A trust has various uses. A trust is a useful tool to utilise in a divorce settlement whereby a divorce settlement can be transferred into a trust and be applied for the benefit of typically minor children and a spouse.
If a person is obliged in terms of a Court order to transfer assets into a trust, it is unlikely that Donations Tax would be leviable on that transaction since it is not motivated by pure liberality or generosity – a requirement for the application of Donations Tax.
An inter vivos trust
Such a trust is an inter vivos trust, which is established during a person’s lifetime in order to manage certain assets or investments and support the beneficiaries in terms of the Court order. The legal principles applicable to inter vivos trusts are to be found in the Law of Contracts. This means that the principles that apply to the execution of a valid contract also apply to the execution of a valid trust instrument.
The objective of this type of trust is usually to provide an income for the beneficiaries or to provide funds for housing, care, maintenance, education, general welfare, recuperation, health, entertainment, pleasure, or the advancement of the life of any beneficiary. It is also used to transfer assets to the capital beneficiaries (i.e. the beneficiaries who may receive trust assets and profit on the sale of trust assets) during the lifetime and upon the termination of the trust. After the trust instrument is signed, the trust is registered with the Master of the High Court in whose jurisdiction most of the assets are situated or where the administration is to take place.
The Trust Property Control Act does not define a beneficiary and is relatively silent as far as matters regarding the beneficiaries of a trust are concerned. It is more concerned with the administration of the trust by the trustees. The nature, number, and rights of beneficiaries are accordingly determined with reference to the trust instrument and our common law. If there is any conflict, the common law will prevail.
Any natural person (unborn or alive) can be a beneficiary of a trust. If a minor (a person under the age of eighteen) is a beneficiary, they must be supported by a guardian when a beneficiary’s decision is required. This should be kept in mind when the trust instrument is drafted, as one may not want the ex-spouse to interfere and hinder the purpose for which the trust was set up, as well as the smooth running thereof.
In the Estate Welch v Commissioner for Sars case of 2004, more than R 3 million was transferred to a trust for the maintenance of the ex-wife and their child in terms of the divorce settlement. The Court held that the transfer of assets was not a donation, which would have triggered Donations Tax. The ex-husband received an undertaking from the trustees to discharge his liability resulting from the Court order, thereby ensuring that the assets were not transferred to the trust without an obligation.
Mr Welch had established a trust for the benefit of his former wife and son in terms of their divorce agreement. Mr Welch died before having transferred the obligatory funds into the trust, so the executors were obliged to do so. Sars treated the payment as a donation by the executors, who ultimately prevailed in the Court in showing that they had performed an obligation and did not make a donation.
But what made their life more difficult than it should have been was that Mr Welch had included himself and his other children as discretionary beneficiaries as well, although the trust instrument indicated that the trust had been established in pursuance of the provisions of the divorce agreement. The Court was of the view that the other children’s expectation of receiving any such payment was only a spes (hope) and not easily quantifiable for the purposes of Donations Tax.
Mr Welch would have been better advised to have created two classes of beneficiaries:
- The first being his former wife and son as primary beneficiaries; and
- himself and his other children as secondary beneficiaries, to be considered only after the obligations to the primary beneficiaries had been satisfied.
A trust may therefore be an effective tool to ring fence a maintenance obligation, both during one’s lifetime as well as after one’s death. It may prevent abuse by an ex-spouse and children, as the assets will be managed by a board of trustees for the benefit of the beneficiaries in terms of the Court order.
Phia van der Spuy is a Chartered Accountant with a Masters degree in tax and a registered Fiduciary Practitioner of South Africa®, a Master Tax Practitioner (SA)™, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze®, the provider of a digital trust solution.
*The views expressed here are not necessarily those of IOL or of title sites.
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