An introduction to trusts in South Africa: A beneficial ownership perspective
Classification of trusts
In South African law, trusts are classified in three ways:
- how the trust was created;
- the discretion of trustees and vesting of rights in beneficiaries; and
- the intention with which the trust was created.
The classification of trusts is an important factor in BOT, as the transfer of rights to the beneficiaries differs depending on the type of trust.
Table 1. Classification of trusts based on how the trust is created
| Characteristics |
Type of trust: Inter vivos |
Testamentary | Legislative | Court order |
|---|---|---|---|---|
| Establishment | Created during the lifetime of the founder by means of an executed and registered trust deed. | Also known as a mortis causa trust, created during the lifetime of the testator (who is the founder) in their last will and testament. | Created through legislation requiring its establishment for a specific purpose; requires an executed and registered trust deed. | Created through an application brought to court to solve a particular problem. |
| Operation | The trust deed sets out the powers and duties of the trustees and how the trust is to be administered and wound up. The founder may be a co-trustee and co-beneficiary. | The trust becomes effective upon the testator’s death. The founder’s testament will identify the trustees and the beneficiaries of the trust. | The trust’s purpose, operation, and management are determined by the provisions of the legislation in terms of which it is established. | The purpose of the trust and the powers and duties of trustees are determined by the court order. |
|
Ownership and control of the trust assets |
The beneficiaries and trustees are identified in the trust deed. However, as the founder can also be a trustee and a beneficiary, the founder can exercise effective control over the administration of the trust in the same way as trustees. The founder can influence the ultimate working of the trust through a letter of wishes, changing provisions of the trust upon their death or mental incapacity. This information is only filed at the Master’s Office upon the founder’s death. | The founder will be deceased. The trustees exercise effective control over the administration of the trust. | As determined by the legislation, but the beneficiaries are ultimately the citizens of South Africa. | Individual(s) who (or on behalf of whom) the application is made to court. |
| Examples | Charitable trust, employee trust, business trust, and Broad-Based Black Economic Empowerment (B-BBEE) trust. | This type of trust is typically used to protect the interest of minors and other dependents who are incapable of looking after their own affairs after the passing of the testator. | Land rehabilitation trusts, Attorney’s Trust Account, the National Development Trust, and the National Parks Board Trust. | The sale of fiduciary property, and for the proceeds of the sale to be kept in a trust for the benefit of the fideicommissaries until such time as the fideicommissum ends. |
Table 2. Classification based on the discretion of trustees and the vesting of rights in beneficiaries [18]
| Characteristics |
Type of trust: Discretionary trust [19] |
Vesting (Vested) trust [20] | Hybrid trust [21] |
|---|---|---|---|
| Trustee powers |
Trustees have discretionary powers to: – decide how and when to allocate the capital or income of the trust to the identified trust beneficiaries; or – nominate the income and/or capital beneficiaries identified from a class of beneficiaries qualified to receive benefit, as specified in the trust deed. |
Trustees are bound by the provisions of the trust deed and have no discretionary powers. |
SARS classifies this type of trust as a combination of a vesting and discretionary trust. Certain rights are vested in beneficiaries, and trustees have certain discretionary powers. Unless the requirements under the discretionary trust qualifications are met, the trust is, in essence, a vesting trust. |
| Beneficiaries | The beneficiaries or class of beneficiaries are identified in the trust deed. | Beneficiaries are pre-determined and the income and/or capital earned by the trust vests in the beneficiaries, as set out in the trust deed. | |
| Vesting of trust assets | No rights accrue to the beneficiary up until such time as determined by the trust deed, by discretion of the trustees. Therefore, in the event of the death or insolvency of such a beneficiary, prior to the rights vesting in such a person, no interest in the trust assets accrue to the estate of such a person. | Trust benefits under a vesting trust form part of the beneficiary’s personal estate for the purposes of the estate’s duty, as the claim to the trust benefits are transferred to their heirs. | |
| Examples | Estate planners use this form of trust to ensure that the assets do not form part of their estate as it ensures savings on the estate’s duty and protects assets from creditors, as the trust property does not form part of the founder’s estate. | This type of trust is usually used for financial planning of personal estates. It can be used to create financial security for one’s family in the future. |
Table 3. Classification based upon the intention with which the trust was created (non-exhaustive) [22]
| Type of trust |
Characteristics: Creation |
Discretion of trustees | Purpose | Special provisions |
|---|---|---|---|---|
| Asset protection trust | Inter vivos. | Trustees have discretionary powers. | Generally used to attempt to aid beneficiaries in mitigating the effects of divorce, insolvency, and taxation. | None. |
| Family trust | Can be either inter vivos or testamentary. |
Either: – Inter vivos: Trustees have discretionary powers. – Testamentary: Trustees have no discretionary powers, as the assets vest in the beneficiaries. |
Generally used to protect and maintain trust property for the benefit of the founder’s children or other family members. | None. |
| Employee trust | Inter vivos, founded by company. | Trustees have discretionary powers. | Generally used to benefit and empower employees of the founder company by allocating shares to such a trust. | None. |
| B-BBEE trust | Inter vivos. | Trustees have discretionary powers. | Generally used for Broad-Based Ownership Schemes, providing for collective ownership by employees, communities, or similar collective groups classified as Black people in South African law. | The B-BBEE Trust derives its income from equity interest in a company and must comply with the requirements of the B-BBEE Act and regulations. |
| Business trust | Inter vivos. | Vesting trust. | Used to carry out business for profit where the beneficiary enjoys the limited liability of trading (as with companies), but where the administration is less expensive than that of companies. Examples include trusts creating private schools, unit trusts, voting trusts, and debenture trusts. | The trustee should be independent from the beneficiaries. The beneficiaries provide the trust capital to the trustees to manage it on behalf of the beneficiaries. The beneficiaries are then issued with share certificates indicating their share in the profits and capital once the trust is wound up. |
| Offshore trust | Inter vivos. | Discretionary or vesting trust. | These forms of trusts are generally used to invest funds abroad. They are no different from ordinary trusts. | These forms of trusts provide a popular vehicle for holding assets in other jurisdictions for tax reasons. |
| Charitable trust | Inter vivos or testamentary. | Trustees have discretionary powers. | These forms of trusts are generally used to receive donations for charitable purposes. | Such a trust is exempted from capital gains taxes if the trust is an approved public benefit entity and is registered as such with the SARS Tax Exemption Unit. If certain legislative requirements are fulfilled, the founder may also be exempted from donations tax. |
| Special trust type A [23] | Inter vivos, testamentary, or court order | Vesting trust. | This type of trust is created for persons with a disability or mental illness (as defined in the Mental Health Care Act) which precludes them from earning an income or managing their own affairs. | Special trust type A qualifies for certain relief from capital gains tax. |
| Special trust type B [24] | Testamentary. | Vesting trust. | This type of trust is created for the purpose of the maintenance and care of the founder’s family, of which at least one beneficiary has to be a minor. | From the moment the youngest beneficiary ceases to be a minor child, the trust is no longer classified as being a special trust type B. A special trust type B has some tax benefit but less so than type A. |
| Land rehabilitation trust | Legislative. The founder is a mining rights holder. Created through section 89 of the Mineral and Petroleum Resources Development Act 28 of 2002. | Vesting trust. | These forms of trusts are created to ensure that there is financial provision for the environmental rehabilitation of prospecting and mining areas. | These types of trusts are specifically ring-fenced for environmental rehabilitation. The mining industry is pushing to have their financial guarantees funded through insurance underwriters in order to avoid capital sitting idle in trust accounts, and to avoid the complexities of divesting of the trust assets following the end of mining activities. [25] |
Endnotes
[18] BDO Wealth Advisory, “Trusts”; Olivier et al., Trust Law and Practice; “Types of Trust”, South African Revenue Service (SARS), n.d., https://www.sars.gov.za/businesses-and-employers/trusts/types-of-trust/.
[19] BDO Wealth Advisory, “Trusts”; Olivier et al., Trust Law and Practice.
[20] BDO Wealth Advisory, “Trusts”; Olivier et al., Trust Law and Practice.
[21] “Types of Trust”, SARS.
[22] BDO Wealth Advisory, 2016; Olivier et al., Trust Law and Practice; “Types of Trust”, SARS.
[23] “Types of Trust”, SARS.
[24] “Types of Trust”, SARS.
[25] “Mining Rehabilitation Guarantees”, Guardrisk, n.d., https://guardrisk.co.za/mining-rehabilitation-guarantees/.