08 July 2011
Posted by: Author: Fiona Marcandonatos
There is a perception that where a person establishes a trust and vests the trust so established with assets, that such trust is then the owner of the assets and the founder has automatically divested himself or herself of those assets.
In terms of the Trust Property Control Act1 it, inter alia, defines a trust as an arrangement through which the ownership of property of one person is by virtue of a trust instrument, made over to another person, the trustee, in whole or in part, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the personal class of persons designated in the trust instrument.
Accordingly, the primary reason why a person would form a trust, is to separate the assets from his or her personal estate.However, one of the most common grounds on which a trust can be attacked is where it is considered to be, for all practical purposes, the alter ego of the founder, in which event the trust assets will be added to the value of the founder’s personal estate, i.e. in the case of a divorce, alternatively the trust assets and income shall be deemed, for tax purposes, to be the assets and income of the taxpayer (i.e. founder).
The situation arose in the case of Badenhorst v Badenhorst 2, in which Mrs Badenhorst argued that the assets of the trust (which at the time of the divorce totalled R3 530 000 – more than the value of the personal assets of both Mr and Mrs Badenhorst combined), for the purposes of the distribution order, be regarded as the assets in her husband’s estate. Mr Badenhorst contended otherwise.
The court held that even though the assets were vested in the trust and it did not form part of the founder’s (i.e. Mr Badenhorst) estate, this did not exclude such assets from consideration when determining what had to be taken into account when making a distribution order in favour of Mrs Badenhorst in the divorce.
The court had regard to a number of facts, including the actual wording of the trust deed, the control given to Mr Badenhorst, the control that the donor (founder) possessed via the wording of the trust deed, and how the actual affairs of the trust were conducted.The court found that Mr Badenhorst was in fact in full de facto control of the trust and that the trust’s assets should be added to the value of his estate.
The court accordingly held that in order to succeed, the wife would need to prove:
1.That her husband controlled the trust.
2.But for the creation of the trust, he would have acquired and owned the assets in his own name.
A similar situation arose in the divorce case of Brunette v Brunette in which Mrs Brunette claimed that the assets of two inter vivos trusts be regarded as the assets of two businesses conducted in partnership by her and her husband. partnership assets and those belonging to the trusts and accordingly the trust’s assets ought to be dealt with as the partnership assets in respect of a redistribution order.
The court held that if Mrs Brunette’s contentions were valid, then the manner in which the trusts had been administered, were very relevant in the court deciding whether the assets be regarded as the partnership assets and thereby be taken into account in any order for a redistribution in terms of Section 7(3) of the Divorce Act
The new Companies Act defines persons in control of a trust to mean, in the case of a juristic person, that is a trust, where that person has the ability to control the majority of the votes of the trustee or to appoint the majority of the trustees, or to appoint or change the majority of the beneficiaries of the trust.Thus ‘control’ by its very meaning in terms of the new Companies Act as well, has far-reaching consequences.
Accordingly, if the founder does not give up control of his assets and administer the trust independently, he runs the very real risk that the assets will be included in his estate, whether for the purposes of a redistribution in a divorce or in respect of maintenance, or even in respect of his tax affairs, whether it be income tax or even estate duty taxes.
In the case of estate duty, the benefit of creating of a trust, is that it is an effective method of reducing estate duty. All things being equal, over a period of time and until the time of death, the value of one’s She alleged that during the course of business, no distinction had been made between the estate is likely to increase in value and as a matter of law, the deceased estate will have to pay 20% of the increase in value, in estate duty. By transferring personal assets into a trust, one can avoid having to pay estate duty on the increased value of the deceased’s estate as at the date of death.
In the case of income tax, the tax benefit from a trust is the ability to spread the income among beneficiaries who might have a lower tax basis. However, as in the case of Badenhorst, if the founder does not give up control of his assets (as transferred to the trust),he runs the risk that the assets will be deemed as his personal assets and thereby be included in his estate for estate duty purposes, alternatively to be taxed at his own personal rate.
Section 3(3)(d) of the Estate Duty Act deems assets in respect of which the deceased had control for his own benefit or for the benefit of his estate, to be assets in his estate for estate duty purposes.
Accordingly, the consequences of not administering a trust as a separate legal entity in which the founder divests himself of full control of the assets of the trust could be dire. To summarise:
•In the event of a divorce, that such assets will be deemed to be his personal assets for the purposes of a redistribution of assets to his wife, alternatively in the determination of the amount of maintenance to be paid by him.
•In the case of income tax, to be taxed at his personal rate as opposed to a lower rate if there are a number of beneficiaries within the trust who are able to be taxed at a lower rate.
•Upon his death, that the assets of the trust are deemed to be his personal assets and to be taxed in terms of the Estate Duty Act.
The bottom line is that if you have a trust or you are thinking of creating one, it needs to be a genuine and bona fide trust and, importantly, control of the trust needs to be in the hands of the trustees, who are not subject to the control of the donor, and if there is an independent trustee (which is advisable), the independent trustee must play an active role in the board of trustees.Of paramount importance, is that the trust is properly administered so that the independence of the trust is clear to all parties at all times.
1Act 57 of 1988
2 2006 (2) SA 255 SCA
3 2009 (5) SA 81 (SEC)
4 Act 70 of 1979
5 Act 71 of 2008
6 Act 45 of 1955
Source: By Fiona Marcandonatos (TaxTALK)