trust, the trustees are required to retain all the accounting and financial records for five years (section 17 of the Trust Property Control Act).
If you are not sure what your trust deed stipulates, search for the termination clause (if any) in the trust deed and ensure it reflects your intentions for setting up the trust in the first place.
If you created a trust to leave a legacy, you probably do not want to allow it to terminate upon your death.