Practical issues facing trustees and beneficiaries

Transcription

1 TRUST SEMINAR Practical issues facing trustees and beneficiaries Professor Walter Geach CA (SA) BA LLB (Cape Town) MCOM FCIS Professor and Head of the Department of Accounting at the University of the Western Cape

2 seminar: contents 1. Trusts in context 2. What is a trust? 3. Problems with trusts 4. The parties to a trust 5. When are trust assets at risk?

3 Trusts in context 3

4 Du Plessisv PienaarNO and others 2002 SCA Mrs X was married in community of property, and she had inherited certain farms, which fell into a separate estate as per a bequest by her father 4

5 The property was bequeathed to MrsX by her father subject to 1. that it was not to form part of the joint estate of MrsX and her husband, 2. that it was notto be subject to the marital power of MrsX s husband, and 3. that it was not to fall within any possible insolvent estate of the Mrs X s husband 5

6 Du Plessisv PienaarNO and others 2002 SCA In community: husband and wife are actually co-debtors in community of property: both spouses are liable for the payment of the debts that are incurred by one of them it follows that a creditor may look to the estates of both the debtors for recovery of the debt 6

7 Du Plessisv PienaarNO and others 2002 SCA The fact that some of her property is separately owned is relevant to the manner in which the property may be dealt with by the spouses inter se and to their rights upon dissolution of the marriage but does not affect the ordinary right of a creditor to look to all the property of the debtor in satisfaction of a debt 7

8 Trusts in context The 2008 Companies Act Hostile tax environment

9 Trusts in context The 2008 Companies Act: a fundamental shift to the left in company law

10 New approach: compliance through personal liability s 218 (2): Any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention 10

11 Directors: s 76 Personal liability if contravening Act A director must act with care, skill and diligence Section 218 (2): personal liability for any contravention of the Act 11

12 Section 20 (9) Companies Act 2008: If there is an unconscionable abuse of the company as a separate entity, the court may- declarethat the company is to be deemed not to be a juristic person in respect of any right, obligation or liability of the company OR make any further order the court considers appropriate

13 EX PARTE APPLICATION STEPHEN MALCOLM GORE N.O (Western Cape February 2013) the remedy should not be regarded as exceptional, or drastic

14 class action (section 157 (1) (c)) the right to make an application to court may be exercised by a person acting as a member of, or in the interest of, a group or class of affected persons 14

15 Trusts in context The 2008 Companies Act Hostile tax environment

16 Tax Ring-fencing of trusts: trusts are taxed and not the beneficiaries 45% flat rate of income tax Inclusion rate for CGT: effective rate is 36% of a net gain (R100 x 80% x 45%)

17 CGT effective rates Increase in inclusion rate %...effective rate increase Individuals 18% 16.4% 13.65% 13.32% 13.32% Companies 22.4% 22.4% 18.65% 18.65% 18.65% Trusts 36% 32.8% 27.31% 26.64% 26.64%

18 Tax amendments 2017 Introducing measures to prevent Estate Duty and Donations Tax avoidance through the use of interest-free (or low interest) loans to a trust: section 7C

19 Section 7C: deemed donation Section 7C applies in respect of any loan, advance or credit that (a) a natural person; or (b) at the instance of that person, a company in relation to which that person is a connected person directly or indirectly provides to a trustin relation to which that person or company, is a connected person

20 Section 7C: deemed donation Section 7C applies in respect of all loans made on, after, or before 1 March 2017 and therefore applies in respect of preexisting loans on which no interest is charged

21 Section 7C: deemed donation If a trust incurs (a) no interest in respect of a loan, advance or credit or (b) interest at a rate lower than the official rate of interest official rate of 8% = R x Interest on the loan to the trust = R y Difference = a donation Donations 20%

22 Section 7C: deemed donation If a natural person lends R to a trust and does not charge interest from 1 March 2017, that will constitute a donation of R for the 2018 tax year of which R is exemptfrom donations tax. R (donation) x 20% (rate of donations tax) = R The donations tax will be payable by 31 March 2018

23 Section 7C: deemed donation The effective maximum rate of donations tax that can arise every year if NO interest is charged is as follows: R100 (loan) x 8% (official rate) x 20% (rate of donations tax) = 1,6% of the loan every year

24 Section 7C: deemed donation Where a loan advanced to a trust does not exceed an amount of R , 8% thereof amounts to R and the taxpayer would be entitled to rely on the exemption of donations tax, which exempts the first R from donations tax

25 Section 7C: deemed donation What is a loan, advance or credit to a trust?

26 Section 7C: deemed donation What is a loan, advance or credit to a trust? Mr/Ms sells growth assets to a trust. Sale? Donation? Obligation? If a loan: interest or no interest?

27 Section 7C: deemed donation The trustees of a trust exercise their discretion and award an amount to a beneficiary, but do not pay it to that beneficiary. Is this a loan by the beneficiary to the trust?

28 Section 7C: nature of the beneficiary s right Can the beneficiary claim payment of the amount?

29 Section 7C will not apply IF if the vested amount cannot, in terms of the trust deed, be distributed to the beneficiary, e.g. before that beneficiary reaches a specific age; or if the trustees have the sole discretion in terms of the trust deed regarding the timing of and the extent of any distribution to that beneficiary of such vested amount..

30 Section 7C: An amount vested by a trust in a trust beneficiary that is not distributed to that beneficiary will be subject to s 7C if that nondistribution results from an election exercised by that beneficiary or a request by that beneficiarythat the amount not be distributed or paid over

31 Section 7C exclusion: loan to fund primary residence No deemed donation if the trust used the loan wholly or partly for purposes of funding a property and (i) the lender or the spouse of that person used that asset as a primary residence throughout the year and (ii) the amount owed relates to the part of that loan, advance or credit that funded the acquisition of that asset; NB: use agreement or resolution

32 Section 7C exclusion Loan to trust and in return the lender obtained a vested right to the trust in proportion to the loan (business trusts)

33 Current tax advantages of trusts

34 Taxes on death 1. Incometax up to date of death 2. CGT(deemed disposal). SA NORMAL TAX: In the last tax return of the deceased 3. Estate duty ESTATE DUTY TAX: paid by the executor on behalf of the deceased estate

35 What is a trust? 35

36 What is a trust? 1. As envisaged by the Trust Property Control Act 2. Other trusts.? 36

37 Definition of trust (part (a) of the definition): Trust Property Control Act A trust is not a legal person but is an arrangementbrought about by a contract or last will and testament Trustees For the benefit of beneficiairies

38 SWANEPOEL N. O. [as Trustee of the HARNE TRUST] v STANDARD BANK OF SOUTH AFRICA LIMITED Loan agreement was entered into between The Harne Trust (the borrower) and the Standard Bank Ltd (the lender) The agreement was signed by a trustee on behalf of the borrower The trustee, in his personal capacity, signed a suretyship agreement 38

39 Definition of trust (part (a) of the definition): Trust Property Control Act a trust instrument

40 The application of the Trust Property Control Act The Act therefore does not apply to oral trusts

41 Verbal or oral trusts?

42 Section 2: certain documents deemed to be trust instruments If a document represents (1)the reduction to writing of (2)an oral agreement (3)by which a trust was (a) created or (b) varied, (4) such document shall for the purposes of this Act be deemed to be a trust instrument.

43 Trust requirements: appointment and authorization of trustees section 6 and the Simplex Case ( preincorporation contracts)

44 Trust requirements: appointment and authorization of trustees But section 6 will not apply to the trustees of an oral (verbal) trust Therefore if there is an urgent transaction, an oral trust can be used

45 Oral (verbal) trusts Very useful for the variation and amendment of trust deeds in a variety of circumstances

46 A trust is an arrangement which has certain consequences

47 A trust is separate from the founder, beneficiaries and trustees 1. When a trust is formed things do not remain as before 2. If things DO remain as before, is there a trust? 47

48 When a trust is formed things do not remain as before 1. Is there separation of control from benefit? 2. Is there an appointment of independent and competent trustees? 48

49 Once there is a trust there is a separation of CONTROL (trustees) from BENEFIT (beneficiaries)

50 A trust is separate from the founder, beneficiaries and trustees Raath v Nel (473/2011) [2012] ZASCA 86 (31 May 2012) The thrust of the appellant s case is that any loss that may have been suffered was not suffered by the respondent personally 50

51 Section 12 Trust Property Control Act: Trust property shall not form part of the personal estate of the trustee except in so far as he as trust beneficiary is entitled to the trust property. 51

52 Problems with trusts

53 Problems 1. Thinking that trusts are not regulated at all 2. The way trusts are formed and the way assets are put into a trust 3. The way trusts are administered 4. The way trusts are amended 5. Taxation of trusts in the future?

54 Problems 1. Thinking that trusts are not regulated at all 2. The way trusts are formed and the way assets are put into a trust 3. The way trusts are administered 4. The way trusts are amended 5. Taxation of trusts in the future?

55 Problem: thinking that trusts are not regulated at all 1. The Constitution applies 2. The Trust Property Control Act applies 3. Other statutes apply (Income Tax Act, Alienation of Land Act) 4. The common law applies 5. The trust deed applies (but subject to all of the above) Trustees hold an office: powers and statutory duties All beneficiaries get rights: both actual and potential The Master has powers 55 55

56 Problems 1. Thinking that trusts are not regulated at all 2. The way trusts are formed and the way assets are put into a trust 3. The way trusts are administered 4. The way trusts are amended 5. Taxation of trusts in the future?

57 There is a separation of ownership/control vs. benefit Thorpe v Trittenwein2007 (2) SA 172 (T): a valid trust will not have been created where the trustees are exactly the same persons as the beneficiaries Consider business or trading trusts: trustees, beneficiaries? Partners? 57

58 The way trusts are formed The trust deed: the photo-copied trust trust contents, purpose and type of trust? The initial donation: real or a sham? The trustees: alter ego trusts: a letter of wishes The beneficiaries: rights?

59 A trust deed is a trust s constitutive charter Outside the provisions of a trust deed, the trust cannot be bound 59 59

60 The way assets are put into a trust Saleon loan account Loan or donation? Repayment terms? Interest-free or interest-bearing? Assets put in trust in settlement of an obligation

61 Problems 1. Thinking that trusts are not regulated at all 2. The way trusts are formed and the way assets are put into a trust 3. The way trusts are administered 4. The way trusts are amended 5. Taxation of trusts in the future?

62 Section 17 Trust Property Control Act A trustee must notwithout the written consent of the Master destroy any document which serves as proof of the 1. Investment 2. Safe custody 3. Control 4. Administration 5. Alienation or 6. Distribution of trust property before the expiry of a period of 5 years from the termination of a trust

63 STEYN AND OTHERS NNO v BLOCKPAVE (PTY) LTD 2011 A trust operates on resolutions 63 63

64 Problems 1. Thinking that trusts are not regulated at all 2. The way trusts are formed and the way assets are put into a trust 3. The way trusts are administered 4. The way trusts are amended 5. Taxation of trusts in the future?

65 Potgieter v Potgieter NO and Others 2012 (1) SA 637 (SCA) (30 September 2011) The trust deed: the trusteescould amend the trust deed 65

66 Acceptance of benefits?

67 Potgieterv PotgieterNO and Others 2012 (1) SA 637 (SCA) (30 September 2011) SCA: The import of acceptance by the beneficiary is that it creates a right for the beneficiary, while no such right existed before

68 The Potgieter principle: Common law: acceptance of benefits? Acceptance of benefits: need not be formal acceptance, but acceptance by conduct 68

69 The amendment of trust deeds RAS AND OTHERS NNO v VAN DER MEULEN AND ANOTHER 2011 (SCA) and it is not without relevance that the respondent alleged that she conducted parttime farming operations on the farm, and paid certain farming expenses at a time after the trust had been created these facts are consistent with her having accepted the benefits of the trust

70 The amendment of trust deeds Zazeraj NO v Jordaan and others It is established law that beneficiaries of discretionary trusts who have received conditional benefits,..have vested rights, and the trust deeds cannot be changed without their consent

71 Problems 1. Thinking that trusts are not regulated at all 2. The way trusts are formed and the way assets are put into a trust 3. The way trusts are administered 4. The way trusts are amended 5. Taxationof trusts in the future?

72 The reason for trusts: the use of Trusts unrelated to tax issues 72

73 Trusts unrelated to tax issues Other than tax planning, there are many reasons to have a trust or trusts, not least being ASSET PROTECTION 73

74 The parties to a trust 1. Founder/donor/settlor 2. Planner (client) 3. Trustees 4. Beneficiaries 5. Master 6. The Protector 74 74

75 The parties to a trust 1. Founder/donor/settlor 2. Planner (client) 3. Trustees 4. Beneficiaries 5. Master 6. The Protector 75 75

76 Alternate trustees?

77 trustees hold office and cannot just do as they please section 9 (1) A trustee shall (1)in the performance of his dutiesand (2) in the exercise of hispowers act with the care act with diligence... and act with skill which can reasonably be expected of a person who manages the affairs of another (objective test): think of WHO can be appointed as a trustee 77

78 STANDER AND OTHERS v SCHWULST AND OTHERS 2008 (1) SA 81 (C) THE ISSUE OF DISCRETION It was alleged that one of the trustees failed over a protracted period to participate in the important discretionary decisions confronting the trustees, and has thus abdicated his responsibilities 78

79 Trustees Resignation

80 Trustees 1. How? Resignation 2. When effective?

81 Trustees: resignation Section 21 of the Trust Property Control Act A trustee may resign by notice in writing 1. to the Master and 2. To the ascertained beneficiaries who have legal capacity, or to the tutors or curators of the beneficiaries under tutorship or curatorship and 3. Must also comply with any provisions of the trust deed, for example, by notice to co-trustees

82 Trustees: resignation Section 21 of the Trust Property Control Act If a trustee does not comply with this section 1. Heremains a trustee 2. Still bound by section 9 3. All subsequent actions by the remaining trustees are VOID (not voidable)

83 Beneficiaries A trust without a beneficiary is a nullity There are risks involved with testamentary trusts

84 Rights of beneficiaries

85 Bewind(real right) Terminology: rights of beneficiaries vested right (personal right) Discretionary right (contingent right) 85 85

86 Potgieterv PotgieterNO and Others 2012 (1) SA 637 (SCA) (30 September 2011) our law affords a contingent beneficiary the right to protect his or her interest against mal-administration

87 The parties to a trust 1. Founder/donor/settlor 2. Planner (client) 3. Trustees 4. Beneficiaries 5. Master 6. The Protector 87 87

88 The protector Can be an individual or legal entity Protector is not a trustee and does not act on behalf of the trust Must not be a beneficiary or trustee Nature of powers will depend on trust deed A professional person might prefer to be a protector rather than a trustee

89 Trust assets: when are they at risk? 89 89

90 Trusts assets: When are they at risk? 1. No need to lift the veil 2. Sham trusts 3. Lifting the veil 4. Universal partnerships 90 90

91 Trusts assets: When are they at risk? 1. No need to lift the veil 2. Sham trusts 3. Lifting the veil 4. Universal partnerships 91 91

92 Trusts assets: When are they at risk? 1. No need to lift the veil: Jordaan, Badenhorstand Britz cases 2. Sham trusts 3. Lifting the veil 4. Universal partnerships 92 92

93 JordaanvsJordaan2001 (3) SA 288(C). The defendant's own evidence had shown that the trusts were actually his alter ego, were regarded by him as such and a means whereby he could gain a financial advantage for himself The Court found that it was not necessary to pierce the corporate veil 93

94 Trusts assets: When are they at risk? 1. No need to lift the veil 2. Sham trusts 3. Lifting the veil 4. Universal partnerships 94 94

95 When a trust is formed: intention 3 trustees B B B

96 When a trust is a sham Khabola NO v Ralitabo NO Case No. : 5512/2010 A trust was formed for the purpose of acquiring agricultural land on which farming activities were to be conducted. No beneficiaries were appointed in the trust instrument No trustee meetings were held The trust was registered and had a reference number

97 VAN ZYL N.O. v KAYE N.O Western Cape High Court 2014 (1) establishing that a trust is a sham and (2) going behind the trust form entail fundamentally different undertakings 97

98 Trust requirements: ensure that it is not a sham

99 Trusts assets: When are they at risk? 1. No need to lift the veil 2. Sham trusts 3. Lifting the veil 4. Universal partnerships 99 99

100 VAN ZYL N.O. v KAYE N.O Western Cape High Court 2014 It is a remedy that will generally be given when the trust form is used in a dishonest or unconscionable manner to evade an existing liability, or avoid an obligation 100

101 A trust that is aimed at frustrating either the founder s creditors(ex Parte Executor Testamentary Estate Boulton PH G24 (C)) or the beneficiary s creditors (Ruskin NO v SapireNO [1966] 2 All SA 11(W)) where an enforceable right to the trust property has already vested will not be upheld

102 Trusts assets: When are they at risk? 1. No need to lift the veil 2. Sham trusts 3. Lifting the veil 4. Universal partnerships

103 ADCOCK v ADCOCK The plaintiff did not claim under the accrual system, and she rather alleged the existence of a universal partnership between (1) herself, (2) the first defendant (her former husband) and (3) the Wilton Trust ( the Trust ) in equal shares

104 ADCOCK v ADCOCK The plaintiff sought confirmation of the dissolution of the universal partnership and the appointment of a liquidator to realize all the assets of the alleged partnership, its main asset being a farm which was registered in the name of Trust