C&A Friedlander Attorneys

The core idea of a trust is the separation of ownership (or control) from enjoyment.

A trust is, by definition, a legal entity in which a person known as a trustee holds or administers moveable or immovable property separately from their own, for the benefit of another person or persons (known as beneficiaries) or for the furtherance of another purpose such as a charity.

Trusts are governed by the Trust Property Control Act, 1988. A trust’s constitutional document is a trust deed which sets out the framework in which the trust must operate, including its powers and limitations. As a general rule, trusts must be registered with the Master of the High Court in the relevant jurisdiction where the trust’s assets are situated. Trustees may only act once the Master has issued Letters of Authority allowing them to do so.

In South Africa, trusts are typically formed in two ways: ‘Inter-vivos’, which is created while the founder is alive; and ‘mortis causa’ or testamentary, which is set up in terms of the will of a person and comes into effect after their death.

The primary types of trusts in South Africa

In South Africa, there are three primary types of trusts:

  1. An ownership trust: The founder of the trust transfers ownership of assets or property to a trustee(s) to be held for the benefit of defined beneficiaries of the trust.
  1. A bewind trust: The founder transfers ownership of assets or property to beneficiaries of the trust while control over the property is given to the trustees(s).
  1. A curatorship trust: As per this structure, the trustee(s) administers the trust’s assets for the benefit of a beneficiary who doesn’t have the capacity to do so.
  1. Trusts can also be governed by a particular statute – for instance, the Companies Act, 2008 envisages a trust to hold shares that have been issued but not fully paid for, and the Financial Institutions (Protection of Funds) Act, 2001 provides for the safe custody and administration of trust property by financial institutions.

Necessary requirements for a trust to enter into a valid contract of purchase, sale or mortgage in respect of immovable property

  1. The deed of sale has to be in writing and the parties thereto or their agents have to be legally authorised to enter into the transaction concerned at the time of signing the contract.
  1. Immovable property can only be purchased on behalf of a trust by a trustee who has been issued with Letters of Authority.
  1. The Letters of Authority should reflect the required minimum number of trustees and if any of the trustees so reflected have resigned, died or no longer qualify to act as a trustee, then they must be formally removed.
  1. The purchase of immovable property by trustees who have been nominated in terms of a trust deed which has not been registered with the Master, or have been nominated by resolution of existing trustees but have not been issued with Letters of Authority is void ab initio (“void from the beginning”) and cannot be ratified.
    This is in contrast with close corporations and companies, where a pre-incorporation contract can be ratified, and consequently immovable property can be purchased on account of such an entity still to be formed.
  1. The trust deed, or will, must specifically authorise the trustees to sell, purchase and/or mortgage immovable property as the case may be.
  1. Either all the trustees must sign the contract, or a resolution must be passed prior to the deed of sale being signed, authorising the transaction concerned and nominating a trustee or trustees to enter into the contract on behalf of the trust.

Benefits of transferring your property into a trust

  1. Asset protection – If assets held by the trust are not owned by the trustees or the beneficiaries, the creditors of the trustees or beneficiaries can have no claim against the trust.
  1. Continuity – A trust does not form part of a deceased estate as a trust is not something that you own, thus it can continue to be run in accordance with the trust deed after your death.
    • When any trustee dies, the trust and any assets owned by it, remain unaffected. Upon the death of a beneficiary, only the portion of the trust assets that vests in that beneficiary upon date of death, would form part of the beneficiary’s estate for estate duty purposes.
  1. Cost – A trust does not die (called “perpetual succession”), so it is not liable for estate duty or executor’s fees that would be payable under the banner of an estate or in the hands of heirs. Furthermore, a trust does not pay capital gains tax as long as an asset is not sold. However, a trust is liable to pay transfer duty and conveyancers fees.
  1. Reduced value of your personal estate – The property no longer falls into your personal estate and thus is not subject to inheritance tax.
  1. Protection of children – A trust protects your children should something happen to you. The trustees will administer the assets in the trust until such time as the beneficiaries reach legal age.
  1. Avoid conflicts of interests – g. A judge or a politician can make use of a trust to insulate themselves from their assets so that they can have the benefit of the profits but relinquish control.
  1. Suitable management – In the unfortunate situation where you are no longer capable of managing your own affairs, the property owned by the trust would ensure that your illness does not affect the management of the property. Furthermore, the trustees would be able to sell the property if need be without your family having to undergo a High Court application to apply for a curator to manage your affairs in order to sell the property.

Things to take into consideration

  • Capital gains tax implications – One of the frequently-cited downsides of holding property in a trust, is that Capital Gains Tax comes into play should you decide to sell. It is certainly much higher on trusts than on individuals with an effective rate of 36%, compared to a maximum individual effect rate of 18% (excluding any annual exclusions).
  • Obtaining finance – A troublesome disadvantage for trusts, especially when it comes to buying property, is the fact that finance can be difficult to come by, and 100% mortgages are almost unheard of. This is due to the fact that trusts are considered high-risk by banks, at least partially because things are a lot more complex to resolve in the event of a default.

Termination of a trust

A trust will terminate by written agreement, on the date set out by the founder, upon the achievement of the trust’s objective, or upon the realisation of the impossibility of achieving the trust’s objective. On dissolution, the trust’s assets will devolve as contemplated in the trust deed.

When it comes to trusts, one cannot prescribe a “one size fits all” guidance approach, and we therefore encourage you to make use of expert property practitioners who will help you make the right decision, taking into account your personal circumstances and goals.

Trust law develops with time and if you are considering buying property in the name of a trust, we encourage you to ask an expert for advice before you take the plunge.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).