Make sure you stick to the law so your trust is not a sham

2013-09-03 00:00

A TRUST is usually at the centre of clients’ estate plans, because it allows them to divest themselves of their assets for the benefit of loved ones. However, it also allows them to retain involvement in the administration of the trust and include themselves as beneficiaries who may benefit, usually at the discretion of the trustees.

No other single vehicle allows for this unique set of circumstances, thus providing an effective tax “avoidance” and asset protection structure. This occurs as long as the trust deed is properly drafted and a trust is administered pedantically.

Drafting the trust deed so as not to fall foul of the various anti-avoidance provisions in the Estate Duty and Income Tax Act is easily achievable. Here, a client engages a suitably experienced fiduciary specialist. However, where most clients sail their trusts directly into the wind is in the administration of the trust after its creation.

So where does it all go wrong? It is a well-established principle that no matter how well your trust deed is drafted, if it is not administered as a trust, independent from the client (usually the founder), it will count for zero. Our courts have had a field day in applying the “substance over form” doctrine, rendering trusts void from inception, because the trust is controlled by the client and effectively a sham.

So, how should one avoid the application of the substance-over-form doctrine? Ensure that the following principles are adhered to:

• Appoint more than one trustee, and at least three if the client who is placing the assets in trust is also a trustee;

• At least one trustee is not also a beneficiary of the trust (the so-called independent trustee, which is now a requirement before the master of the high court will register a trust);

• The trust deed provides for majority decisions by trustees, with no single trustee retaining a veto over decisions;

• No single trustee has the right to appoint and dismiss trustees;

• The founder or a trustee does not have the right to determine who receives trust assets in his will; and

• All decisions by trustees are properly recorded to reflect that all trustees applied their minds before (and not after) entering into transactions.

Ultimately, failure to apply any one of these principles will undermine the purpose of the trust and open it to attack.

Arno Goebel, Director: Trusts, Estates & Tax

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