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When knights went off to battle in the Middle Ages, they wanted to preserve their wealth and protect their dependants should they not make it back. To cover this eventuality, trusts were invented. Trusts today can perform a crucial role in protecting assets and are frequently recommended by estate planners. The legal and taxation landscape has changed, however, resulting in unintended consequences for the unwary.

Trusts must be established correctly and carefully managed as was highlighted in a recent case that was argued before the Supreme Court of Appeal in the case of Badenhorst v Badenhorst 2006(2) SA 255(SCA).

The Court decided that while the assets were held in trust, they were in fact under the control of Badenhorst, who was one of the trustees. Therefore the trust was essentially a sham. For Badenhorst, this had serious consequences. All the assets were deemed to be owned by him personally, and had to be equitably shared with Badenhorst in their divorce proceedings.

If you have a trust, this court decision could have serious consequences for you.

You can be sure that South African Revenue Services has taken note of the arguments put forward by Badenhorst’s lawyers, and it is only a matter of time before a case comes before court with SARS, seeking an order that estate duty be paid on assets which were held in trust, under the de facto control of the deceased.

A trust is essentially a collection of assets and liabilities vesting in the trustees to be administered by them in terms of the deed for the benefit of the beneficiaries.

The trust deed is a legal agreement, or contract, between the founder of the trust and trustees, which sets out how the trust is constituted and how it is to be administered.

It expressly sets out that all transferred assets become trust assets under the sole control of the trustees.

The Trust Property Control Act regulates trusts and requires that all trust deeds are registered with the Master of the High Court. No person may act as a trustee until they have been issued with letters of authority to do so by the Master.

Trusts have been used for many years as an integral part of financial and estate planning. The cost of owning assets in trust has, however, in aggregate, become more expensive in terms of capital gains taxes, income taxes and fewer income tax avoidance opportunities. Add to this the risk of being declared a sham trust in court, the whole exercise could end up being a waste of time and money.

The primary purpose of a trust should be to put assets under the control of others who can act in your place for the beneficiaries. This allows continuity in the event of death, absence and incapacity, separating the enjoyment of capital and income and the management of it. This is particularly important in the case of minors, or major beneficiaries who are not good with finances or are incapacitated. Protection from creditors is a real advantage. Also, there will be no estate duty or capital gains tax payable on the trust assets on the death of the founder.

Where the founder, trustee and beneficiary are the same, extra care is required to ensure your trust is not set aside.


To avoid the pitfalls relating to trusts which have recently come before our courts, consider the following:

• Know and understand the duties of trustees arising from both the Common Law and Trust Property Control Act;

• Carefully read and understand the provisions of the trust deed of any trust of which you are a trustee;

• Comply with all the administrative requirements of the trust deed, especially those regulating what the trustees are empowered to do and how the decisions of the trust are to be made;

• Ensure that a qualified independent trustee (preferably a lawyer, accountant or a trust company) is appointed to the trust and that the independent trustee is party to all trust decisions;

• Keep a minute book, recording all the decisions of the trustees and books of account recording the trust’s financial dealings;

• Ensure that letters of authority exist for each of the Trustees, and that at all times there are as many trustees appointed as required by the trust deed; and

• Remember that the fundamental principle of trusts is the separation of ownership.

Source: www.netto.co.za


Ian Beere CA(SA) CFPTM, is a partner of Netto Financial Services and is the 2007 recipient of the coveted Financial Planner of the Year Award.

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