Only beneficiaries can benefit from a trust.
Few people are aware that the founder can decide who is to benefit from the trust and to what extent.
Limitations and milestones can also be built into the trust deed to ensure the desired beneficiaries benefit from the trust at a point in time.
Distinguish between beneficiaries
If you want a specific beneficiary to be favoured over others in a discretionary trust, one can state that in the trust instrument – otherwise, beneficiaries may put pressure on trustees to treat them equally.
The trust instrument (in the case of a discretionary trust) should also clearly state that beneficiaries ought not to be treated equally if this was the express wish of the estate planner.
The Court held in the Jowell v Bramwell-Jones case of 2000 that trustees are duty-bound to treat beneficiaries impartially and to strike a balance between the interests of different beneficiaries.
That will be the case if the trust instrument does not determine otherwise. Jowell v Bramwell-Jones 2000 3 SA 274 (SCA), 284 (don’t favour one beneficiary against another, implying equal treatment subject to express terms in the trust deed to discriminate on fair grounds.)
It is perfectly acceptable to create primary beneficiaries who should benefit up to a point – such as when a specific event takes place (like death) or the reaching of a milestone (such as when an individual turns eighteen), and other beneficiaries only starting to benefit at some future point (Estate Dempers v SIR case of 1977).
A trust instrument can also provide that a beneficiary will only receive a benefit from a trust for a limited period.
The beneficiary may have an unconditional vested right for that limited period only – in this instance, note that any income or capital gains vested will form part of their assets during a divorce or when their estate goes insolvent.
You cannot vest income and/or capital in a beneficiary in a trust instrument and cease the vested right in the event of the insolvency or divorce of that beneficiary.
One can also create ‘contingent’ beneficiaries in the event that the primary beneficiaries are no longer alive.
One can, therefore, tailor the description of beneficiaries and the date or event from which they can benefit from the trust to your specific wishes. One can decide whether they are to be income or capital beneficiaries (or both).
This gives you the flexibility to treat each type of beneficiary differently. However, be mindful of the potential conflict between capital and income beneficiaries when trustees are required to make decisions involving trust assets, including types of investments, when to buy or sell assets, and distributions.
In the event that income and capital beneficiaries are different, it is good practice to state in the trust instrument that if the income is insufficient for the maintenance of an income beneficiary that trust capital can be used to make good on any such shortfall.
This will assist the trustees in optimising the trust’s investment returns while taking into account the needs of all beneficiaries to prevent unintended hardship.
Focusing solely on a trust’s short-term income production 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 capital beneficiaries.
Be mindful of how you define ‘income’ in the trust instrument since it may include all ‘fruits’ from assets – such as the occupation of a property – or it can narrowly refer to actual revenue received, such as rental income.
The term ‘net income’ – gross income less expenses – should also be clearly defined, 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.
If only the income is distributed, the expenses related to the income will not qualify as a deduction for tax purposes in the hands of the beneficiary or the trust and will be lost.
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 realised on the disposal of trust assets.
The treatment of unallocated income should also be defined to reflect the founder’s intention – in other words, 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 their individual natures.
Be mindful of our Constitution
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, offends our Constitution, it will be declared invalid.
While this seems to go against the principle of freedom of testation or contractual freedom, the law has never tolerated acts that are against good morals.
Since anything that offends the provisions of our Constitution goes against good morals, be mindful when creating a trust – especially a charitable or educational trust – that the terms you stipulate in the trust instrument are not contrary to public policy, as grounded in our Constitution.
The trust cannot, 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 does not have to use Section 13 of the Trust Property Control Act to remove them.
Instead, it can strike out the offending clause(s) in terms of the common law (Minister of Education v Syfrets Trust Ltd case of 2006).
Phia van der Spuy is a Chartered Accountant with a Masters degree in tax and a registered Fiduciary Practitioner of South Africa®, a Chartered Tax Adviser, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze®, the provider of a digital trust solution.