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Amendment and variation of Trust Deeds - Coggle Diagram
Amendment and variation
of Trust Deeds
Amendment: Testamentary Trust
s13
Generally can't vary because there is freedom of testation
but if testamentary trust has discriminatory provisions offending the constitution, court can delete offending parts from the trust deed.
also if unforeseen consequences the founder did not contemplate
Amendment:
Inter vivos
trust
Generally, Court does not have power to vary contracts, although s13 applies to these
Hofer and others v Kevitt and others
referred to
Crookes NO and another v Watson and others
where accepted that a trust
inter vivos
is a contract for the benefit of a 3rd person and can be varied between the trustees and the founder
unless beneficiaries have accepted the benefit stipulated for them, then any amendment needs their approval
In
Potgieter and another v Potgieter NO and others
clause 2 specified trustees could amend capital beneficiaries with Founder's consent during his lifetime
added new beneficiaries without consulting existing beneficiaries and without their consent.
Court found that the guardian had accepted the benefit on the beneficiary's behalf, therefore no amendment was possible without prior consent.
Joubert and others v Joubert and Others
it is in the very nature of a
stipulatio alteri
that a 3rd party who accepts benefit of a contract can't do so electively, but subject to limitations and onerous provisions.
This includes the reservation of the right to vary the terms of the trust, the beneficiaries will accept the benefit
subject to the limitation
.
Contracts for a trust to be formed
S6 says trustees can't act without authority to act from Master
Possible solution to make contract in favour of 3rd party -
stipulatio alteri
- where client contracts in writing with the trust once trustees have been duly appointed and authorised to accept the benefits under the contract.
Transfer of immovable property may result in
double
transfer duty
- to person who accepts and then gives right up to trustees
Advantages of trusts
Asset protection - creditors, divorce
protection subject to normal insolvency rules re impeachable transactions
trust assets could be exposed to claims of creditors if sold assets on loan account. Loan account in trust is asset of sellers.
On insolvency, creditors could look to trust assets to settle the loan account.
Estate Freezing
particularly used in
Inter vivos
discretionary trusts
Estate duty savings only applicable to discretionary trusts
as they don't confer real rights on to the beneficiary
S3(3)(d) is important
Efficient succession
Death of beneficiary does not impede other beneficiaries
Trust assets not part of deceased beneficiary's estate for estate duty or admin
Trust rather than usufruct or other limited interest in property
a limited interest over property is an asset of that holder, and will have to be valued (for ED purposes) over lifetime of person who will acquire that right.
Discretionary Trust could allow annual use of asset, then exercise discretion for another beneficiary in the event of death
Multiple owners of assets
immovable property
*e.g., difficult to subdivide farm, can have several beneficiaries with different rights of use over various parts of farm.
Future generations
Protects heir/legatee from bad marriages, creditors, bad business decisions
can build in ability to distribute assets to beneficiary/ies if required
can be set up for perpetuity - perpetual succession
Use of trusts to receive lump sums
useful to receive lumpsum from retirement funds for young, incapacitated beneficiaries.
Similar to beneficiary funds under PFA, however may only pay to Trust under specific circumstances under Section 37C
Tax uses
if no living person made a donation, settlement or other disposition (s7 of ITA), it is possible to split income by distributing income or capital gains to a beneficiary, ensuring the beneficiary is taxed and not the trust.
reduces the tax rate (trusts taxed at higher % than natural person)
Disadvantages of Trusts
Duties on trustees
onerous, Skill requirement very high. Beneficiaries can be demanding.
Control
Founder must give up control for trust to be effective/Valid
Otherwise does not meet requirements ito S3(3)(d) to be excluded
could also be deprived of an asset or income during own lifetime if relationship with Trustees deteriorates
Trust could result in hardship - beware!
Taxation of trusts
Definitions and rates
Definitions
Person
, includes trust, separate entity apart from trustees and beneficiaries.
As a person, a Trust can become liable for CGT.
Connected person
includes beneficiary of that trust, relative of this beneficiary, other trust of which beneficiary or relative is a beneficiary
Trust
Defined as including a written, verbal,
inter vivos
and testamentary trust. Regarded as trust even if not such ito Trust Property Control Act.
Tax rates that apply
Individuals and Special Trusts - 18%, Companies 21.6% (was 22.4%), Other trusts, 36%
Special Trust
rules that apply to Special Trusts differ from those of Ordinary Trusts
Two types of Special Trusts for tax purposes and one type of special trust for CGT purposes
Does not qualify for ITA rebates, medical tax credits or interest exemption
1) Disability special trust
Set up for benefit of 1+ disabled persons (18.3 of ITA)
must be relatives in relation to each other.
Not special trust in YOA ending on or after date all such persons deceased
Entitled to R40k/Primary Res/Personal use asset exclusions
2) Under 18 special trust
Testamentary Trust solely or benefit of beneficiaries who are:
relatives in relation to deceased
who are alive on the date of death, including conceived but not yet born,
where youngest is on last date of the YOA under age of 18
Not recognised as special trust for CGT purposes
except to extent that inclusion rate applicable to the trust is 40%.
Won't qualify for the:
R40 000 annual exclusion
Primary residence exclusion
Personal use asset exclusion