In layman’s terms, business trusts are a legal arrangement created to hold and manage assets for the benefit of individuals or entities
There are a number of ways in which different types of business trusts are classified in South Africa and deciding on the most appropriate structure for your business needs can sometimes be tricky. This week we will look at some of the most popular trust structures and familiarise ourselves with the legal terminology used by professionals.
What is the legal nature of a Trust?
In South Africa, business trusts are governed by common law and the Trust Property Control Act, 57 of 1988, and are registered with the Master of the High Court.
In layman’s terms a trust can be described as a legal arrangement or instrument which is created to hold and manage assets for the benefit of certain individuals or entities (beneficiaries). A trust is not a juristic (legal) person, but there are times when, in certain statutes, a trust is regarded as having a separate legal identity (for tax purposes in terms of the Income Tax Act and the Companies Act, for example).
The term ‘trust’ simply describes the fiduciary arrangement or relationship between the parties, being the founder and trustees.
What are the different types of Business Trusts?
South African law recognises three types of trusts:
1. Ownership Trust: The trust founder transfers ownership of assets or property to a trustee(s) to be held for the benefit of defined or determinable beneficiaries of the trust. This is the most common form of a trust and is also known as an “ordinary trust”.
• The assets will remain within the trust and vest in the trustees to manage on behalf of the beneficiaries
• The rights of the beneficiaries in respect of the trust assets are usually determined by the trust deed.
2. Bewind Trust: The founder makes a bequest to the beneficiaries and vests the administration of the assets in the trustees.
• The assets vest in the beneficiaries.
• The trustees only have administrative control of the trust assets which they manage for the benefit of the beneficiaries until the assets are transferred to the beneficiaries.
3. Curatorship Trust: Similar in structure to the bewind trust, except that the assets are administered on behalf of a beneficiary who does not have the capacity to manage his/her own affairs.
How can you distinguish the nature of one trust from that of another?
• Inter Vivos Trust – created by and between living persons through an agreement;
• Testamentary Trust – created in terms of a will;
• Discretionary Trust – this type of trust gives the trustee(s) discretionary powers as to how and when to allocate the income or capital of the trust to the beneficiaries;
• Vested Trust – trustees are not given any discretion in the deed, and beneficiaries and their benefits are fixed and predetermined.
(It should be noted that different tax requirements apply in respect of these trusts.)
What is needed when structuring Business Trusts?
• FOUNDER: Person/Entity who forms a trust in order to transfer ownership of assets/funds.
• TRUSTEES: Those who administer and control the trust’s assets for the benefit of the beneficiaries.
• BENEFICIARIES: Those who benefit from assets can be either income or capital beneficiaries who can have vested or contingent rights.
• TRUST DEED: The trust deed defines the framework in which the trust must operate, including the powers, duties and limitations of trustees. The main provisions specified in the trust deed should include the following:
o Objectives of the trust
o Names or class of the beneficiaries and whether they are income or capital beneficiaries or both
o Rights, obligations, power and duties of trustees
o Rules and restrictions regarding the distribution of income and capital
o Duration and procedure on termination of the trust
o Procedure for trust amendments
o Requirement for trustee meetings
o Requirements for trustee appointment, removal or replacement.
When is a Trust valid?
• The founder must have the intention to transfer control of the asset
• Trustees must be capable of fulfilling their fiduciary duties
• The objective must be clearly stated and lawful
• The beneficiaries must be clearly identified.
The role of a trust is to fulfil the timing requirement, i.e. when it is supposed to commence operating. The tax requirements applicable will determine the most appropriate type and nature of trust instrument to be set up. SERR Synergy specialises in unique ownership solutions, including the structuring of ownership trusts, collective ownership structures as well as family trusts. It is important to note that B-BBEE ownership trusts are partially NON-discretionary (compulsory or vesting) and have their own unique recognition.
About the Author: Sanet van Zyl joined SERR Synergy in June 2014 as the Trust and Corporate Advisory Manager. She specialises in Ownership structures, which includes ownership trusts, collective ownership structures and trust administration.
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