AMANDA VISSER: In estate planning, trusts are often used to plan around the death of the estate owner, who is usually also the founder of the trust. When the founder of the trust dies, there are several considerations to keep in mind. But what happens if a beneficiary of the trust dies? My name is Amanda Visser, and I’m with Louis van Vuren, CEO of the Fiduciary Institute of Southern Africa, who will walk us through the process. Louis, what are the things that you have to bear in mind when planning around the death of the founder?
LOUIS VAN VUREN: Amanda, it’s very important that, when the founder of a trust has planned, and planning is made for the will of that person, you take note of any loans that could be owing by the trust to the founder. Now, loans owed by a trust to the founder have become a little bit of a problem in the past number of years because of an amendment to the Income Tax Act, which has serious tax consequences if the loan is an interest-free loan – which is usually the way it was done before. But it is extremely important, whether that loan is interest-free or carries interest, that the will of the founder deals with such a loan.
There are various options for dealing with that loan. One is that the founder bequeaths the loan back to the trust. In other words, whatever is outstanding at the date of the death of the founder of the trust by way of a loan from the trust to the founder, that the founder bequeaths that outstanding balance to the trust – in other words, extinguishes the loan.
One of the other options is for the founder to bequeath the loan to a spouse or one of the beneficiaries of the trust, and that loan can then form part of that heir of the founder’s estate.
There are also powers that the founder could have been granted in the trust deed that the founder may exercise in his or her will, and those powers should be taken cognisance of. Some of them could create problems, but the fact is that those powers often exist in the trust deed, and one has to take cognisance of them, and decide whether to exercise those powers in the will of the founder.
AMANDA VISSER: What happens when the beneficiary dies before receiving any of those benefits?
LOUIS VAN VUREN: That depends to a large extent on whether benefits from the trust have vested in a beneficiary – or have not – at the time of death of that beneficiary. Benefits that have vested obviously belong to the beneficiary and will form part of his or her estate. South African law recognises two types of trust. There is the so-called ownership trust, and there’s also what is called a ‘bewind’.
In a bewind, the trust property actually belongs to the beneficiary but is placed under the control of the trustees. In an ownership trust, the trust property belongs to the trustees in their capacity as trustees. Now, in a bewind, if the beneficiary dies, the beneficiary has always been the owner of that property, and therefore the trust property will form part of that beneficiary’s estate. In an ownership trust, it really depends whether the benefits have vested or not.
Sometimes, benefits from a trust can vest in a beneficiary without the trustees paying out those benefits to the beneficiary. There are sometimes very good reasons for doing that; the beneficiary may not yet be in a position to administer or properly handle the benefits, and many trust deeds make provision for benefits to be vested in a beneficiary but are kept under the control of the trustees after vesting.
Now, if the benefits have vested, and the beneficiary then dies, those benefits must be claimed by the executor of the deceased estate of that beneficiary, because they then belong to the beneficiary and must form part of the deceased estate of that beneficiary. If benefits have not vested yet, the trust deed will determine what will happen. If the deed makes provision for substitution by descendants of the deceased beneficiary, those descendants will become beneficiaries and could then receive benefits from the trust in future. If the deed does not make provision for substitution, the benefits will usually accrue to the rest of the beneficiaries.
Therefore, it’s extremely important that the possible scenarios are considered when the trust deed is drafted. What you do not want is to have a situation where a beneficiary dies unexpectedly and the trust runs out of beneficiaries, because that could cause a serious problem. It is therefore, in planning – in setting up a trust – extremely important to think through all the scenarios and plan for all the possible contingencies that if a beneficiary dies, who will step into the place of that beneficiary. And it is advisable to have, in the end, a catch-all provision to make sure that a trust cannot run out of beneficiaries.
AMANDA VISSER: What happens in the case where a beneficiary dies after receiving the benefits?
LOUIS VAN VUREN: Once the beneficiary has received the benefits, either by just having them vested in the beneficiary, or them actually having been paid out to the beneficiary or transferred to the beneficiary, those benefits belong to that beneficiary and are no longer part of the trust property. Income sometimes is vested in the beneficiary, or capital gains attributed to a beneficiary, to take advantage of lower tax rates. Once that has happened, the rule ‘Once vested, always vested’ applies and the vested income or its attributed capital gain then belongs to that beneficiary, even if it is still under the control of the trustees.
Therefore, it’s extremely important that trust beneficiaries have wills. Even a minor child could be wealthy if substantial benefits have been vested in that child, although those benefits may still be under the control of the trustees. And not having a will in that situation means that the rules of intestate succession will apply, which could have undesirable effects.
The whole purpose of the trust may have been to move assets away from the parents of that child or, in particular circumstances, to keep assets away from the parents of that minor child who is a trust beneficiary. And if that child then does not have a will, under the rules of intestate succession those benefits, that trust property, may eventually end up in the hands of the parents, which is what you tried to avoid in the first place.
AMANDA VISSER: Having listened to all that, what is the thing that you have to consider when setting up a trust as part of your estate planning?
LOUIS VAN VUREN: I think important, Amanda, at the time of setup, is to think through the possible permutations, and think through all the contingencies and try to plan to avoid unexpected situations.
Secondly, ensure that the trust instrument – that’s the deed, or the will if it is a testamentary trust – makes provision for the unexpected. People do not always die in the expected sequence. We always think that old people die before young people, and the statistics say that men die younger than women, but things do not always happen that way.
Make sure, thirdly, that the trust beneficiaries have wills.
And then I think, in the fourth place, is a very important point: don’t let the tax tail wag the planning dog. Make sure that the planning is done to achieve the desired effect. Always be aware of the tax cost, but do not tie yourself in knots. Don’t try to avoid tax and, in the end, sacrifice the purpose for which the trust was set up in the first place.
AMANDA VISSER: Thank you, Louis. That was Louis van Vuren, CEO of the Fiduciary Institute of Southern Africa.
Brought to you by the Fiduciary Institute of Southern Africa (Fisa).