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Introduction
What is a trust? According to the definition given in clause 1 of the Trust Property Control Act 57/1988, a trust is the arrangement through which the ownership of property of one person is by virtue of a trust instrument made over or bequeathed to trustees or beneficiaries for the benefit of the class of persons designated in the said trust instrument. For the purposes of our Trusts we need only focus on the bequeathment applicable to trustees.


This definition only describes how a trust is formed, i.e. through a deed of trust where a donation is made by the founder to the trustees for the benefit of the beneficiaries. But what is a trust then? Is it a legal entity? No, it can best be described as a contractual arrangement where assets are held by a controlling party for the benefit of a third party. In our trusts the controlling party will always be the trustees and the third party the beneficiaries.

The type of trust we use is known as a discretionary inter vivos trust. Inter vivos meaning it is a living trust based on the principles of contract entered into and between parties that is alive at the inception date. The trust is discretionary, in the sense that all the rights pertaining to the trust are given into the hands of the trustees.

Reasons in law for trusts
Many reasons can be held forth for the creation of trusts, but only 2 stands out. These are asset protection and estate planning. Although a company can provide the same level of protection as a trust there is no estate planning benefits, as the shares of a company falls squarely into your own estate. The tax rules applying to companies are also much more stringent, for instance no distributions can be made, as to the company income, to the shareholders, to pay tax on in their personal capacities. Dividends have to be declared and a fixed effective rate of tax applies set at 34.55%.

Asset protection

Effective asset protection is gained from the type of trust that is used. The trust that offers the most effective protection is the discretionary inter vivos trust. All the rights in this type of trust are placed in the hands of the trustees. The beneficiaries have no rights and only a specie or hope of a benefit. Why is this? If a beneficiary is given a vested right to a benefit from the trust, the trust is immediately opened to creditors, as a vested right is attachable and can be ceded or loaned against. A vested right also forms part of the accrual principle in the Income Tax Act meaning that the income to be received is taxable regardless if you receive it or not. Thus by giving the rights to the trustees and always managing the trust with care diligence and skill as per clause 9 of the Trust Property Control Act the trust is protected from creditors. The trustees in their fiduciary capacity have only a limited liability pertaining to the trust i.e. gross negligence, fraud or mismanagement.

Estate planning

The Estate Duty Act places a benchmark of R 3.5 mil on the estate of any individual before estate duty tax is payable. If an individual's estate crosses the benchmark estate duty is payable. There are a couple of clever ways to circumvent this benchmark in the short term, for instance to make your spouse the sole beneficiary of your estate. This will not exempt you from estate duty tax forever though. If he or she passes away all the estate duty tax will be levied on his or her estate. The old saying goes ‘the only sure thing in life is death and taxes'. One scenario is an exception though. You don't have an estate; all your family assets and properties are held in trusts. A trust is exempt from estate duty as it does not form part of your estate and is seen as a separate contractual arrangement if it is structured correctly. This is where your independent trustee plays an important role together with your list of beneficiaries and intention that the trust continues ad infinitum as to the trustee's discretion. The most important point to take into consideration is that the trust must never seem to be an extension of your own estate, for instance you and you're spouse are the only trustees and beneficiaries (the court would currently also not register a trust structured in this way).

Treasury type trusts

Treasury Trust offers a couple of different trusts to its members. These trusts do not differ in the wording of the deeds or the type. They are all discretionary inter vivos trusts. How does this work? The reasoning behind this is simply that a discretionary inter vivos trust not only offers the most effective protection of any trust, but also as our deeds are written currently, offers the most fluidity and flexibility. There are no binding clauses in the deed; the trustees are free to act as they chose as long as they stay within the parameters of the Trust Property Control Act or any other statuary act and their dealings are always bona fide.

How do the trusts differ then? They differ in their goal and objectives, thus how they are used. Following is a short summary of the different types of trusts and their application.

Family Trust

This trust holds you're paid up assets and has absolutely no risk attached to it. It serves as a vault and a failsafe if something should go wrong. As the trust is structured correctly (discretionary inter vivos) and no risk is ever taken in the trust, no creditor can or should ever be able to attach any of the assets ever held in this trust. These assets are moved into the trust via either an individual's donations tax exemption of a 100k per year or a loan account. The only thing to keep a close eye on is the loan account from your personal estate to this trust, as the loan account becomes asset in your personal name. If you should go insolvent at any time and the trust is not in a position to pay the loan account back the trust itself may be sequestrated as per the court's decision in Magnum Financial Holdings (Pty) Ltd (in liquidation) v Summerley and Another NNO 1984(1)SA160W. This trust will always remain non-trading as well, due to the fact that while trusts trades interest must be levied on the loan account, thus while the trust remains non-trading there will be no interest on the loan account. The main goal of this trust is asset protection although estate planning also plays a role in the long term.

Property Investment Trust

This trust is where the Treoc Type property is bought in and held. There is risk in this trust as there are bonds on the properties. The property and family trusts thus stand central to the Treoc double trust structure – as a division between your assets and your liabilities. In order to qualify for a bond in this trust the banks will almost always insist on personal surety to be signed by the trustees (except the independent trustee). If you follow Coert Coetzee's methodology of refinance the trust will always have highly bonded properties and no real profit, as there should be shortfalls at all times. This will minimise any tax implication arising if the refinanced money stays within the trust as the interest on the bond is always a tax deductable from the rental with the levies and maintenance costs. If however you move the refinanced capital out of the trust, the part moved is non-tax deductable

You could also of course follow Robert Kiosaki's methodology and pay of the properties before you buy more.

Personally I would advise taking the middle road and only refinancing positive rental income, thus you are sure of the sustainability in terms of having the refinance granted by the banks as well retaining a manner of tax relief if you leave the refinanced capital in the trust or buy more property with it.

What will happen if for some odd reason we default on the bonds? The banks will surely sue the trust, wouldn't they? They will, but they can't sue the trust directly as the trust is not a legal entity, but a contractual arrangement. They will thus sue the party that holds the assets as stipulated by this arrangement, which in this case would be the trustees. In order to fix a claim against a trustee, mismanagement fraud or gross negligence has to be proved. The banks though, do not have to follow this route, as they already have a personal claim against the trustees that signed surety in their personal capacity.

So where are we now? The banks can hold you personally liable for the outstanding bonds as you signed surety. This is where your family trust becomes invaluable. All your assets are protected in the family trust and you have no assets in your name, thus the only thing you can lose is your name. If needs be follow the route of debt counselling and try your utmost best not be declared insolvent by a court order, as then you may no longer act as a trustee in accordance with clause 20(2)(c) of the Trust Property Control Act. If a trustee is declared insolvent it doesn't mean that he will lose his family trust, only that someone else (wife, family member) need to act as a trustee in his stead.

Another question that arises is do the creditors not have a claim against the family trust? The family trust is a different contractual arrangement to the property trust and they are only linked as beneficiaries. As the trusts are discretionary the beneficiaries may never have a claim against the trust, thus if the property trust runs into trouble a claim may not be lodged against the family trust.

The main goal of this trust, except for separating your liabilities from your assets is estate planning. One of the frequently asked questions is, if all my assets are protected in a family trust why can't I just buy the properties in my own name. The answer again is quite simple. The scenario above is playing at being devil's advocate. You should never be in a position where you may be held liable for outstanding bonds.

If everything runs smoothly and you manage to build a considerable portfolio before the end of your life, you could be facing a staggering amount of estate duty taxes if this portfolio is settled firmly in your personal estate. By buying all these properties in a trust or trusts you will manage to not pay a single cent of estate duty on the properties themselves.

Residential Trust

This trust is set up specifically to protect your family home or holiday home. Why do we need a different trust for these properties? To go back to our devil's advocate scenario, a property may be attached by creditors if there is enough equity in it. It goes without saying that property you yourself will be staying in will not be highly geared. There is no tenant to help you pay off the bond. All the bond repayments will thus be coming out of your own pocket. If you then take into account that equity will automatically be accruing in this property if you don't refinance it makes an attractive asset to any creditors if trouble should arise. By holding this property in a different trust you are effectively protecting it from any creditors.

The goal of this trust is thus twofold, asset protection as well as estate planning.

Share Trust

The shares of a company you own forms part of your estate, thus estate duty will be payable on them upon your death. Forming part of your estate the shares are also seen as an asset and creditors can actually attach the shares of your company!

Why can't we just hold these shares in a family trust? Two reasons, firstly dividends can be declared and paid out to the share holders. You do not want to trade as such in your family trust thus dividends becomes a problem. Secondly and may be more importantly, in some cases the shareholders of a company may be asked to sign surety. If this is the case in a certain scenario you will immediately bring risk into the family trust and negate its goal.

The goal of this trust is thus again asset protection as well as estate planning

Asset Trust

The assets of your company are held in this trust and then rented back to the company. The reason and goal of this trust is purely asset protection. If you should lose your company its assets do not form part of it and you basically have a ‘shell company'. Thus it is easier to begin a new company, as you still have your previous company's assets, than to begin from scratch.

Provider Trust

This trust's goal would be to use property as a long term investment by buying the property in trust but never refinancing thus creating a provider for old age.

The Role of Treasury Trust

Except for the structuring of the trust Treasury Trust still plays an important role in the administration and management of the trust. Treasury Trust Services fulfils the role of independent trustee and one of our affiliates Topaz Accounting the role of bookkeepers to the trust if they are engaged in this capacity by the client.

Although neither the Trust Property Control Act nor any other statute forces a trust to have an independent trustee, the Master of the High Court, has as a matter of best practice, pursuant to court cases like Land Agriculture Bank of South Africa v Parker 2005(2)SA(SCA) and more recently Thorpe v Trittenwein 2007(2)SA172(SCA), decided to not register a trust without an independent trustee. If for some reason a trust passes past the master without an independent trustee, and the other trustees are all beneficiaries, the trust will be declared a sham trust pursuant to the decision in the aforementioned Thorpe-case.

There is no obligation placed on the trustees to appoint an auditor in the trust by the Trust Property Control Act, but in practice the Master of the High Court insists that an accounting officer be appointed unless good grounds can be furnished why this should not be so (for instance all trustees should furnish security). Thus it is practically impossible to register a trust currently without an accountant being appointed.

Prepared by: Ryno Venter

Last modified on Tuesday, 02 July 2013 08:51

What is a Trust?

What is a trust? According to the definition given in clause 1 of the Trust Property Control Act 57/1988, a trust is the arrangement through which the ownership of property of one person... read more

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