Phia van der Spuy, a FISA member, FPSA® and founder of Trusteeze, writes on trusts for the Affluence section of the Independent Group’s Saturday media.
The beginning of a year is a good time to review a trust deed to ensure it’s still relevant and to understand how changes in circumstances can impact a trust arrangement. Here are a few aspects that may assist you in reviewing a trust deed:
DESCRIPTION OF BENEFICIARIES
It’s important to ensure that the description of the beneficiaries in the trust deed identifies them by name or makes them identifiable such as your descendants . It’s important to ensure that the meaning of the term “beneficiaries” corresponds with its intended meaning in clauses dealing with, for example, the appointment of trustees or the amendment of the deed. If, for example, the term “beneficiary” is used to include “all those persons related by blood or affinity to the founder”, and if the agreement of all beneficiaries is required for the appointment of a trustee or to make a change to the trust deed, it may become a tedious task to trace and involve said people in such an appointment or change. In terms of the object of a trust, it’s important to remember that without a clearly defined object, a trust does not come into existence. In a family trust, the object is the beneficiaries, for whose benefit the trust was created. A beneficiary may be an income and or capital beneficiary, depending who the founder intended to benefit from income and capital of the trust. In the event that income and capital beneficiaries are different, it’s good practice to provide in the trust instrument that in the event that income is insufficient for the maintenance of an income beneficiary, that capital can be used to make good any such shortfall. This will assist the trustees to optimise the trust’s investment returns, while taking into account the needs of all beneficiaries to prevent unintended hardship. Focusing at all cost on the short term income production in a trust may have a detrimental effect on the long term position and value of the trust’s assets, which in the long run may negatively impact both the income and the capital beneficiaries.
WHAT IS ALLOWABLE WITH RESPECT TO BENEFICIARIES?
If you want a specific beneficiary to be favoured over others in a discretionary trust, say so in the trust deed, otherwise beneficiaries may put pressure on trustees to treat them equally. The trust deed in the instance of a discretionary trust should also clearly state that beneficiaries ought not to be treated equally, if that is what the estate planner wishes for. It’s perfectly acceptable for a trust instrument to provide that a beneficiary shall not receive a benefit until the happening of some event, such as reaching a certain age (Estate Dempers v SIR, 1977). A trust instrument can also provide that a beneficiary will receive a benefit from a trust for a limited period only. The beneficiary may then have an unconditional vested right for that limited period, and such right will during that time form part of his or her insolvent estate or his or her assets during a divorce. It may be that the provisions of our Constitution affect the content of a trust instrument. If any provision, including the appointment of beneficiaries in a trust instrument, offend our Constitution, it will be declared invalid. This seems to be going against the principle of freedom of testation or contractual freedom, but the law has never tolerated acts that are against good morals, and something that offends the provisions of our Constitution goes against good morals. So be mindful, particularly with a charitable or educational trust, that the terms you stipulate in the trust instrument not be contrary to public policy, as grounded in our Constitution. It can’t, for example, exclude recipients of trust benefits on the grounds of race, gender or religion. If such terms are illegal, immoral or contrary to public policy, a court can strike out the offending clause in terms of the common law Minister of Education v Sy pets Trust Ltd, 2006 . You can’t vest income and or capital in a beneficiary in a trust instrument, but cease the vested right in the event of the insolvency or divorce of that beneficiary. A trust instrument can’t restrict a beneficiary, for example, by prohibiting a beneficiary from marrying. A beneficiary can cede both a vested and discretionary right to another person or entity. One may well want to prohibit such a cession in terms of the trust instrument.
INCOME AND CAPITAL
Be mindful how you define “income” in the trust instrument, as it may include all “fruits” from assets, such as the occupation of a property, or it can narrowly only refer to actual revenue received, such as rental income. The term “net income” should also be clearly defined gross income less expenses and the trust instrument should allow trustees to distribute both income and net income. This may be advantageous from a tax perspective when the conduit principle is used to distribute net income to beneficiaries, who will pay the income tax on the net income, and not on the income. Income should also be clearly distinguished from capital in the trust instrument, especially if different people are income and capital beneficiaries. Capital beneficiaries can benefit from the distribution of an actual trust asset or from a gain made on the disposal of trust assets. The treatment of unallocated income should also be defined to reflect the founder’s intention whether it will form part of trust capital at the end of a financial year, if unallocated, or whether it will keep its nature as income. If the trust instrument is silent, it may be assumed that income and capital will always retain its nature.