If you believe you have set up a valid trust, think again if any of the 10 points below give you sleepless nights…
In a recent article (“What to do about loans to trusts”), I discussed the new section 7C of the Income Tax Act and the effect on loans to inter vivos trusts in particular.
It is relatively simple to set up an inter vivos trust and to comply with statutory law so as to have a legal trust on the face of it. However, in the light of case law where certain trust structures have been exposed as a ‘sham’, or the alter ego of the estate planner, as well as the Davis Tax Commission’s focus on trusts as a possible source of wealth tax, and the introduction of donations tax on interest-free or low interest loans, it is essential that the spirit of trust law is upheld as well.
It is not enough that ownership of assets changes from the settlor or estate planner to the trustees, but actual control of the assets must pass, as well. To this end there are a number of matters that require proper attention, as failure on one or more of them could raise a ‘red flag’, leaving the structure open to attack by creditors, the courts, the tax authorities and the regulatory authorities.
- The most recent letters of authority must contain the names of all current trustees. Are all the trustees still competent to act as trustees and does the number of trustees in place comply with the required number in terms of the deed? Make sure changes to trustees are registered with the Master of the High Court as soon as possible.
- The trustees must act in the best interest of the beneficiaries – put them first, before the interests of the trustees. Principles of TCF (treating customers fairly) should be adhered to. The fiduciary standard of care is higher than the ordinary standard of care expected from people.
- Does the trust own and operate its own bank account? Does the trust balance sheet clearly indicate the assets and funds managed and controlled by the trustees on behalf of the beneficiaries? Are records of all financial transactions available?
- Is the trust registered with the SARS as a taxpayer with its own unique reference number? Taxes should be up to date.
- Is there at least one independent trustee; that is, a trustee who is not related to the beneficiaries or their spouses/life partners? The recommendation in Land and Agricultural Bank of SA v Parker & others 2005 (2) SA 77 (SCA) has been reinforced by the Chief Master in circular 2 of 2017. In future the Master should require the appointment of an independent trustee where the trust is set up for family business and the trustees and beneficiaries are all related to one another. In our view, it is prudent to have an independent trustee in all cases.
- Are proper annual financial records being kept by the trustees? Does the trust require auditing in terms of the deed? Are minutes of meetings recorded and signed off by the trustees? Trustees should meet at least once a year – depending on what the deed says.
- Has a resolution or agreement been signed by the lender and borrower in the case of loans to and from the trustees? Has the issue of whether interest will be charged and at what rate, been recorded?
- Does the trust deed contain veto-type clauses that give too much arbitrary control to one trustee – in particular the estate planner or settlor?
- The trustees must diligently comply with FICA, FATCA (Foreign Account Tax Compliance Act) and other similar law.
- Is there anything, such as a term or condition of the trust deed, or the manner of behaviour of the trustees, that indicates that the settlor or estate planner ‘pulls the strings’ and the other trustees are just passive and compliant?
Remember never talk about “my trust”. We are all guilty of this, but it is not correct. Trust property is not part of your personal estate, as long as you comply with the law.
Article written by David Thomson, Senior Legal Adviser, Sanlam Trust
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