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Is your trust worth its paper?

24 February 2014   (0 Comments)
Posted by: Author: Ingé Lamprecht
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Author: Ingé Lamprecht

In more than 85% of trusts on which legal audits have been done, validity can be questioned.

Prof Willie van der Westhuizen, head of trust law and estate planning at Millers Attorneys, says based on their own empirical studies and legal audits done on trusts deeds from all over South Africa for the past 15 years, there are various reasons for possible invalidity.

One potential example is where the trust deed was amended without the consent of the original beneficiaries if these beneficiaries have already accepted their benefits in terms of the trust in the past.

The fact that a trust deed is filed with the Master of the High Court does not mean it is valid because it is not the Master’s duty to check for validity, he says.

While there are various grey and rather technical areas in trust law that could result in possible invalidity, the most common other issues revolve around the formation of a trust with only oneself as a party to the contract, where the object of the trust is too vague or where the trustees exceeded their power of appointment.

Van der Westhuizen recently addressed these issues at a trust and taxation law seminar hosted by Citadel.

Amendments?

With the Minister of Finance Pravin Gordhan, due to deliver his budget speech on Wednesday, trusts could again become the subject of discussion.

The budget of 2013 indicated that a number of measures would be introduced to curb tax avoidance associated with trusts.

"To curtail tax avoidance associated with trusts, government is proposing several legislative measures during 2013/14. Certain aspects of local and offshore trusts have long been a problem for global tax enforcement due to their flexibility and flow-through nature. Also of concern is the use of trusts to avoid estate duty, which will be reviewed,” the Budget Review stated. 

However, in July last year, when the tax amendment bills were published, National Treasury indicated that these proposals required more consultation and that it would be "dealt with later this year [2013] or as part of next year’s [2014] process”.

Van der Westhuizen says from his perspective the existing legislation is sufficient and only needs to be applied in the correct way.

If a relook at the taxation of trusts is however required it can form part of the broader investigation by the Davis Committee into the tax system, he says.

"If one looks at the terms of reference of the Davis Committee the investigation into the taxation of trusts is supposed to form part of their instructions and brief and it is hoped that clarity be brought on this aspect.”

It will not only save costs (and perhaps taxpayers’ money) but it will result in a much more holistic integration of the taxation (if any changes are to come) of trusts in the broader tax system in South Africa, he says.

Van der Westhuizen says hopefully the consultations that Treasury (and Sars) have had with the different stakeholders since the announcement in the Budget Review of 2013 brought new perspectives and that the undoing of the current legislation and the substitution of it with new legislation may not be that easy.

"The current legislation is at least settled and understood in some way while new legislation usually brings about a number of expensive court cases before it is properly interpreted and settled.”

Van der Westhuizen says trusts are really the only proper protective tool, vehicle or entity that is available to protect personal assets (when applied correctly).

He cautions however, that tax considerations should never be the primary reason for using trusts.

In this regard, the quotes from a book he co-authored with RP Pace, titled Wills & Trusts:

"Despite its perceived tax and estate duty benefits, it is unwise to select the trust (or any other entity) merely for its possible tax (and duty) benefits, because, with changing tax legislation, such benefits may not last long. In the alternative it is also important that when perceptions about the tax benefits of trusts change to the negative, serious consideration still be given to trusts as a holistic estate planning tool, for example, because of the protective qualities it possess.

"It is, therefore, important not to create trusts on an ad hoc basis (as unfortunately so often happens) or for any particular tax reasons (positive or negative) but rather to integrate trusts in a holistic manner in well-structured estate plans where sufficient provision is made for proper financial risk protection plans and family relationship plans, both of which are some of the most neglected aspects of most estate plans in South Africa.

"In the process, features of the trust, such as the protection of beneficiaries (against themselves and financial disaster), continuity and limited liability, should rather determine the purpose for creating the trust.”

This article first appeared on moneyweb.co.za.


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