A trust is a unique legal entity created to hold assets for the benefit of its beneficiaries. Trustees are entrusted to manage the trust’s affairs in favour of the beneficiaries according to the provisions of the trust deed. As a separate legal entity distinct from its founder, trustees, and beneficiaries, a trust safeguards all assets and liabilities from the personal estates of the beneficiaries and their creditors until the trust funds vest. This is why trusts have been integral to corporate and estate structuring since their inception as they provide long-term security to individuals and their families across generations.
Trusts are taxed at a flat rate of 45%. The conduit principle, however, allows income and capital gains to be taxed at the marginal rates of the beneficiaries in the event that the income and capital gains are declared in the same year that they vest in the trust. While this benefit is appealing, it has been subject to abuse and exploitation, bringing the administration of trusts under the watchful eye of the South African Revenue Services.
Using a trust therefore requires careful consideration within the broader framework of estate planning and corporate planning. The implications must be well understood, as assets become the property of the trust and cannot be dealt with as an alter ego of the trust founder or trustees. Failure to recognise this distinction may lead to piercing the trust veil, which occurs when ownership and control of the assets of the trust vest in the same party to such an extent that the trust becomes the alter ego of that individual. This may result in a trust’s existence being declared a sham thereby vesting the trust assets in the name of a beneficiary. This is particularly so in divorce proceedings where trust funds have in certain divorce scenarios been deemed to be the property of a beneficiary and included in the estate for calculation purposes.
In addition, the new General Laws (Anti-Money Laundering and Combatting Terrorism Financing) Amendment Act 22 of 2022 (“Amendment Act”) has introduced significant changes to the administration of trusts in an attempt to combat money laundering and terrorist financing. All trustees, including independent trustees, are now required to document and record the beneficial ownership structure of a trust and to lodge this with the Master of the High Court and keep records of the engagement of accountable institutions by the trust up to date. Failure to comply could result in a penalty of up to R10 million and/or 5 years imprisonment. The compliance requirements imposed by the Amendment Act most certainly ups the required level of administering a trust in accordance with applicable laws.
Another consideration to bear in mind is determining how a trust is to be funded. There are certain specific anti-avoidance rules that prohibit the impermissible transfer of wealth below market value between natural persons and trusts. The manner in which a trust is financed is of utmost importance to ensure that there are no negative tax effects for the trust, and quite possibly those parties connected to the trust.
When taking the above into account, in our view, a trust, if utilised correctly and with the proper purpose, remains an important tool for corporate structuring and estate planning and can provide vital benefits and safeguards. However, it is not always the answer, as each client’s unique situation and overall objectives must be considered. However, a trust still offers benefits and will continue to remain relevant in estate planning and corporate structuring, but note must be taken of the increasing administrative responsibilities that now also accompany a trust.
If you’re contemplating setting up a trust or need a comprehensive review of your existing trust, estate, or corporate planning, or if you’re unsure about complying with the latest trust requirements, reach out to our dedicated Tax Advisory or Trust Office Team today. Let our experts guide you through every step.
Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).
