Dissolving a testamentary trust

Given that we are not experts in all fields within the financial services industry, we decided that it would make sense to open up a professional forum and have some of your questions answered here. FAnews is therefore encouraging readers to pose question

FAnews received a query from a reader who is a trustee and beneficiary of a testamentary trust which was set up when his father died in 1988. “The trust had no income, nor any capital goods, such as property investments, but had motor cars, furniture and so on, which have over the years been used by the beneficiaries and have now depreciated to zero value for tax purposes,” the reader says.

He asked how the trust can be dissolved since it no longer serves a useful purpose.

FAnews asked Louis Venter, joint head of fiduciary advice, wealth and investment cluster, RMB Private Bank, to explain how such a trust can be dissolved.

Reasons for terminating a trust

As with companies and CCs, a trust mostly has a perpetual existence that is not attached to the life-and-death battle which the creator or the beneficiaries deal with. However, a trust is not as perpetual as one would think and a number of reasons might trigger the death of a trust. “Lately, legislative changes have either forced a trust to implode or have raised the question if trusts should not be reconsidered and, where deemed appropriate, be given a death sentence,” says Venter.

He says that more natural reasons for the termination of trusts are typically one of the following:

* The amount left in the trust makes it uneconomical to continue with the trust and the beneficiaries are better off managing the assets in their own estates or rather receiving income from a single premium annuity purchased for them by the trustees, from the trust funds.

* The trust has served its purpose and either the trust deed dictates that one should call it a day, or the trustees makes this decision and transfer the assets to the beneficiaries.

* A trust might fail due to the purpose it was set up for is no longer reachable or all the beneficiaries might have passed away already.

* The trustees just decide they have had enough and put the trust ‘to the sword’.

“From a legislative point of view, we have seen two recent disruptions in the otherwise peaceful life span of trusts,” says Venter. SARS has granted a window period for the transfer of residential property from a trust and once the property has been transferred the trust must terminate within six months. This is a non-negotiable term and one that must be complied with. Then, the latest comments in the annual budget speech have, of course, sparked fears of a punitive tax dispensation for housing assets in a trust. “We have yet to see the draft legislation, but the words expressed in the budget do seem troubling.”

The process of terminating a trust

In all the above cases, including that of our reader, the same process needs to be followed when terminating a trust.

* The trustees must sign a resolution containing the reasons of the decision the trust is terminated.

* All assets must be transferred from the trust to the beneficiaries and all debts paid so as to leave the trust devoid of any assets. The trustees must confirm this fact in a resolution.

* The trust bank account needs to be closed and proof of this needs to be at hand. If the trust did not have a bank account (which it should have had!) the fact must be declared under oath by the trustees.

* All beneficiaries must sign a letter stating that they know about the closure of the trust and that they feel they have received their fair share. This is quite a tricky requirement to adhere to in many cases.

* The accountant of the trust must confirm in writing that the trust has neither assets nor liabilities and that the final steps of deregistering the trust will be undertaken by the accountant (like deregistering with SARS).

* Documents 1 to 5 needs to be submitted to the Master of the High Court, in whose jurisdiction the trust was created, together with the original letter of authority (as an affidavit stating that it is lost) and the certified IDs of all trustees and beneficiaries.

“All the beneficiaries need to agree to the distributions and closure of the trust,” Venter says. “If the trust still has minors or the will does not allow for the termination of the trust, the trust can be closed based on the fact that it has served its purpose.”

In the event that a trust’s liabilities exceed its assets, one needs to sequestrate a trust in terms of the Insolvency Act, which is a totally different process.

Editor’s thoughts: Do you have a particular matter you would like to see addressed on the FAnews website? Comment below or email fiona@fanews.co.za. Also, if you believe you may be able to answer questions, drop us an e-mail with your relevant field/s of expertise.

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