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Law and Taxation of Trusts - Coggle Diagram
Law and Taxation of Trusts
Intro: Why popular
Estate Duty and CGT on Death:
sell/transfer growth asset to a trust, any growth in value will be excluded for estate duty purposes (swaps for frozen asset - Loan account)
Not owned by the client, so not subject to "deemed disposal" rules for CGT. In trust, so not a disposal.
Asset protection:
separate ownership and control from use and enjoyment. Not part of personal assets, so not part of insolvent or deceased estate. Not assets for divorce purposes.
Trusts can hold shares and other investments.
Testamentary Trusts:
Formed on death. Used to pass benefit to heirs and legatees rather than give full ownership.
Applicable Law:
Constitution of SA
Trust Property Control Act 57 of 1988
Other statutes - Income Tax Act, Alienation of Land Act.
Common Law - mainly developed through application of common law
Definition: Trust
A
legal relationship
created
by a
person
(founder, donor, settlor)
through
placing assets under control of another
person (Trustees)
during founder's lifetime (
Intervivos
trust) or
on death (
testamentary/
Mortis causa
)
for the
benefit of 3rd persons
(beneficiaries)
Defined ito Section 1 of Trust Property Control Act 57 of 1988
Two types of trusts by ownership:
Ordinary Trust
- Trustees own and control assets for benefit of beneficiaries (def a)
Bewind Trust
- Trustees merely manage and control assets, beneficiaries actually own the assets. (def b)
Parties to a Trust
Founder
/Donor/Settler
Trustee
- Responsible for administration.
Can also be a beneficiary, must act in best interests of all beneficiaries ito Trust Deed
Beneficiary
- Derive rights from the trust deed. Minimum 1 beneficiary.
Types of Trusts
1
Is founder alive (
inter vivos
) or dead (Testamentary/
mortis causa
)? :
2
Based on
rights of beneficiaries and ownership
:
Ordinary Trust
- trustee owns for admin purposes, not part of trustee's estate. Trustee can be beneficiary.
Bewind Trust
- beneficiary acquires ownership, but asset administered and under control of trustees
Discretionary Trust
- beneficiary has no vested rights. income and capital they receive determined by trustees at their
discretion
.
Vesting Trusts
- beneficiary has vested right to income and/or capital (determine which right).
3
Based on
where trust is formed
:
Local trusts v International (Offshore) trusts.
Local subject to jurisdiction of Master of the HC
International - not subject to the same. In country.
Legal nature of Trusts
Inter vivos
Crooks, NO and another v Watson and Others
Contract
for the benefit of a third person,
stipulatio alteri
Common law - trust not a legal person, but certain statutes like ITA include a Trust in definition of "person"
Testamentary Trust
not a "Contract" - arises on death of founder, created by last will and testament of a deceased person.
Braun v Blann and Botha NNO and another
accepted that testamentary trust not
fideicommissum
Formalities regarding valid Will applies.
Trust as a person
Common law does not recognise a trust as a legal person, but as contract.
Trustees have "bare" ownership of trust assets
Section 12 of Act states not part of trustee's estate
ITA and Companies Act includes Trust as (Juristic) person.
Bewind trust owned by beneficiaries, part of their estate.
Essentials for formation of valid trust
Intention by Founder to form a trust, expressed in a way that creates an obligation on trustees to administer the trust property for benefit of the beneficiaries
Object of Trust must be lawful
Beneficiaries must be clearly identified or described, otherwise is a nullity
Initial trust property must be defined with certainty
Binding obligation on trustees to administer assets obo beneficiaries
Trust object must be sufficiently certain, beneficiaries ascertained or ascertainable, or impersonal object (charitable trust) must be clearly defined
Testamentary trusts: Formalities relating to a valid Will must be complied with.
Requirements of Trust Property Act must be complied with - copy of trust deed lodged with Master, trustee can't act until authorised by Master to do so (letter of authority)
Consequence of valid trusts
control of asset passed from founder to trustees
trustees have obligations once established
nbeneficiaries have certain rights
beneficiaries and or planner don't control the trust or the
assets in their capacities as such
Family trust:
often owner's intention is to carry on controlling and owning asset as before
Alter Ego: Master may require independent trustees where all trustees are also beneficiaries of the trust
Business Trust:
maybe real intention to create partnership type structure
Will be inferred where beneficiaries seen to have direct or indirect control over trustees or trust assets, or trustees only beneficiaries of the trust.
Pierce the veil
Simply because a document refers to "establishment of a trust" master may disregard trust form if some other legal structure in fact formed. Ideally majority independent trustees, or resolve to require approval from independent trustee
Badenhorst v Badenhorst
- Veneer that in justice should be pierced in the interests of creditors and ex-spouse
Jordaan v Jordaan
- wife claimed assets in divorce, nature of husband controlling assets, no decision making, alter ego.
Section 3(3)(d) of Estate Duty Act
Property deceased has immediately before death that he was competent to dispose of for own benefit or for benefit of their estate.
"Competent to dispose of" includes ability to revoke or vary provisions of any trust (Section 3(5)(b))
Registration of trust deeds
registered with Master of the High Court
All info - full details and ID of trustees, where records kept, etc. Bank account details.
Master will determine if security required to be furnished.
May insist some trustees are independent.
Once satisfied, will assign reference number to trust deed and provide letter of authorities ito S6 of Act