When and how can trustees make distributions to beneficiaries?
NO BENEFICIARY has a right to any distribution in a discretionary trust. An individual may be defined as a beneficiary, but he/she is not entitled to any distribution until such time as the trustees have approved such a distribution.
The trustees should observe the trust deed and its stipulated procedures to ensure that all requirements are met when distributions are made/ approved.
These procedures include the required notices for meetings, agendas, what constitutes a quorum to make decisions, procedures at meetings, whether decisions should be unanimously approved by trustees or by a majority of trustees (one can set different requirements for different distributions, such as a majority decision for smaller amounts and unanimous decision for large capital distributions)’ approval of minutes’ who can make payments and finally, arbitration provisions in situations where decisions cannot be reached in terms of the trust deed.
Usually the trust deed provides for the distribution of cash or “in specie” distribution (distribution of an asset in its current form, instead of selling it and distributing the cash proceeds).
The trust deed should provide for the ways in which the founder envisages these distributions to be made.
Should the trustees decide to utilise the conduit principle to make distributions to beneficiaries, with the aim of taxing any related income and/or capital gain in the hands of the beneficiaries rather than in the hands of the trust (at a higher tax rate), the definition of “vest” (as required by the Income Tax Act) should be understood.
The legal definition of a “vested right” as required by the SA Revenue Service (Sars) is “a right belonging completely and unconditionally to a person as a property interest, which cannot be impaired or taken away without the consent of the owner”.
It is important to remember that in terms of the conduit principle, trustees must approve such distributions to the relevant beneficiaries before the end of the trust’s financial year, the end of February each year.
Many trust deeds incorrectly deem the approval of a distribution after February to fall into the previous year. This will not be accepted by Sars.
To make use of the conduit principle, trustees should meet before the end of February and ensure that any distributions are made to fall within the year ending on the last day of the month. Should they fail to make the distributions within the tax year (March to February), tax will be payable on the related income or capital gain in the trust at a higher tax rate when compared to the beneficiary’s possible lower tax rate.
The trustees have similar duties to the directors of a company to ensure that the trust is both solvent and liquid after distributions are made to beneficiaries. A trust is solvent if the total value of its assets exceeds its liabilities.
A trust is liquid if it is in a position to settle debts in the foreseeable future, for example within the following 12 months. The trustees will be required to create financial projections to satisfy this requirement. These assessments should be recorded and attached to a distribution resolution.
When you set up a trust, ensure that the trust deed contains adequate provisions for the making of distributions to beneficiaries. When the trustees consider making distributions to beneficiaries, they should observe these provisions in the trust deed, otherwise it may be declared null and void.
Van der Spuy is a registered fiduciary practitioner of SA, a master tax practitioner, trust and estate practitioner and founder of Trusteeze, a professional trust practitioner.