Which laws af­fect trusts in South Africa?

TRUST PROP­ERTY CONTROL ACT

Saturday Star - - P E R S O N A L F I N A N C E - PHIA VAN DER SPUY

TRUSTS be­came part of South African law af­ter the Bri­tish oc­cu­pied the Cape in 1806. South African trust law, as we know it to­day, was de­vel­oped in­cre­men­tally as a com­bi­na­tion of English law, Ro­mandutch law and South African rules.

The gov­ern­ment is work­ing on im­prov­ing the reg­u­la­tion of trusts. The law of trusts is not con­tained in any sin­gle set of leg­is­la­tion. Trusts in South Africa are, in fact, largely un­reg­u­lated, which fre­quently leads to their abuse.

The main statute that gov­erns South African trust law is the Trust Prop­erty Control Act of 1988, which reg­u­lates cer­tain ad­min­is­tra­tive as­pects re­lat­ing to trusts. South African trusts are also gov­erned by the In­come Tax Act, Es­tate Duty Act and com­mon law.

Trusts can also be gov­erned by a par­tic­u­lar statute. For ex­am­ple, the Com­pa­nies Act en­vis­ages a trust to hold shares that have been is­sued but not fully paid for, and the Fi­nan­cial In­sti­tu­tions (Pro­tec­tion of Funds) Act pro­vides for the safe cus­tody and ad­min­is­tra­tion of trust prop­erty by fi­nan­cial in­sti­tu­tions.

A trust is not an in­de­pen­dent en­tity or ju­ris­tic per­son that can be owned, sold, or trans­ferred as would be the case with a com­pany or a close cor­po­ra­tion.

A trust does not have a le­gal per­son­al­ity, be­cause it is sim­ply an ac­cu­mu­la­tion of as­sets. Be­cause of this, a trust can­not own prop­erty. Any prop­erty held in trust is held by the trustees in their ca­pac­ity as trustees.

A trust can­not be sued, be­cause it is not recog­nised as a le­gal per­son in South Africa, un­less a statute de­fines it as such. The Deeds Reg­istry Act, Trans­fer Duty Act, Value Added Tax Act and the In­sol­vency Act af­ford a trust le­gal per­son­al­ity. The trustees, in their of­fi­cial ca­pac­ity, can be sued, how­ever.

De­spite its lack of le­gal per­son­al­ity, a trust has le­gal ca­pac­ity, and the trustees may per­form ju­ris­tic acts, pro­vided the trust in­stru­ment al­lows this.

The fol­low­ing leg­is­la­tion is im­por­tant for trusts: The pur­pose of the act (ac­cord­ing to its pream­ble) is to reg­u­late the control of trust prop­erty, and to pro­vide for mat­ters re­lat­ing to it. Much of the act is aimed at es­tab­lish­ing firmer control over trustees and their ad­min­is­tra­tion of the trust.

Al­though the text of the act is not di­vided into chap­ters, the fol­low­ing as­pects are cov­ered: Def­i­ni­tion clause; Doc­u­ments deemed to be trust in­stru­ments;

The role of the High Court in re­spect of trusts and trustees; The role of the Mas­ter of the High Court in re­spect of trusts and trustees;

The du­ties of trustees; and

The pow­ers of ben­e­fi­cia­ries or in­ter­ested par­ties.

IN­COME TAX ACT

Be­fore 1998, trusts were not de­fined as tax­pay­ers un­der the In­come Tax Act, un­like in­di­vid­u­als and com­pa­nies. This gave rise to a con­sid­er­able amount of abuse of trusts for tax-sav­ing pur­poses. The gov­ern­ment has since made var­i­ous amend­ments to this act to com­bat these prac­tices.

The In­come Tax Act sees a trust as a “per­son” for tax pur­poses. All trusts must be reg­is­tered with the South African Revenue Ser­vice (Sars), as a re­sult of this def­i­ni­tion.

Var­i­ous tax­a­tion sec­tions and anti-avoid­ance mea­sures have been in­tro­duced re­lat­ing to trusts. Sars is re­view­ing trusts, and es­tate plan­ners should stay abreast of any changes that may af­fect them.

ES­TATE DUTY ACT

Sec­tion 3(3)(d) of the Es­tate Duty Act is rel­e­vant where the trust in­stru­ment con­tains a pro­vi­sion that em­pow­ers the de­ceased, im­me­di­ately be­fore his or her death, to:

◆ Ap­pro­pri­ate or dis­pose of prop­erty.

◆ Or re­voke or vary the pro­vi­sions of any do­na­tion, set­tle­ment, trust, or other dis­po­si­tion made by him or her for his or her own, or his or her es­tate’s ben­e­fit.

A trust deed may typ­i­cally con­tain clauses that at­tempt to pro­tect the es­tate plan­ner, such as the in­clu­sion of a cast­ing vote, a tes­ta­men­tary reser­va­tion, etc.

In­stead of pro­vid­ing the nec­es­sary pro­tec­tion for the es­tate plan­ner, it will rather com­pro­mise him or her. In such a case, the trust prop­erty will be in­cluded in the es­tate of the de­ceased as deemed prop­erty and at­tract es­tate duty; so it is im­por­tant to be mind­ful of in­sert­ing prob­lem­atic pro­vi­sions when you draft your trust deed.

It is not even a re­quire­ment that the es­tate plan­ner in fact ben­e­fited from such favourable pro­vi­sions; the mere fact that such a per­son had the abil­ity to deal with the as­sets in the way en­vis­aged in the act, the day be­fore he or she dies, will re­sult in the as­sets be­ing in­cluded in the es­tate of such a per­son upon death.

If you have reg­is­tered a trust, re­view and amend your trust deed and re­move any pro­vi­sions which may im­pact your es­tate neg­a­tively, es­pe­cially if you have not made pro­vi­sion for ad­di­tional es­tate duty and cap­i­tal gains tax payable on your death, as a re­sult.

There are bet­ter ways to struc­ture a trust deed to pro­vide the es­tate plan­ner with some level of in­flu­ence with­out fall­ing foul of this oner­ous pro­vi­sion of the Es­tate Duty Act.

COM­MON LAW

Com­mon law is the body of law de­vel­oped by judges and courts. The defin­ing char­ac­ter­is­tic of com­mon law is that it arises as le­gal prece­dent that can be ap­plied to sim­i­lar sit­u­a­tions.

To­day, one-third of the world’s pop­u­la­tion live in com­mon law ju­ris­dic­tions, or in sys­tems mixed with civil law. Ow­ing to the lim­ited leg­is­la­tion re­lat­ing to trusts in South Africa, huge reliance is placed on le­gal prece­dent re­lat­ing to the treat­ment of trusts.

Phia van der Spuy is a reg­is­tered fidu­ciary prac­ti­tioner of South Africa, a mas­ter tax prac­ti­tioner (SA) and the founder of Trus­teeze, which spe­cialises in trust ad­min­is­tra­tion.

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