I bequeath the residue of my estate to my children. However, the benefit will be held in trust until the death of my spouse.
If the Average Joe reads this sentence in a will, they may for a fleeting moment wonder why no-one can write plain language contracts, but probably won’t spend much time pondering its implications.
Yet the clause may present those involved with a problem since it is unclear whether the trust that was set up in terms of the will is an ownership trust or a so-called ‘bewind’ trust (more about the difference later). While this may not seem important, it has a direct bearing on the position of trust beneficiaries.
The rights of trust beneficiaries depend on the provisions of the trust instrument, explains Louis van Vuren, CEO of the Fiduciary Institute of Southern Africa (Fisa). A trust instrument refers to the way in which a trust is established – whether it is through an agreement or trust deed (in the case of the typical family trust), a will (in the case of a testamentary trust) or by way of a court order (where a trust is set up for the beneficiary of a Road Accident Fund claim).
It stands to reason that there should be clarity about why the trust is established and what position and rights beneficiaries should have.
Where trust assets are owned by the trustees, the trust will be called an ownership trust, but if the beneficiaries own the assets, the trust will be known as a ‘bewind’, Van Vuren explains.
Trust beneficiaries can be identified by name in the trust instrument or may be members of a class of beneficiaries (the children of the deceased, for example).
Who the beneficiaries are and what their rights are must be stipulated in the trust instrument, Van Vuren says.
“In the case of a testamentary trust [such as the example at the start of this article], the wording is of utmost importance in determining whether the trust created in the will is an ownership trust or a ‘bewind’. If it is a ‘bewind’, the ownership of the inheritance vests in the beneficiaries and cannot be taken away by the trustees.”
The wording is also important in determining what the rights of the beneficiaries are with regards to income and/or capital.
The beneficiaries in an ownership trust can have vested rights to benefits – in other words rights to income, capital or both. Or they can have contingent rights. In the latter case, the decision to distribute income and/or capital sits with trustees. The only ‘right’ beneficiaries have is to be considered for these benefits when the trustees decide to distribute the benefits, Van Vuren says.
Beneficiaries also have the right to proper administration by the trustees as well as the right to take part in decisions to amend the trust deed.
“Any beneficiary with a vested right to income and/or capital from a trust must agree to any decision to amend the trust deed. The same applies to any beneficiary who, although they have not received benefits yet, has indicated that they are aware of contingent rights and accept those rights.”
Van Vuren says if a beneficiary believes trustees are not acting in their best interests and in line with their general fiduciary duty, they can sue for breach of trust. Beneficiaries also have a right to request the Master of the High Court to demand an account of their administration of the trust from the trustees.
Van Vuren says although tax implications can become quite complex and expert advice may be required, the general rule is that income or capital gains that are vested in a beneficiary are attributed to that beneficiary for tax purposes and taxed in the beneficiary’s hands, but investors should also consider the deeming provisions in Section 7 of the Income Tax Act and those in paragraphs 68 to 72 of the Eighth Schedule.
“It is also possible to distribute income to a beneficiary and have it taxed in the hands of the beneficiary but retain it in trust for the exclusive benefit of that beneficiary under a power granted to the trustees in the will. What must be borne in mind is that such income, as well as attributed capital gain, will be regarded as vested in the beneficiary and may then lose the insolvency protection afforded by a trust.”
Brought to you by the Fiduciary Institute of Southern Africa (Fisa).