In order to safeguard his assets, John decides to create a family trust for the benefit of his immediate family and future generations to come. His friend, Sue, tells him that she has heard or read in the media that the estate owner (being John) cannot be the founder of the trust if he is also to be appointed as a trustee and he may also not be named as a capital beneficiary. Sue suggests that she should be the founder of the trust that John wishes to create.

FOUNDER

In the past, older persons were used as the founder of a trust due to an (incorrect) interpretation of tax legislation applicable in the 1980’s and 1990’s. These trusts are commonly known as so-called “granny trusts”. In some instances, a completely unrelated person is/was used as the founder, for example the brother of the secretary of the attorney who drafted the trust deed. The legal implication of making use of such a person is that transfer duty will be payable should the trust own a fixed property and the trustees decide to distribute the property to a beneficiary in an unbundling process. Where the beneficiary who receives a fixed property from the trust is related to the founder of the trust within the third degree of consanguinity (blood relation), no transfer duty is payable due to the exemption provided for in the Transfer Duty Act.

Another problem with using an unrelated person or a related but older person as founder is that it may also cause practical difficulties when it comes to the amendment of the trust deed should the founder not be traced or already be deceased as the trustees will then be bound by the derived powers of amendment contained in the trust deed (if any).

It is therefore important that the estate owner (being John in our example above) be the founder of the trust. However, one should take note of the anti-avoidance provisions of the Income Tax Act in this regard.

TRUSTEES

It is recommended that the estate owner and his/her spouse be the trustees. The trustees are the persons responsible for the administration of the trust assets and owe a fiduciary responsibility to the beneficiaries. They should always act independently, in the best interest of all the beneficiaries and with the necessary skill, care and diligence as can be expected from a person dealing with the assets of someone else. The trust deed should stipulate the minimum number of trustees that should be in office.

According to a directive from the Chief Master issued in 2017, the Master’s office should insist upon the appointment of an “independent” trustee (i.e. someone not related to any of the beneficiaries or other trustees) with the registrations of new “family business trusts”. Although the concept of the “independent trustee” appears wonderful on paper, the outcome of numerous court cases over the past few years seem to show that the appointment of the “independent trustee” is not effective in practice. The idea behind the “independent” trustee is to protect third parties doing business with trusts and to ensure that one dominant trustee does not control the trust. The said court cases have shown that even with an attorney or accountant fulfilling the role of the independent trustee, it did not prevent a particular trustee (normally the estate owner) to control the trust and treat it as his alter ego to the detriment of a third party or beneficiary. An independent trustee has an important role to play if such person is truly independent and does not succumb to the whims and wishes of the estate owner-trustee.

In our example, John and his wife can be the trustees together with his friend Sue who can act as the independent trustee.

BENEFICIARIES

It is important that the class of beneficiaries be defined as widely as possible but without being vague as any amendment to the beneficiaries at a later stage may amount to a change of the object of the trust which may result in the trust becoming invalid.

Poorly drafted trust deeds stipulate that the descendants of the beneficiaries will only qualify as beneficiaries after the demise of their parents. In many of the older trust deeds the estate owner does not even qualify as a beneficiary (sometimes as an income beneficiary at best). Where the income beneficiaries are defined as being the capital beneficiaries as well as those persons related to the capital beneficiaries by “blood or affinity”, it will mean that the parents, siblings, uncles, aunts, nieces, nephews, cousins, etc qualify as income beneficiaries as well as the “family-in-law”. Although drafting the class of beneficiaries in this way may have its benefit in the wide class of beneficiaries to distribute income to for income tax purposes (or to provide for a granny or auntie in an old age home), this wide definition of beneficiaries may have dire consequences for the amendment of the trust deed should the founder be deceased or not able to be a party to the deed of amendment.

It is also important to clarify definitions such as “children” and “spouse”. Determine whether adopted children and/or step-children should also qualify as beneficiaries. Where a spouse should (or should not) qualify as a beneficiary, clearly state whether a person in a permanent cohabitation relationship should also fall within this definition.

In our example, John, his wife and their children and legal descendants can qualify as beneficiaries. What is important is that John should not be the founder, a beneficiary and the only trustee, but he can be the founder, a beneficiary and a trustee as long as there is also another trustee/s acting with him in this position. It is of paramount importance when creating and administering a family trust that the estate owner realises that he is no longer owner and in control of the assets transferred to the trust and should therefore not act as such.

Always consult with our legal team in our Trust Department when it comes to matters of the Trust.