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The process of setting up an inter vivos trust

There are far-reaching financial and legal implications of setting up a trust.

If you’re considering setting up a living trust, bear in mind that it is an administratively intensive process that requires you to follow the strict procedures set out in terms of the Trust Property Control Act. Further, it is important to ensure that such a trust is appropriate for your estate planning needs and is fit for purpose, keeping in mind that there are far-reaching financial and legal implications of setting up a trust.

Identifying the purpose of the trust

A living trust can serve a number of purposes, so it is important to consider upfront what it is you wish to achieve by setting one up. An inter vivos trust can be used to protect or preserve an asset for the benefit of one or more beneficiaries over a period of time, such as in the case of a family farm that the trust founder wishes to protect for future generations. A trust can also be used by the founder to protect their personal assets from their business activities by transferring certain assets, such as the family home, into a trust to protect the asset from potential creditors.

A living trust can also be used to reduce estate duty by transferring growth assets into the trust. For instance, by selling a property to the trust, all growth on the property will remain in the trust and only the loan account to the seller is repayable on death. As such, living trusts are popular vehicles for housing investment property portfolios. Whatever the purpose of your trust is, your trust deed must be clear with respect to its purpose and objectives – in the absence of which your trust may not legally exist.

Deciding on the type of trust

Once you are clear on the purpose of your living trust, you will need to decide whether a vesting or discretionary trust is most appropriate to your needs. In a discretionary trust, the trustees exercise discretion in respect of the quantum and timing of the income and/or capital paid to the beneficiaries within the framework of the trust deed. On the other hand, in a vesting trust, the income and/or capital gains vest in the beneficiaries.

Naming the trust

The next step is to determine an appropriate name for your trust and, in this regard, you have the freedom to choose any name you deem fit. Remember, your trust will be registered with the Master of the High Court and not with the Registrar of Companies, meaning that you do not need to reserve a name for your trust.

Transferring the assets

In order for a trust to be formed, there must be a handing over of the trust property by the founder to the trustees. In this regard, the authorities are clear that the trust founder must relinquish direct control of the trust assets to the trustees, in the absence of which the trust may be deemed a sham or ‘alter ego’ trust. As the trust founder, give careful thought to what it means to relinquish control of an asset during your lifetime as this could have far-reaching effects on your financial future. Generally speaking, the trust founder either makes a donation to the trust or sells an asset to the trust in the form of a loan account, and it is important that the trust assets can be clearly identified.

Appointing the trustees

The trustees that you appoint will have a fiduciary duty to manage the trust assets in the best interests of the trust beneficiaries, and it is, therefore, important to choose your trustees wisely. Ideally, you should consider someone who has financial acumen and/or experience in managing trusts. If possible, avoid appointing an even number of trustees as this could result in a stale-mate situation when it comes to decision-making. Further, appointing too many trustees can cause logistical problems when it comes to setting up meetings, obtaining signatures or attending in person. In the case of family business trusts, where the trustees and beneficiaries are members of the same family, it is advisable that one of the trustees is an independent person. Your trust deed will need to clearly set out the duties, powers and responsibilities of your trustees, how they will be remunerated, and the extent of their mandate.

Nominating beneficiaries

You will be required to clearly nominate your beneficiaries and ensure that they are easily identifiable in terms of your trust deed. Further, you will need to determine whether each beneficiary will be an income and/or capital beneficiary, depending on your objectives, keeping in mind that you have the freedom to treat each beneficiary differently in terms of the benefits they stand to receive from the trust.

Drafting the trust deed

It is highly advisable to secure the services of a fiduciary expert to draft your trust deed. Also to be included in your trust deed is the rules and restrictions regarding the distribution of income and capital, detail of the administrative procedures such as meetings and voting, financial management, accounting records, auditing requirements and the duration of the trust.

Collating documentation

You will need to compile the following documentation in order to register your trust:

  • A covering letter to the Master of the High Court;
  • Trust Registration Form;
  • Two signed trust deeds;
  • Acceptance of trusteeship signed by each trustee together with a certified copy of each ID;
  • A sworn affidavit by the independent trustee (where applicable);
  • Beneficiaries declaration form;
  • JM21 forms;
  • Proof of payment for registration; and
  • The final certified court order.

Registering the trust

Your living trust must be registered at the Master’s Office in whose area of jurisdiction the greatest portion of the trust assets is situated. Your trust will be given a registration number that starts with the letter IT followed by a number issued by the Master’s Office, followed by the year in which your trust is registered. As soon as the trust is registered, the trust founder must make the initial donation to the trust, failing which no trust will come into existence. 

Letters of authority

Once the Master of the High Court is satisfied that the documents are in order, he will issue what is referred to as Letters of Authority which provide the trustees with authority to act on behalf of the trust. It is important to note that your trustees may not conduct business or enter into contracts on behalf of the trust until they have received authority to do so. One of the first functions of the trustees is to open a bank account in the name of the trust and to register the trust with Sars.

As is evident from the above, setting up a living trust should not be undertaken lightly and should be done with the guidance of a fiduciary expert. From the outset, it is important to be clear on your long-term goals and objectives, and appreciative of the fact that you will be required to relinquish full control of the assets you wish to house in the trust.

ADVISOR PROFILE

Eric Jordaan

Crue Invest (Pty) Ltd

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